The internet is fast becoming an important new channel for commerce in a range of businesses—much faster than anyone would have predicted two years ago. But determining how to take advantage of the opportunities this new channel is creating will not be easy for most executives, especially those in large, well-established companies.

Three years after emerging into the spotlight, the Internet poses a difficult challenge for established businesses. The opportunities presented by the channel seem to be readily apparent: by allowing for direct, ubiquitous links to anyone anywhere, the Internet lets companies build interactive relationships with customers and suppliers, and deliver new products and services at very low cost. But the companies that seem to have taken advantage of these opportunities are start-ups like Yahoo! and Amazon.com. Established businesses that over decades have carefully built brands and physical distribution relationships risk damaging all they have created when they pursue commerce in cyber-space. What’s more, Internet commerce is such a new phenomenon—and so much about it is uncertain and confusing—that it is difficult for executives at most companies, new or old, to decide the best way to use the channel. And it is even more difficult for them to estimate accurately the returns on any Internet investment they may make.

Nonetheless, managers can’t afford to avoid thinking about the impact of Internet commerce on their businesses. At the very least, they need to understand the opportunities available to them and recognize how their companies may be vulnerable if rivals seize those opportunities first. To determine what opportunities and threats the Internet poses, managers should focus in a systematic way on what the Internet can allow their particular organization to do. Broadly speaking, the Internet presents four distinct types of opportunities.

First, through the Internet companies can establish a direct link to customers (or to others with whom they have important relationships, such as critical suppliers or distributors) to complete transactions or trade information more easily. Second, the technology lets companies bypass others in the value chain. For instance, a book publisher could bypass retailers or distributors and sell directly to readers. Third, companies can use the Internet to develop and deliver new products and services for new customers. And, fourth, a company could conceivably use the Internet to become the dominant player in the electronic channel of a specific industry or segment, controlling access to customers and setting new business rules.

By exploring the opportunities and threats they face in each of these four domains, executives can realistically assess what, if any, investments they should begin to make in Internet commerce and determine what risks they will need to plan for. A sound Internet-commerce strategy begins by articulating what is possible.

Establishing the Internet Channel

To deliver new services or bypass intermediaries, companies first need to build direct connections to customers. That means more than just designing a Web site to market a company’s offerings. The behavior of customers who are already buying goods and services on-line clearly indicates that companies can build momentum in their digital channels by using Internet technology to deliver three forms of service to customers.

First, companies are giving customers just about the same level of service through the Internet that they can currently get directly from a salesperson. For instance, Marshall Industries, a distributor of electronic components, makes it very convenient for customers to search for and order parts on-line. Visitors to the company’s Web site can hunt for a part by its number, by a description, or by its manufacturer. They can place an order for parts, pay for them electronically, track the status of previous orders, and even speed delivery time by connecting directly from Marshall Industries’ Web site to the shipping company’s site.

Second, companies are using new Internet technologies to personalize interactions with their customers and build customer loyalty. One way is to tailor the information and options customers see at a site to just what they want. For example, when visitors arrive at Time Warner’s Pathfinder Internet site—which contains articles and graphics from more than 25 of the company’s publications—they can register, identifying the topics that interest them. Then the Pathfinder site recognizes the visitors whenever they return and tailors the content delivered to their screens.

At What Point Should You Master Your Internet Channel? Not all companies will want to conduct business over the Web yet. Ask these questions to see if you can reduce costs and increase service levels by establishing an Internet channel. 1. How much does it cost me to provide services that customers could get for themselves over the Internet? 2. How can I use the information I have about individual customers to make it easier for them to do business with me? 3. What help can I give customers by using the experience of other customers or the expertise of my employees? 4. Will I be at a significant disadvantage if my competitors provide these capabilities to customers before I do?

Similarly, Staples is using personalization to reduce the cost large companies incur when ordering its office supplies electronically. Staples is creating customized supply catalogs that can run on its customers’ intranets. These catalogs contain only those items and prices negotiated in contracts with each company. The Staples system can maintain lists of previously ordered items, saving customers time when reordering. By searching and ordering electronically, Staples’ customers can reduce their purchase-order processing costs—which through traditional channels can sometimes amount to more than the cost of the goods purchased. And over time, Staples could learn a great deal about its customers’ preferences and use that information to offer other customized services that competitors, especially in the physical world, would find difficult to duplicate. For example, Staples could recommend new items to customers to complement what they have previously purchased or offer price discounts for items that customers have looked at in their on-line catalogs but have not yet bought.

Third, companies can provide valuable new services inexpensively. A company could, for example, draw on data from its entire customer base to make available wide-ranging knowledge of some topic. For instance, if a customer has a problem with a product, he or she might consult a site’s directory of frequently asked questions to see how others have solved it. Or the customer might benefit from knowing how others have used a particular product. Amazon.com, the on-line bookstore, encourages customers to post reviews of books they have read for other visitors to see, making it possible for customers to scan reviews by peers—in addition to those from publications such as the New York Times—before deciding to order a book.

The combination of these three levels of service could make the Internet channel very compelling for customers. And because these services are basically just electronic exchanges, they can be delivered at very low cost. Investments in the electronic channel displace traditional sales, marketing, and service costs; moreover, the technology allows companies to offer increasingly higher levels of service without incurring incremental costs for each transaction. For example, Cisco Systems conducts 40% of its sales—$9 million per business day—over the Internet. The company expects the volume to increase from its current level of more than $2 billion per year to $5 billion by July. By selling through the Internet, the company has reduced its annual operating expenses by nearly $270 million. But Cisco’s managers say the real value of the electronic channel is that it allows the company to provide buyers with a range of advantages—convenience, information, personalization, and interactivity—that competitors cannot.

The opportunity for those companies that move first to establish electronic channels is a threat to those that do not. When customers choose to do business through an Internet channel, they make an investment of their time and attention. It takes time to figure out how to use a site and become comfortable with it. If a site involves personalization, customers have to fill out profiles and, perhaps, update or otherwise adjust them over time. They may also modify their own systems to make better use of electronic connections: for instance, ten of Cisco’s largest customers are installing new software in their own computers to tie their inventory and procurement systems to Cisco’s systems. Finally, customers must offer sensitive information, such as credit card numbers, and trust that the seller will manage that information discretely. For these reasons, the average customer, once he or she has established a relationship with one electronic seller, is unlikely to go through the effort again with many suppliers.

This all-too-human reluctance to abandon what works is a formidable obstacle to companies that do not move aggressively enough. Followers in this new channel risk being stuck with the unenviable task of getting customers to abandon investments they have already made in a competitor—and this will be a barrier that increases over time as the relationship between customer and competitor deepens.

The emergence of the direct connection could have another consequence that managers need to anticipate. Companies that currently do not want to participate in Internet commerce may be forced to by competitors or customers. Consider how Internet commerce could affect Dell and Compaq as potential suppliers of computer equipment to General Electric. Several major divisions of GE are completing plans to put parts and equipment up for bid on the Internet. They intend to deal directly with suppliers over the Net and to receive multiple bids for every part. Based on early trials, GE estimates that it will shave $500 million to $700 million off its purchasing costs over three years and cut purchasing cycle times by as much as 50%. The company expects that in five years it will purchase the majority of everything it buys through this Web-based bidding system.

Companies that do not want to participate in Internet commerce may be forced to do so by competitors or customers.

Dell sells computer equipment directly to its customers, sometimes over the Internet, but Compaq sells through distributors. That could put Compaq at a disadvantage for GE’s business. Its distribution costs are higher, its pricing and information systems are designed for conducting business through distributors, and any move Compaq makes toward accepting orders over the Internet could threaten those distributors.

What’s worse from Compaq’s point of view, Dell could gain internal efficiencies through the Internet channel, as Cisco has discovered, and learn a great deal more about customers. Dell is currently selling almost $3 million worth of computers a day through its Web site. By the year 2000, the company expects to handle half of all its business—ranging from customer inquiries to orders to follow-up service—through the Internet. Such developments are forcing Dell’s rivals in the computer industry to develop Internet channels of their own. And first movers like Dell, both established companies and start-ups, are already beginning to emerge in other industries, such as auto retailing (General Motors and Auto-By-Tel), financial services (Merrill Lynch and E *Trade), and trade publishing (Cahners and VerticalNet).

As pioneering companies in an industry begin to build electronic channels, rivals will need to reexamine their value chains. New companies have no existing value chains to protect, of course, and so can set up their businesses in ways that take advantage of the Internet. But companies that deal through others to reach end customers (such as Compaq and IBM in the computer industry) will need to weigh the importance of protecting existing relationships with the distributors and partners that account for most of their current revenue against the advantages of establishing future strategic positions and revenue streams. This is one of the most difficult issues that large, established companies face in making decisions about engaging in Internet commerce. For instance, although a book publisher might be tempted to use the Internet to sell directly to bookstores or even to readers, it runs the risk of damaging long-standing relationships with distributors.

Pirating the Value Chain

Companies may find they have little choice but to risk damaging relationships in their physical chains to compete in the electronic channel. The ubiquity of the Internet—the fact that anyone can link to anyone else—makes it potentially possible for a participant in the value chain to usurp the role of any other participant. Not only could the book publisher bypass the distributor and sell directly to readers, but Barnes & Noble and Amazon.com could decide to publish their own books—after all, they have very good information, gathered and collated electronically, about readers’ interests.

Consider how various participants in the personal-computer value chain are already squaring off against one another to reach the end customer. Currently, computer manufacturers like Apple, Compaq, and IBM purchase the components that make up the computers from suppliers like Intel (which makes microprocessors), and Seagate Technology (which produces hard-disk drives). Manufacturers supply machines to distributors such as Ingram Micro and MicroAge, which in turn supply retailers like CompUSA. That is the physical value chain for much of the industry (excluding manufacturers that sell through direct mail, such as Dell and Gateway 2000). But Internet commerce is already blurring the boundaries in that chain. Ingram Micro and MicroAge are seeking to bypass the physical retailers by setting up Internet-based services that would allow anyone to become an on-line retailer of computers. MicroAge lets physical or virtual resellers choose from a selection of computer systems online whose availability and prices vary daily. Soon, on-line retailers will be able to relay orders directly from customers to Ingram Micro, which will acquire the computers from the manufacturer or if necessary assemble the components, ship the computers directly back to the customer, and provide subsequent support services.

At the same time, retailers like CompUSA are establishing their own brands of computers, which they intend to sell both in stores and over the Internet. They will order parts electronically from component suppliers. (The Internet makes the logistics of such a system easier to manage.) Finally, Apple and other computer makers have made the difficult choice to sell computers over the Internet, too.

Competition is even coming from outside the value chain. United Parcel Service has announced that it is setting up a service for virtual merchants. Using Internet commerce software, a merchant can create a product catalog and a storefront on the Web. UPS will then manage the operations. The merchant or its customers will be able to schedule deliveries, track packages, and coordinate complex schedules over the Web. Conceivably, an on-line PC vendor could let consumers create customized machines, made up of components drawn from several different manufacturers. UPS would then gather the parts overnight, deliver them to an assembly facility, pick up the assembled product, and deliver it to the customer.

On-line providers of information about computers, such as CNET, are already becoming resellers of software and hardware products. For instance, visitors to the CNET Web site can read reviews of software and then order a highly touted product from the CNET store without ever leaving the site. The Internet search-service Yahoo! also sells hardware and software through its site by linking seamlessly to partners’ sites. Even ancillary players in the industry’s value chain—including banks like Barclays and First Union, and telecommunications providers, such as AT&T—have established shopping services on their sites and could sell computers (or anything else) to their customers. In other words, once companies establish an electronic channel, they could choose to become pirates in the value chain, capturing margins from other participants up or down the chain.

Should You Pirate Your Value Chain? When companies pirate the value chain of their industry, they are essentially eliminating layers of costs that are built into the current distribution system. Ask these questions to see if the distribution chain in your industry is likely to consolidate and if you should take the initiative to make that happen. 1. Can I realize significant margins by consolidating parts of the value chain to my customer? 2. Can I create significant value for customers by reducing the number of entities they have to deal with in the value chain? 3. What additional skills would I need to develop or acquire to take over the functions of others in my value chain? 4. Will I be at a competitive disadvantage if someone else moves first to consolidate the value chain?

Pirates will probably emerge from the ranks of those innovative companies that can recognize where core value will be most effectively delivered to customers over a network. Consider how RoweCom, an electronic subscription agent on the Internet, has captured margins from intermediaries in the value chain for periodicals by using the network to change the industry’s business model. Publishers traditionally have sold periodicals to libraries through subscription agents. Agents typically consolidate orders from many libraries and forward them to publishers, charging 3% to 5% of the list price for their services. RoweCom allows libraries to order periodicals directly from publishers over the Internet and make payments electronically through Banc One. RoweCom also provides a new level of service. For instance, libraries can place orders at any time and can easily use the site to track their budgets. Most important, however, RoweCom charges $5 per transaction, not the 3% to 5% of the list price. As a result, libraries have been moving their expensive orders to RoweCom. In the past 18 months, more than 75 libraries—including some of the largest in the nation—have subscribed to RoweCom’s Internet service.

Individual publishers are also linking directly to end users. For example, Academic Press has established an Internet channel to deliver content electronically to libraries. Other academic and professional publishers have also done this, but Academic Press has changed the business model for electronic-content delivery. Rather than issuing licenses to individual libraries, the company has begun selling site licenses for all the libraries in an entire country. For instance, any library in Finland can now access all of Academic Press’s publications under a single countrywide license—eliminating the need for a distributor or an agent. Competing publishers will now need to reconsider their distribution chain in any nation where libraries have signed up for Academic Press’s broader license.

Value chain pirates are in a position to define new business rules and introduce new business models. But pirates will also need to develop new capabilities. Those companies that stand to lose margins to pirates currently provide very real value to customers—such as merchandising skills (which Ingram Micro does not have but CompUSA does), logistics expertise (which CompUSA does not have but UPS does), and information management (which CNET can do better than Apple). To succeed, pirates must be able to provide that value, either by building the skills in house or by allying with others.

IBM discovered this to be the case when in 1996 it launched Infomart, an electronic-content delivery initiative, and World Avenue, a cyberspace mall. IBM had believed that it could use its computer network to become a new intermediary, pirating margins from physical distributors. Infomart would have challenged the physical distribution chain for publications by making it possible for customers to go to a single site to have material from several different publishers delivered to them electronically. World Avenue was to be a single site from which consumers could access a number of different electronic stores. But IBM soon recognized that being a superpublisher required more than just making content available, and on-line merchandising meant more than just being a storefront. IBM lacked the editorial and magazine-circulation skills of publishers and the merchandising and advertising skills of retailers. The computer company had the direct connection to customers, but that was not enough to make the initiatives succeed. IBM halted both initiatives the following year.

Digital Value Creation

Can You Create New Digital Value? Companies that seek to create digital value using their Internet channels could do so in a number of ways. Ask these questions to see how your company could best leverage its existing digital assets or leverage the digital assets of other companies that are on the Internet. 1. Can I offer additional information or transaction services to my existing customer base? 2. Can I address the needs of new customer segments by repackaging my current information assets or by creating new business propositions using the Internet? 3. Can I use my ability to attract customers to generate new sources of revenue, such as advertising or sales of complementary products? 4. Will my current business be significantly harmed by other companies providing some of the value I currently offer on an à la carte basis?

Instead of (or perhaps in addition to) pirating value from others in the value chain, companies that establish Internet channels can choose to introduce new products and services. Not only is the Internet channel a direct connection to customers or to any participant in the value chain, it is also a platform for innovation. It is a way to produce and distribute new combinations of digital information—or to create new transaction models and services—without incurring the traditional costs of complexity that exist in the physical world. And clearly, innovation will heighten competition if companies choose to create new value through the Internet by providing something that had previously been furnished by someone else.

For instance, a broker that has established an Internet channel to offer securities transaction services might begin to provide customers with access to research reports for free, which, of course, will harm businesses that offer such reports for a fee. Each time a company, large or small, succeeds in taking away a small piece of someone else’s business, it undermines the economics of that business—like termites eating away at the support beams of a house.

The Internet presents three opportunities for creating new value by taking away bits of someone else’s business. First, a company can use its direct access to customers; each time a customer visits a company’s Web site is an opportunity to deliver additional services or provide a path for other businesses that want to reach that customer. Snap-on Tools Corporation, a manufacturer of professional-grade tools for automobile repair businesses, adds new value for its customers by supplying them with regulatory information about such subjects as waste disposal at no fee. This strengthens Snap-on Tools’ relationship with its customers, but it weakens the business of commercial publishers that provide such information for a fee. Netscape Communications Corporation, a company that develops and sells Internet software, receives significant additional revenue at very little marginal cost by selling advertising space on its site. Netscape effectively draws revenue away from sites that derive the bulk of their revenue from advertising.

Second, a company can mine its own digital assets to serve new customer segments. Standard & Poor’s Corporation, a company that has traditionally provided financial information to institutional customers, is using the information it has stored digitally to provide financial planning services to individuals over the Internet. For a small fee, customers will be able to evaluate the risk of their individual securities portfolios, make portfolio allocation decisions based on the advice of market experts. They can even be alerted electronically to changes in analysts’ recommendations that affect their portfolios. Standard & Poor’s could never afford to target individuals with this service through a sales force or other traditional sales channels. But by offering the service at low cost over the Internet, the company will be able to compete with brokers and financial analysts.

Finally, a company can take advantage of its ability to conduct transactions over the Internet to take away value from others. For example, a major bank that has traditionally provided check-clearing services is planning to use the Internet to offer complete bill-payment services for universities and order-management services for retailers. The new, targeted services should help strengthen the bank’s core transaction-processing business, and it will also eat away at the business of companies that currently provide these services, such as those that furnish electronic data interchange (EDI) services.

Ultimately, the risk of Internet commerce for established businesses is not from digital tornadoes but from digital termites.

In all three cases, each addition of digital value by one company weakens the business proposition of another company in a small way. Ultimately, the risk for established businesses is not from digital tornadoes but from digital termites.

Creating a Customer Magnet

Companies that can establish direct links to their customers, pirate their industry’s value chain, and take away bits of value digitally from other companies may put themselves in a position to become powerful new forces in electronic commerce. They may become the on-line versions of today’s category-killer stores—such as Toys R Us and Wal-Mart—and become category destinations.

Certainly, there are economies of scale inherent in concentration on the Internet. Traditional reasons for having numerous suppliers in an industry are not valid on the Internet. First, the Internet makes physical distance between consumers and suppliers largely irrelevant: any store is equally accessible to any customer. Second, stores that establish a strong position or dominant brand on the Internet can grow rapidly, relatively unhampered by the costs and delays common when expanding in the physical world. Third, single stores can differentiate services for many customer segments, customizing offerings and tailoring the way visitors enter and move around the site to address regional or individual differences. As a result, a small number of companies can meet the diverse needs of large segments of the global market.

But more important, if customers are not willing to learn how to navigate hundreds of different sites, each with its own unique layout, then the Web will turn out to be a naturally concentrating medium. People feel comfortable returning to the stores they know, virtual or physical, because they can easily navigate the familiar aisles and find what they are looking for. They will gravitate toward sites that can meet all their needs in specific categories. And customers will head for the places many other customers frequent if they can interact with one another and derive some value from the interaction.

Consider how this might work. A customer magnet for music compact discs might offer visitors a choice of practically any CD available by connecting to all major distributors. The site might also offer a rich selection of CD reviews from public and specialized sources—everything from the most popular music magazines to the electronic bulletin boards of major music schools. It could enable customers to interact with one another, sharing experiences and opinions. It could also offer several transaction options: customers might choose to participate in for-fee membership programs or benefit from affinity or loyalty programs. The site might be structured to appear differently to customers from different countries or to those with varying levels of technical skills. It might also co-opt other sites aimed at the same customer base by offering commissions for every visitor a customer sends along. Finally, the site could create marketing programs in the physical world to ensure that its brand became synonymous with music CDs. The customer magnet would own the connection, the access, and the direct interface to the customer. Industry participants, such as the CD distributors and music magazines, would have to operate through the magnet.

The steps a company could take to become a customer magnet are remarkably similar in very different industries. A solid-waste company, too, could develop the ability to provide its customers with an electronic place for gathering information, for interacting with other customers, and for conducting transactions, and then invest in creating critical mass and momentum. In this instance, industry participants might include government agencies in different countries and various suppliers of pumps and valves.

Should I Become a Customer Magnet? Becoming a customer magnet involves a substantial investment in marketing and infrastructure. Ask these questions to see if you should make the investment to become a magnet or how you should work with other companies to influence the type of customer magnet that develops in your industry. 1. Can my industry be divided into logical product, customer, or business-model segments that could evolve into customer magnets? 2. What services could an industry magnet offer my customers that would make it efficient for them to select and purchase products or services? 3. What partnerships or alliances could I create to establish the critical mass needed to become an industry magnet? 4. Will the emergence of a competing industry magnet hurt my relationships with customers or my margins?

In any case, it is conceivable that some companies will attempt to control the electronic channel by becoming the site that can provide customers with everything they could want. Customer magnets could organize themselves around a specific type of product or service, a particular segment of customers, an entire industry, or a unique business model. A given industry may have room for only five, or even fewer, such magnets. Being few in number, they will have a tremendous influence on the shape of their industry. They will not own all the assets for delivering service—such as CD distribution or solid-waste pumps—but they could control access to suppliers and subtly sway customers’ choices by promoting or ignoring individual brands. Over time, a customer magnet could become the electronic gateway to an entire industry.

Product Magnets.

Amazon.com has quickly established itself as a product magnet and today is synonymous with book retailing on the Web. Amazon offers customers virtually every book available, provides access to reviews, to book discussion groups, and even to authors themselves. It also offers a number of other services, such as notifying readers by E-mail when a new book is available and recommending books based on patterns perceived in customers’ past purchases.

Consider the implications of Amazon’s success. Today, only Barnes & Noble rivals Amazon in the electronic channel. Customers will probably need no more than four or five of these companies. As on-line revenues increase for these two electronic merchants, what role will there be in the channel for the thousands of book retailers that have physical operations? Moreover, could Amazon use its infrastructure to move into music or professional periodicals? The tendency toward concentration in the electronic channel, which is unfolding in book sales, is likely to occur in a variety of other product categories as well.

Service Magnets.

Companies like Yahoo!, Excite, and Lycos are becoming magnets in information services about the Internet. In less than two years, the field of competitors in this category has been reduced from more than 20 to fewer than 5 companies, and none of the established yellow-page companies or other paper-based search providers, such as the Thomas Register, is on the list. Today, new search services targeted at ever narrower subsegments—such as those for locating people or telephone numbers—find it more efficient to market themselves under the Yahoo! umbrella rather than go it alone. The cost of attracting a critical mass of customers on the Web is too high for companies that are not magnets. The fact that smaller companies are willing to offer their services through Yahoo! suggests that Yahoo! has already achieved the critical mass it needs to be a service magnet.

Customer Segment Magnets.

New companies are targeting well-defined segments of customers and becoming their premier electronic channel. Tripod, for example, bills itself as an “electronic community” that targets Generation Xers—18 to 35 year olds. The service provides information on such issues as careers, health, and money, and facilitates commerce by linking directly to the sites of other companies directed at this segment. Visitors to Tripod’s Web site can find jobs through Classifieds2000, for instance, or establish bank accounts through Security First Network Bank. In less than two years, Tripod’s community has grown to more than 300,000 members.

Industry Magnets.

Companies such as Auto-By-Tel and Microsoft CarPoint (which sell cars, trucks, and other vehicles over the Internet); Imx Mortgage Exchange; the FastParts Trading Exchange (which distributes electronic components); and InsWeb Corporation (which offers insurance) could become customer magnets for entire industries. These companies bring hundreds of suppliers together under one virtual roof, providing customers with an easy, convenient way to compare and purchase offerings.

InsWeb, for example, allows customers to compare prices for several different products, including health, life, and automobile insurance. The site also contains consumer information about insurance products, lists available agents, gives visitors access to Standard & Poor’s ratings of insurance companies, and offers on-line simulation tools to help customers estimate the amount of coverage they may need for certain lines of insurance. If a customer likes a quote for, say, a ten-year term-life insurance policy from a highly rated company, he or she can click on a button to obtain an on-line application form and begin the application process.

The insurance companies that market themselves and sell policies through InsWeb will face challenges similar to those other established companies are likely to encounter when more industry magnets begin to appear in Internet channels: How can a company differentiate its products when the rules are determined by other parties? In side-by-side comparisons, how can a company emphasize its unique value? How can it differentiate itself through marketing when the magnet can standardize the information or determine which differentiating features will be emphasized? For a while, insurance providers could refuse to join InsWeb’s listings. They might even sell policies through their own individual sites. But customers will prefer the convenience of shopping in one location. If InsWeb can get enough providers and build significant traffic to its site, laggard insurers will have little choice but to participate.

Business Model Magnets.

Companies could become magnets by introducing new business models that take advantage of the interactive capabilities of the Internet. For instance, Onsale is an on-line auction house for consumer electronic products, computer equipment, and sporting goods. Customers can visit the site any time, day or night, to learn about various goods and make a bid. Similarly, NECX is establishing a spot market for computer parts. And Altra Energy Technologies is an Internet-based marketplace for natural gas that had revenues of more than $1 billion in 1997. Other companies are trying to establish similar marketplaces for advertising space, airline seats, ship-cargo space, and other perishable goods. In each case, an entire industry really only needs one magnet to manage the interactions between suppliers and customers.

Clearly, few companies can justify the investment that will be needed to become a customer magnet. Managers can’t yet quantify the financial rewards from such an initiative, and the risks are daunting. It is difficult and expensive for companies to integrate their existing business applications with the Internet technologies they will need to conduct commerce on-line. It will also be difficult to integrate electronic processes for commerce with existing physical processes that often involve numerous functions and many business units within an organization. And companies that create customer magnets will likely need to work with competitors—and their systems and processes—to offer customers everything they could want.

But if companies decide that Internet commerce is too important to ignore, it may be possible for them to adopt less risky approaches to protect their positions in the electronic channel. For instance, more than ten of the nation’s largest banks, including Banc One, Citicorp, and First Union, have formed a joint venture with IBM to create a common industry interface for retail banking over the Internet. The banks recognize that owning direct access to the customer is critical. They do not want to cede that access to an industry outsider, such as a home-banking software provider like Intuit or Microsoft, or to a single enterprising bank. Instead, the partners in the joint venture are sharing the costs of building a technological base for electronic banking, and in the process they are attempting to protect their industry’s existing relationships with its customers.

Established companies might also stake out competitive positions in the electronic channel by allying with others to create cascading value chains. That is, companies that furnish complementary services to a common customer base could band together to establish an exclusive bundle of services in the electronic channel. For instance, hotels, travel agents, guidebook publishers, and car rental agencies could create an exclusive network that would provide customers with everything they need when traveling.

Finally, established companies could find ways to embed their products or services in customer magnets. For instance, Amazon has become a book provider to Yahoo’s customers. When someone visits Yahoo’s site to search for, say, furniture repair, a button pops up asking the visitor if he or she wants a book on the topic.

For managers in established businesses, the Internet is a tough nut to crack. It is very simple to set up a Web presence but quite difficult to create a Web-based business model. One thing is certain: the changes made possible by the Internet are strategic and fundamental. However these changes play out in individual industries, they will unquestionably affect every company’s relationship with its customers and the value propositions for many companies in the foreseeable future.