Back in 2000, an investment bank asked me to study business-to-business electronic commerce. The resulting paper, E-comm Econ: The Economics of Electronic Commerce, turns out to have made some good predictions. It pooh-poohed the portals that were emerging in all industries, but made a point that has turned out to have substantial validity: electronic commerce has increased effective production capacity.
I’m in Chicago speaking at a conference of aluminum extruders. What I heard at last night dinner was striking: more than half of the new business these guys are getting comes from Internet inquiries. Here’s what that means for the economy and for business.
In the old world of, like, five years ago, productive capacity was only available if someone knew it was available. That’s what I mean by effective capacity. If a buyer of, say, aluminum extrusions had checked in with his usual vendors, and with the sales people who would call on him, then he had checked his sources. He could consult a printed directory, mail specs, and ask for a bid, but that wasn’t done too much because of the time lags and bother. The “market for aluminum extrusions” was actually a set of small regional and industry markets with only minor overlap.
In today’s world, a buyer checks with his usual vendors and the salespeople who call on him. But he also emails specs to other vendors across the country and perhaps around the world. They look at what he wants and decide whether they want to bid on it. The buyer has far more effective capacity to choose from. So when one region is running close to full bore, there are other regions which can take up the slack.
This is a one-time shift. We’ve had a big gain in effective capacity without adding any factories. Cool. But it won’t continue. Once everyone is able to connect with everyone else, we only gain capacity by adding machines or increasing productivity. So economically speaking, we’re nearing the end of this one-time benefit.
Businesses here tell me that they have to beef up their Internet capabilities. They are right. When half your new business is coming from this channel, a company needs to ensure that its web site makes life fast and convenient for potential customers. I’m not the expert on how to design the perfect web site, but if you don’t have an expert working for you, you are behind the curve.
Business Strategy Implications: A buyer-friendly web site is an absolute need, not a luxury. It won’t get you ahead of the competition, but it will keep you from being left behind. Buyers who are not using the Internet to check on sources are missing an opportunity to find the guy with unused capacity, who can provide good products at a low price.