A framework for designing new information systems
Yves Pigneur
Ecole des HEC - Université de Lausanne
yves.pigneur@unil.ch
This paper presents and analyzes the use of information and communication technologies (ICTs) by companies adopting new organizations paradigms for reaching their strategic objectives. We suggest a 3-by-3 matrix framework with two dimensions. The first dimension is 3 new paradigms of organization: (a) teamwork, (b) strategic network, and (c) ìcustomworkî or customer-oriented sale chain. The second introduces 3 coordination mechanisms using ICTs to improve (a) the use of information at boundaries, (b) the communication and relations with partners, and (c) the coordination of activities using more or less market-oriented mechanisms.
1 Introduction
This paper proposes a framework that could be used to analyze how advances in information and communication technologies (ICTs) will affect the future of companies which are seeking new and more productive ways of organizing their functions and activities while facing increasing competition from abroad [Bressand, 1995].
This introduction briefly presents the environmental issues (global, information-based and customer-driven economy), the internal issues (strategic, organizational and technological aspects) faced by companies, and a first overview of the framework adopted in this paper.
1.1 Environmental issues
Companies, especially small and medium-sized enterprises (SMEs) are confronted with a number of changes that require innovative answers. Among these are (a) the emergence of a competitive global economy, (b) the trend towards an information-based economy, and (c) the shift from mass production to a customer-driven economy.
To compete in today's global information-based and customer-driven economy, companies must be efficient, innovative and competitive; able to respond just-in-time, focus on quality, and implement a so-called mass-customization [Pine, 1995]. But in order to do this today, they must also be able to leverage the new information and communication technologies (ICTs) to fit better in their environment, establish more cooperative inter-organizational relationships and compete on the international markets [Bobin, 1995] [Nora, 1995].
1.2 Internal issues
Facing the general challenges described above in their environment,
companies try to adapt and align (a) their strategy, (b) their
organizational structure, and (c) their use of information and
communication technologies (ICT) in order to remain competitive,
survive or grow (see figure 1).
Strategy: between innovation and efficiency
Companies mainly adopt three kinds of strategies [Porter, 1985]: (a) reducing their costs, (b) diversifying their distribution channels and targeting new markets, and (c) improving the service to their clients and the quality of their offering.
Most of them try to elaborate their strategy between these extremes and investigate for improving both their innovation (by diversification and improvements) and their efficiency (by cost reduction).
Organization: between autonomy and control
In order to monitor the changes in their environment and to gain the advantages of both an innovation strategy and an efficiency one, companies are in the - maybe too slow ? - process of reviewing their organizational structures and processes [Martin, 1996]. We distinguish three worldwide-adopted paradigm shifts [Tapscott, 1996] that some companies try to adopt in order to:
flatten some of their old-fashioned hierarchies by adopting teamwork, revising their decision processes, improving their integration and re-engineering their business processes [Lipnack, 1993] [Ciborra, 1995]
build or join a strategic network of companies by adopting new patterns in collaboration with their business partners and transforming themselves in extended enterprises [Jarillo, 1993] [Konsynski, 1993]
establish more customer-oriented relationships or ìcustomworkî by adopting new distribution chains, mass-customized practices and renewed intermediation structures [Pine, 1993]
These organizational structures aim at gaining the advantages of both the (market-based) autonomy and the (hierarchy-based) control, such as reducing the production and the coordination costs simultaneously [Malone, 1993].
Technology: between competition and cooperation
Last, companies know that information and communication technologies (ICTs) can be a lever to implement their strategy and re-engineer their organization; they would like to take advantage of both innovation and efficiency, and to turn both autonomy and control to account.
Information and communication technologies can help companies to compete in a highly competitive, information-based and customer-driven economy.
Among these ICTs which can improve coordination, we observe the three trends towards the adoption of (a) groupware, but also workflow and executive information system (EIS), (b) inter-organizational systems (IOS) and electronic data interchange (EDI), and (c) electronic commerce systems such as the Internet.
ICTs like groupware, EDI and the Internet are both driving and facilitating the adaptation of companies to the changes presented above. For example, ICTs allow companies and particularly SMEs [OTA, 1994]:
to enter niche markets on a worldwide basis and get quicker trade opportunities
to link up with transregional or transnational corporations as suppliers, value-added providers or other market intermediaries
to operate with groups of small business as if they were much larger entities, enabling them to compete with large businesses on a more equal footing
to shorten product development cycles and adopt marketing strategies that are highly responsive to customer needs.
These technologies also allow companies to reach and implement the so-called ìco-opetitionî when competitors cooperate. Unfortunately we have also to point out that too often they cannot take advantage of these ICTs because the required investments are too high, their competencies are inadequate or the leverage role of ICTs misappreciated.
1.3 Our analysis framework
In order to analyze more deeply the role of ICTs in helping companies
confronted with these changes in the economy to react, we adopted
a framework, illustrated in table 2, to structure our presentation
and to present this paper.
| Teamwork | |||
| Network | |||
| Customwork | |||
The first dimension of this framework is the type of organizational paradigms or cooperative structures. We distinguish the following ones:
[teamwork] team-based auto-organization, between group of autonomous individuals and controlled hierarchy, for coordinating activities inside a value chain and allowing empowerment
[network] strategic network organization, between market-based subcontracting and vertical integration, for coordinating values chains inside a value system and allowing control without ownership
[customwork] a custom-oriented internetwork for distribution, between direct customer-seller connexion and retail-based sales channel, for coordinating a value system with customers and allowing mass-customization.
We cross this dimension with a second one which is a 3-step coordination model [Crowston, 1993], similar to the framework adopted in [Konsynski, 1993] for the extended enterprise. This model suggests three kinds of generic activities for coordinating activities that can be supported and improved by the use of the new ICTs:
[information] one can use ICTs to improve information gathering capability and better interact with the environment by getting and sending information outside the boundaries
[communication] one can use ICTs to support and improve communication and cooperative relations when making transactions with partners (i.e. supplier, customer, consumer, value-added provider, third-parties)
[coordination] one can use technologies to improve the coordination of activities among partners and with customers; by adopting market-oriented mechanisms, sometimes more adequate than the hierarchical paradigm.
Both organizational paradigms and its advanced technological support have significant effects, as suggested by [Huber, 1990], not only on organizational design, intelligence, but also on decision making inside the companies. However this paper mainly focuses on the coordination role of ICTs [Malone, 1993] and adopt the third orientation of information systems adopted by [Flores, 1988] which distinguishes:
[information] the first orientation (MIS) carries the assumption that the greater the quantity and accuracy of the information available, the more able are people to consider alternatives and make decisions
[decision] the second orientation (DSS) moves away from the data itself to the process of problem solving and decision making
[interaction] the third orientation focuses on communication, interaction and coordination and emphasizes the concept of commitment or contract.
This last orientation is also similar to the approach expressed by the transaction-cost theory [Williamson, 1975] which consider organizations as networks of exchanges and contracts between members, and suggest a transactional view of the information systems: ìan information system can be defined as the network of information flows that are needed to create, set up, control and maintain the organization's constituent contractsî [Ciborra, 1995].
2 Teamwork and auto-organization
Academics, since Peter Drucker, argue that organization has to be flat and flexible with empowered teams of knowledge workers re-engineering and improving business processes.
W.L. Gore & Associates - Self-management and auto-designated teams
Gore-Tex is this product used for clothing of all kind which evaporates sweat while protecting its wearer from the rain. This lattice textile is made by a lattice organization, a company that relies on self-developing teams without managers or bosses - but with a lot of leaders.
W.L. Gore & Associates is a company that evolved from the late Wilbert Gore's experiences. He joined DuPont de Nemours in 1945 where he held several positions, including head of operations research. In 1958, he founded W.L. Gore & Associates for developing applications for Teflon.
W.L. Gore & Associates is a company without titles, hierarchy, or any of the conventional structures associated with enterprises of its size. Gore asks its associates to follow four guiding principles: (1) try to be fair, (2) use freedom to grow, (3) make your own commitments, and keep them, and (4) consult other associates prior to any action that may adversely affect the company.
To avoid bureaucracy, to keep motivation and to develop innovation, the company uses the lattice, which has these characteristics:
lines of communications are direct, person to person, with no intermediary
there is no fixed or assigned authority
there are sponsors or mentors, not bosses
natural leadership is defined by followship
objectives are set by those must ìmake that happenî
tasks and functions are organized through commitments
The firm has now over 5'000 associates or employees in 150 plants in six countries and is about $1 billion in sales ... with the same auto-organization!
[Shipper, 1992]
In the same time, one observes that many firms have not succeeded in designing such an ideal firm. Innovation and control, autonomy and efficiency, empowerment and group cohesion., competition and cooperation, speed and complexity: many companies will have to resolve that kind of apparent contradictions or dilemna.
Implementing the last à la mode groupware environment in a traditional hierarchically structured organization simply won't work! Aligning strategy, organization and technology for maximizing flexibility, innovation, collaboration and control still remains the key issue. Learning from success stories and mistakes clarified several important lessons: speed counts but not at the expense of control, empowerment is not anarchy, and transforming an organization requires more than just changing the structure [Applegate, 1996].
Inside the firm, open teamwork could be an organizational answer and groupware a technological lever.
Teamwork is not only a mix of competencies. It is also a complex network of relations, influences and personal ambitions. Five basic principles or success factors have been identified by [Lipnack, 1993]:
(1) The unifying purpose represents the ability of defining and keeping a common goal that all members can take as reference. If this unity is not achieved, no common view of the project will be shared, slowing the development process and wasting resources to control the work performed.
(2) Voluntary links or relationships are not visible but they are an essential element to keep the team's cohesion and cooperation. Any team must be supported by communication tools as various as possible to satisfy any requirements. This need is naturally increased as you are decentralized, or working in a different time frame (asynchronous communication).
The new information and communication technologies such as groupware and workflow management play a major role in order to sustain these voluntary links among the team members. The way these communication and groupware tools are implemented is also strongly depending of the internal organization of the team.
(3) Teams consist of independent members. But the independence of the members must be controlled to ensure compliance with the needs of the group. Team is a fragile equilibrium between personal ambition and the need of the others to achieve this personal goal.
(4) Teams have multiple leaders. It increases the effectiveness of the group as it combines the dynamic of multiple views with the speed of the parallel processing. By leader, we identify people who take responsibility in the project, make and keep commitments. They must not be compared to ìbossesî as they do not have subordinates. Multiple leaders as well as independent members are also depending of the internal organization of the team.
(5) The last success factor is to maintain interactive levels through the organizational structure. By integrating people from different level of the hierarchy, a team increases its power as firms crossing their boundaries. It enlarge their scope as well as their level of competence.
To be successful, a team needs to incorporate all five elements and to ensure a proper balance between the internal competition of its independent members and multiple leaders, and cooperation (and control) with its unifying principles and voluntary links.
Teamwork can be found in any type of organizational environments and scales: small groups, larger clusters, business units, small and large companies such as Gore [Shipper, 1992], Oticon [Kolind, 1994], Semco [Semler, 1994], and ABB [Lipnack, 1993].
New information and communication technologies, such as groupware, organizational support system and workflow management, can leverage the redesign of (§2.1) the share of information, reporting and environmental scanning, (§2.2) the communication between team partners, and (§2.3) the coordination of activities inside a value chain [Porter, 1985].
2.1 Shared information
Teamwork technologies allow teams to retrieve, share and update information not only inside teams but also outside their boundaries.
The advanced information and communication technologies, such as on-line databases and services, included the Internet, electronic document management (EDM) and executive information systems (EIS) allow companies to redesign their information gathering and diffusion.
Electronic document management [Applegate, 1996] [Coleman, 1996] [Sprague, 1996] is the application of modern information technologies to create, store, organize, transmit, retrieve, manipulate, update documents to fulfil organizational purposes; document are sets of information pertaining to topics, structured for human comprehension, represented by a variety of symbols, stored and handled as units. Such shared information repositories (for example Lotus/Notes) consist of documents or ìnotesî databases; they also integrate discussion databases (or forums) in order to link access to shared documents with associated commentaries and group discussions. Information can be entered in the repositories by filling out electronic templates or forms. Electronic agents are software programs that help manage and control information sharing; they can be used to alert managers to events or sales opportunities, to monitor sales leads in a database, to filter e-mail messages, and to dispatch information among team members.
Such advanced shared information systems can also be used to store a company's expertise, its practice and knowledge. The ìshadow partnerî at KPMG Peat Marwick was intended to be a worldwide information network that would link all KPMG professionals to each other and to a wealth of database and information services. The database would include information, updated daily, about experiences and contacts of the partners, public information such as directories, on-line news services; training courses on business topics.
Executive information systems, organizational support systems, datawarehouses [Boone, 1993] [Fedorowicz, 1992] are other technologies that enable people to access common, shared, up-to-date, internal and external, information. EIS are tools for monitoring, controlling and measuring business activities. EIS allow to share a common source of information throughout an organization. However EIS are typically designed so that managers can customize the look and feel of the system, by selecting the information presentation and by choosing the management support tools they prefer to use.
ABB - reaching flexibility and control
Asea Brown Boveri is in the electrical systems and equipment business. It is a distributed global network of more than 1'300 mostly traditionally organized companies, houses only 100 professional staff people in Zurich. ABB is a global giant with about 250'000 people working in 140 countries and 1992 revenues of about CHF40 billion. Within the companies are 5'000 profit centers of 40 to 50 people, each with P&L responsibility; finally there is an ongoing effort to segment Profit centers into high-performance teams of 5 to 15 people.
ABB feeds on the creative tension between cooperation and competition that fuels teamwork: ìwe want to be global and local, big and small, radically decentralized with centralized reporting and controlî Barnevik, ABB's CEO, says.
To foster open communications, ABB has its ABACUS executive information system, ìthe glue of transparent, centralized reporting ... of performance data on ... profit centersî. This executive information system both gives the sparse hierarchy the information it needs to make fast globally sensitive decisions, and it keeps players ìfully informedî on the basic operations of ABB's internal market mechanisms. The information system and market interactions supplant the vast administrative structures endemic to traditional organisations.
[Lipnack, 1993]
Initially dedicated to senior managers, EIS is now perceived as a integration tool [Applegate, 1996] for not only providing the top management with a better understanding of operations and local business dynamics, but also giving to line employees a better understanding of strategic goals & initiatives and the corporatewide perspective.
Therefore use of these integration systems can lead simultaneously to centralization and decentralization of decision making, as predicted by [Huber, 1990]. A well-known example is seen at Frito-Lay [Fedorowicz, 1992]. This company installed a sophisticated EIS to gather scanner data, perform trend analysis, and provide executives with immediate access to market problems and opportunities. This EIS completely redistributed the responsibilities inside the business processes: decisions previously made by the line were shifted up to top management, and vice versa.
Another use of EIS is illustrated at Cypress Semiconductor [Applegate, 1996], a company having adopted teamwork. At Cypress, a computer-based information system track corporate, departmental and individual performance so regularly and in such detail that the company is virtually transparent. The system give managers the capacity to monitor what's happening at all levels, to anticipate problems or conflicts, to intervene when appropriate, and to identify best practices
2.2 Electronic communication
Groupware [Coleman, 1995] is an umbrella term for the technologies that support person-to-person interaction from e-mail to electronic meeting systems (EMS) to video-conference.
Advanced information technologies such as electronic mail, discussion forum and computer conferencing, electronic meeting systems, group writing, scheduling and calendaring impact the way people communicate, teams work and, eventually, organizations process.
There are several classification framework for groupware. The
best known is the scheme [Johansen, 1991] which focuses on the
time and place of interaction and identifies enabling technologies,
as illustrated in table 2.
| Same Place | Need: Face-to-Face Meeting
electronic whiteboards Electronic Meeting System (EMS) Group Decision Support System (GDSS) | Need: Common view
shared files team room and shift work group displays (Management Cockpit) |
| Different Places | Need: Cross-Distance Meeting
conference calls screen sharing videoconferencing | Need: Ongoing Coordination
electronic mail and voice mail computer conferencing & forums forms management |
A mix of these groupware technologies can be used by teams according to their specific needs at different stages of their life cycle as suggested by [Johansen, 1991]. The case studies are numerous and illustrate the variety of possible outcomes of introducing groupware solutions [Applegate, 1995] [Coleman, 1995] [Ciborra, 1995].
Use of groupware technologies is sometimes amusing, original, or controversial. At the Chemical Bank [Applegate, 1996], one of the most popular and widely use of Lotus/Notes applications is a ìRumor Millî. Instituted as a tool for communicating among employees information on changes in the organization, and to alert management to concerns that might cause undue stress or dysfunction within the organization, the ìRumor Millî enabled anyone to post - possibly anonymously - or respond to a rumor.
It is argued that groupware technologies enhance team performance, productivity, competitiveness, organizational streamlining, increased functionality, and customer service. However, in order to achieve these results, careful attention to implementation and is required. Successful implementation requires an alignment of a new way of communicating (technology), a new way of working together inside teams (organization), and a new way of making business (strategy) in a given context (environment}.
Commitment
In the panorama of groupware technologies, one of them holds a special place. Recognizing that, in teamwork, the conveyance of commitments is fundamental, [Flores, 1988] suggests a groupware solution where commitment is the basis for communication.
In this approach based on the speech/act theory, the communication between two parties can be divided into four stages: the opening, the negotiation, the performance and the assessment.
The opening can be made by a team member wishing to delegate a task, but can also result from a spontaneous service offer. It ensues a negotiation on the conditions of the task performance using some offers and counter-offers. Once an agreement is reached, the task is performed and its termination announced. The team member receiving the task results, can then express its satisfaction or not and provoke, if needed, a new performance.
This support framework allows to manage the conversation and the correct use of the message types according to the state of the task performance. The framework also allows to manage the actor commitments like the list of tasks the actor promised to perform to other actors and those promised by other ones to the actor.
Many tools have been developed based on this approach such as the Coordinator e-mail system and the Action Technology workflow environment, designed by the promoters of this approach [Flores, 1988]. Several companies have adopted that kind of environments into their implementation of groupware solutions. One of them, a cable-manufacturing company, uses Coordinator with success, for many years, in order to improve the communication inside teams distributed in Lausanne, Atlanta, Hong-Kong and Finland. Some methods for analyzing and re-engineering business processes also integrates this approach [Scherr, 1993].
2.3 Coordination mechanisms
Coordination of activities can be highly improved by advanced information technologies.
Team technologies allow people to coordinate business activities or tasks in entirely new ways leaving progressively central planning for adopting more market-oriented mechanisms.
Workflow automation [White, 1994] is typically a hierarchy-based mechanism: it is associated with the automatic routing of documents based on an anticipated plan. Such a system generally routes documents to the next person who must take an action (e.g. approve a report) according to a set of rules fixing the route path based on the document contents or the person's role. Note the three Rs of workflow: Route, Rules and Roles. Workflow automation expand the power of electronic forms and agents by providing additional knowledge about the flow of information and the underlying business processes; therefore it is often related to Business Process Re-engineering [Martin, 1996].
Workflow automation is now widespreadly used in companies and among others the insurance industry since USAA pioneered such systems and was successful in improving its productivity. This company installed an information system integrating workflow automation and imaging system to automate its core business, insurance sales and underwriting, routing the right document at the right person. Moreover, USAA used this system to capture amounts of information about customers in order to provide advices whenever a customer contacts USAA. Looking at the flow of information, USAA was also able to invente business lines targeted to the needs of specific customers, such as insurance for boat owners [Rayport, 1995].
At the opposite, some coordination systems are based on market-driven mechanisms and technologies [Rasmussen, 1991] [Zucchinetti, 1995], most of them derived from the distributed artificial intelligence.
Distributed artificial intelligence
Distributed Artificial Intelligence [Durfee, 1989] provides frameworks and mechanisms for asynchronous and structured communications. It covers several cooperative system types, aiming at different objectives and resting on different coordination mechanisms:
In the multiagent planning, the description of the problem to solve and the individual agent plans are centralized to establish a global collaboration plan between them. The sophisticated local control tries to integrate, in the local agent intelligence, a reasoning on actions and beliefs of other agents to solve the coordination problem. In the functionally accurate cooperation systems, the conflict resolution becomes an integrated part of the problem solving activity.
The contract net system leans on a task allocation between agents, following a call for bids on a market. The submission of a task within an agent community and the different steps (the offer, the adjudication, the realization and the validation) are defined in a protocol. The coordination mode is the contract, ratified in case of correspondence between the experience, resources and information necessitated by the task, and those possessed by the potential provider.
Partial experimentation [Bloch, 1995] concerning the call for bids framework has been achieved in the context of software company that has experienced Lotus/Notes in order to coordinate the tasks to be dispatched among the team members of a custom support service.
Electronic market for skill-based management
Most of the groupware systems concerns the support to teams when they are operational; few groupware tools support the creation of teams before the commitment to cooperate.
New expectation on human resource are emerging with the increasing popular empowerment, teamwork, and skills-based management [Michel, 1991] which intends to provide competitive advantages by integrating human resource in the strategy. The companies therefore need new tools to fulfil the following tasks:
manage and keep track of skills and knowledge
help their employees to define their profiles
support the teams in their search for the right skills and team members
match supply and demand to find the appropriate skills when needed in a team.
An answer to these problems, suggested by [Lang, 1995] inspired by [Authier, 1992], should be to create an electronic platform providing market management functions for skill supply and demand. These function should include identification of buyers (teams) and sellers (employees), call for bids, negotiation and substitution identification, settlement, trust brokering, market history management, and skill valuation, as for most electronic market access forum [Konsynski, 1993].
Towards open teamwork
[Constantine, 1993] identifies four types of teamwork organization and their corresponding strength and weaknesses. This typology is interesting because it is detailed enough to extract support frameworks. Indeed, it takes into consideration elements such as the complexity of the task to perform, its repetitive or innovative nature, some contingency factors such as the team cohesion, its stability, its hierarchical structure or the degree of autonomy of its members, and includes objectives such as creativity, adaptability, efficiency or foreseeability.
These factors are grouped into four team families mainly based
on the coordination mode that they suggest. Team organizations
mainly differ based on the maintained balance between the competition
and cooperation principles presented above. The four types of
structures are exposed in Figure 2.
The closed team is characterized by a hierarchical coordination mode, where an executive coordinates activities by taking decisions, delegating actions and controlling results. Information is strictly controlled and internal controls are put in place to counteract any deviation.
The random team is at the opposite. It is characterized by strong innovative and individual initiatives, favoring change and creativity; the control there is weak. It completely rely on independent initiatives for direction and decision; the independence of each individual is the major concern. The rather chaotic functioning of this type of team is reflected in its name.
The synchronous team supposes a harmonious alignment of the team members according to a common vision. Members have a perfect notion of their role and their mission, and they do not have to negotiate in order to coordinate their activities. Such a team organization is based on a strong tacit alignment and shared knowledge. This type of team is very efficient, but requires a stable context and a repetitive work.
The open team leans on a process of permanent adaptation and adjustment, essential for the coordination of very complex tasks. Feedback on results obtained by the other team members allows the team to discuss the project direction and to adjust its actions. It is based on adaptive collaboration. This means that individual initiatives are encourage, but they need to be discussed with the rest of the group to get agreed and integrated in the global view of the project. As the synchronized team it is egalitarian as roles and responsibilities are not pre-assigned and can be redistributed.
Open teamwork seeks to integrate simultaneously the innovation of the random team with the control of the closed or hierarchical one. Open teamwork is clearly a co-opetition structure and coordination mechanism.
Co-opetition is a widespreadly used acronym that combines the words competition and cooperation. Apparent or linguistic contradiction that managers has to resolve for providing their companies with advantages of both: competition means independence for flexibility and innovation; cooperation means interdependence for efficiency and control. As did Lars Kolind for his Oticon company:
Oticon - a spaghetti organization
About ten percent of the world's population suffer from reduced hearing. The challenge to all hearing aid manufacturers was at the beginning of the 1990's to make devices that adapt automatically in the changing sound environments and to make all kinds of controls a thing of the past. This requires more than technology but a combination of audiology, psychology, technology ... and imagination.
Oticon is a danish company, founded in 1904, a leading manufacturer of hearing aids, with 1'100 employee, 14 companies around the world and stable sales of about DKK450 million (CHF800 million). In 1990, Lars Kolind, the Oticon's CEO, decided upon a strategic move to develop a unique, knowledge-based corporate head quarter organization, based on a complete electronic infrastructure. The objective was to stimulate creativity and efficiency; the goal was set at 30 per cent improvement in productivity (defined as cost per hearing aid sold)
Four aspects of the organization were turned upside down in order to force innovation:
each employee assigned to at least two projects
no more formal hierarchical organization; no departments and no titles; but teams of independent experts with informal relations between them, guided by common values and goals
no assigned office or desks; but an open space with similar computerized workstations; a mobile phone and a trolley for each - nomad - employee
a paper-less company and a sophisticated electronic infrastructure, i.e. an investment of about DKK 30 million
After a 3-quarter period of chaos, results were impressive: Oticon was first on the market with a fully automatic computerized hearing aid, the sales started a trend towards DKK 660 million recorded in 1993, sales growth has quadrupled (23% in 1993), profit have soared and tripled to a record level of about 13 per cent in 1993, and Oticon was certified ISO9001.
[Kolind, 1994]
3 Strategic network and extended enterprise
The traditional view of the firm with clear boundaries, limited relations with partners and stable markets is evolving. Today, information and communication technologies can leverage a redesign of the inter-organizational relations [Konsynski, 1993] [Klein, 1996] allowing the companies to (§3.1) get better at gathering information about their out-of-boundary environment, (§3.2) establish EDI-based partnerships with their clients and suppliers, and (§3.3) share electronic platforms and markets with their competitors.
This phenomenon of crossing, extending and transforming the boundaries allowed by the new information technologies also enables independent companies to build or join strategic networks, co-opetition structures for coordinating value chains [Porter, 1985] or configurations of activities [Revaz, 1996].
3.1 Business information at boundaries
Boundaries of firms are transformed by various forms of information and communication technologies (ICT).
The information and communication technologies, such as CD-Rom and on-line services, allow companies to know better their commercial and technological environment. They can discover business opportunities at a very fast pace. These firms can also build a marketing ìpresenceî on these networks, thereby being more accessible to their customers, suppliers and various partners.
Business information (trade contacts and opportunities, market intelligence, statistics) plays a key role in marketing and staying competitive. Not having access to the relevant information at the right time can be a serious obstacle to do business.
Here is, for illustrative purposes, a taxonomy of business information proposed by a recent United Nations report [UNCTAD, 1994] which gives a comprehensive overview of the role of business information for increasing international trade efficiency:
general economy and business information: the eye opener
product and market studies: the overall picture
statistical data: getting the hard facts
price information: the bottom line
trade regulations and standards: looking over the hurdles
business contact: knowing your partners
business opportunities: the chance is now
Information and communication technologies increasingly enable companies to scan, monitor and pay attention to information (events, trends, and patterns) that take place in their environment. They also allow a better diffusion of (marketing) information from the firm to its external environment.
Environmental scanning is the activity of perceiving and interpreting the environment for the purpose of taking the appropriate decisions. Recently, environmental scanning has become a more systematic activity in companies and its appeal has grown with the increasing amount of electronically and often publicly available information about the competitive environment. From the on-line databases and networks such as the Internet, managers can scan, analyse and interpret information that may signal threats and opportunities.
The sources of business information are numerous and varied: commercial suppliers, the business press, banks, trade fairs, trading companies, trade and industry associations, national public sector institutions and intergovernmental organizations provide business information and most of them do so through networks or on-line databases.
Electronic networks and on-line databases are becoming now the first media for supporting this environmental scanning, far ahead of the more traditional sources of information such as printed material, personal contacts or professional fairs. It also means that more and more information only exists or at least appears first on electronic networks. Therefore enterprises without a good practice of accessing such electronic business information will be disadvantaged.
State and public information
In most countries, governments took many initiatives to support their national companies in the field of electronic commerce. To assist SMEs in the global information-based economy, the public administration within central and local government might also promote the electronic dissemination of business-related information.
Many public administrations, at the country, state or city level, use ICTs to widely dispatch census information collected and structured to help their local businesses reach foreign markets.
Because of the critical role that information plays in trade and commerce, the public sector in many countries tries to take advantage of the ICTs to ensure the widespread and equitable distribution of business information. These ICTs enable the public administration to provide more and better packaged information to meet SMEs' needs. Delivering this information electronically can promote electronic commerce to SMEs but also result in rationalization gains and more efficient service for the public administration.
Many US federal agencies and departments provide on-line information to American companies: economic and business indicators, foreign trade data, statistics (business, employment, energy, monetary, price and productivity, regional economy) and summaries of current economy conditions. In addition, many trade opportunities files are made available on a periodic basis. The same is becoming true for the European Union.
The Internet is becoming one of the most systematic sources of this government-provided business information.
In most cases, this information is free or very low-cost but issues of financing and pricing are actively debated. Another debate raises equity concerns: if the on-line information gives distinct advantages (timeliness and searchability), those without electronic access will be disadvantaged. Nevertheless, facilitating cheap and ubiquitous access (through public access terminals for instance) could leverage the field.
3.2 Business partnerships and relations
Relations with partners outside the enterprise (suppliers, customers and even competitors) that are facilitated by information and communication technologies (ICT) are of major concern to the enterprises and their managers.
Some ICTs, typically known as electronic data interchange (EDI), allow enterprises to perform transactions with their partners more effectively, notably by reducing the amount of paperwork needed at each step of transactions (orders, invoices and payments). These ICTs can also be used as levers for stronger partnerships, alliances or inter-organizational systems (IOS).
There is an accelerating trend towards computer-supported links between independent firms to achieve and sustain efficiency in their interactions. ICTs such as not only EDI [Kalakota, 1996] but also Efficient Customer Response (ECR) and Supply Chain Management (SCM) leverage new partnerships, associations, and bilateral business processes that reshape organizations and industries. More recently, standardization to support such information-based linkages is emerging.
EDI helps Leroy-Merlin reduce costs and streamline processes
Leroy-Merlin is the second-largest distributor of Do-It-Yourself products in France and is part of the international Auchan group. The company procures its goods from about 1'000 regular suppliers and sells them to end-consumers through the 59 company-owned outlet stores.
In 1988, initially aiming at improving the operational efficiency of processing its purchase orders, Leroy-Merlin began installing an EDI application based on the standardized EDI-Service ìAllegroî widespreadly used in the distribution industry. The company was able to convince some suppliers with whom it has a high number of orders to switch to EDI due to the foreseeable benefits of reducing input errors and processing cost per order. However only the medium-sized suppliers have easily accepted to adopt the EDI system; the large suppliers often had too much weight and bureaucracy to accept EDI, and the small ones didn't have the IT infrastructure or maturity.
Three years after introducing EDI, Leroy-MErlin had more than 50% of purchase orders sent by EDI. The lead time between the order's entry at Leroy-Merlin and its acknowledgment by the supplier was reduced from an average of 5 days to about 1 day now. With the traditional approach of sending orders via mail or fax, the average cost per order was about 3 francs; the EDI system has significantly reduced this cost to 40 cents. Leroy-Merlin also points out the following qualitative results: less paper and administration work, independence from the postal service, no more data re-entering at the supplier's site, more reliability and accurate data
[Jelassi, 1994]
Benefits of IOS and EDI [Howard, 1995] include cost savings and service-level improvements. Direct cost savings are due to a decrease in data entry effort, a reduced error rate, and speedier information flows, especially if the EDI system is directly interfaced with the data processing systems of the partners. Indirect cost savings like reduced inventory levels occur when IOSs are used as levers for a closer relationship between the trading partners. Service-level improvements have also been observed when using IOSs, for instance faster response times, just-in-time production, more responsive service to customers, easier tracking and better control of goods during shipping, and faster reconciliation of shipping notices and invoices.
In some cases, IOSs and EDI were used by companies to get a competitive advantage on their competitors or suppliers, as Wal-Mart and Sears demonstrated in the retail sector, Baxter [Vitale, 1988] in healthcare-procurement, or Brun-Passot [Jelassi, 1995] in office supply procurement. In other cases, IOS and EDI were adopted by an entire sector as a competitive necessity and a stimulant for the industry, such as the Quick-Response [Hammond, 1993] in the apparel sector.
Another effect of such electronic integration, interesting for the SME-based context, is that small companies can look, feel and act as larger companies since the rules of time, distance and complexity are changed [Konsynski, 1993]. For example, a small company could get a global worldwide presence if it chooses to distribute its products over largely used electronic networks. As such, it competes with larger companies with subsidiaries in many countries.
Finally, many observers think that a network like the Internet will be used more intensively for computer-supported partnerships and electronic data interchange (EDI on Internet) as soon as some issues like security, reliability and electronic money are improved. The first experiences in this matter are very positive [Kalakota, 1996].
Links with the public sector
In many countries, government procurement is used as a leverage to deploy ICTs and support inter-organizational systems.
Public administrations are large transaction processors which can achieve very significant productivity gains when using the EDI type of ICTs. These administrations reduce their own operating costs and, more importantly, act as leaders or promoters towards their private partners (customers or suppliers).
Some governments stimulate the market by leveraging the government procurement power. In the United States, the impact of government procurement on the development of ICTs has been and remains tremendously important. One such initiative is the Continuous Acquisition and Life-Cycle Support (CALS) for linking governmental agencies and their suppliers. The Singapore EDI-based initiatives, such as TradeNet [Konsynski, 1993], demonstrate the role that government sponsorship of ICTs can play in the competitive position of a nation. The European Union and most of its members have launched many initiatives to deal with similar concerns.
Recently Denmark adopted its IT Political Action Plan where the development of electronic communication, such as EDI-based systems, between public administrations and private companies is one of the major options. In this idea, the second biggest city (Arrhus) already exchanges more than 50,000 EDIFACT messages a month with its partners. In this plan towards a paper-less administration, citizens and companies wishing to communicate electronically with public authorities will have this possibility.
Another important part of this Danish report is on the healthcare program (MedCom'95) aiming to handle the 32 million prescriptions, 23 million laboratory reports and 6 million medical reports on patients leaving hospitals by EDI within five years. During the pilot phase the EDI software is free of charge.
From vision to action in Denmark
Keypoints from the ìInformation Society 2000î strategy report of Denmark are:
A number of laws must be rewritten, such as those regulating legal aspects of handling and storage of electronic documents, and public access to official documents
The public sector will be in the front line of introducing electronic commerce, starting with the healthcare sector
Public administrations will be interconnected through a network and obliged to be able to communicate electronically with any citizen and company that wishes to do so
All public institutions must have an e-mail address
The public sector will move to the electronic storage of documents
All Danish companies should get a unique registration number to be used in electronic communication with the public sector
A network should be created for the exchange of electronic documents in business, open to all Danish companies
(Electronic Trader, 1995)
Such a trend towards the use of electronic communication between public administrations and private companies aims at achieving rationalization for the public sector but also at stimulating private sector activity.
3.3 Business platforms and markets
Market transformations are profound as market search and coordination mechanisms are transformed by information and communication technologies.
Enterprises are collaborating with competitors in their efforts to build electronic platforms. These larger projects, sometimes coordinated by an industry association or embedded in a consortium structure, function with communal principles where ideas, technologies and sometimes advantages are openly shared between the members.
ICT can play a major role in the rationalization of many fragmented markets involving many buyers and sellers, by reducing the transaction costs due to the identification of trading partners and the coordination of transaction execution and settlement. We adopt a three-class typology for classifying inter-organization systems, as suggested by [Konsynski, 1993] who distinguishes (a) virtual systems, (b) industrial platforms, and (c) electronic market access forum:
Virtual systems arise when international or sectorial standards are selected by a community of market participants, such as the Quick Response [Hammond, 1993] initiative in the textile sector. The intention is often to prevent the dominance of proprietary standards. Once the standards are selected, each participant agrees to implement these standards in its own systems.
Industry platforms represent the initiative of one or more players (trade participants, professional organizations, or industry associations) in a market to provide a common electronic platform for the industry. The intention is to offer transaction savings, bring economies of scale, and improve the efficiency of trade for the entire participating community. Such platforms are popular in transport (SABRE-like airlines reservation systems and Cargo Community Systems), insurance (RINET) and healthcare industries. One of the well-advertised national platforms is Singapore's TradeNet connecting all the partners of the nation's seaport and airport. Another initiative in Finland, (FinnPap/Finnboard) was no less significant:
A trading environment for Finland in international paper and wood products
Most of the paper companies in Finland, whose sales amount to $4 billion annually, jointly developed an EDI-based industrial platform to link themselves with their key customers and international sales offices. These companies decided that to compete effectively they had to provide an on-line data interchange with their customers and they provided them with a virtual and instantaneous means of placing status inquiries and new orders, in contrast with the 12-day norm of this industry. Moreover, considering their individual small sizes, they were unable to join one of the proprietary information networks of their big competitors.
The system cost $50 million to develop. The speed and quality of response provided by this common platform would have been technically and financially unattainable by any of the individual participants. Therefore, many SMEs acting together and leveraging technology were able to appear to the outside world as a big competitor, creating a so-called virtual or networked company.
[Konsynski, 1993]
Electronic market access forums (EMAFs) refer to computer-supported environments or places where an intermediary or facilitator performs many essential market functions like seller and buyer identification, matching, negotiation, settlement, insurance and trust brokering, product and service valuation. The intent is often the promotion of fair and competitive markets. Such EMAFs exist in many industrial sectors as illustrated in [Konsynski, 1993] [Jelassi, 1996] [Bradley, 1993]: finance, textiles, gemstones (GEM), spare parts (ILS), used cars (Aucnet & AutoInfo), and procurement (Citius).
The United States especially but also the European Union and other countries like Singapore have launched many initiatives in virtual systems, industrial platforms and electronic market access forums. There are some big - mainly US - companies which are highly interested in providing infrastructure, services and applications for supporting these electronic commerce activities. Some other companies operating networks (e.g. Compuserve or Microsoft) originally dedicated to the consumer market are going to host some business-to-business applications and intend to be more active in this segment.
Another phenomenon has to be mentioned: the Internet, in which many business-to-business experiments are emerging to implement virtual systems (EDI on Internet), industrial platforms and electronic market access forums. New improved security, encryption and electronic money systems are a high priority and improvements are quickly coming to the market. Many observers think that the Internet will host many inter-organizational systems while allowing great cost savings over some existing platforms or EMAFs, thereby increasing the number of new projects in electronic markets.
Public platforms and markets
The public sector can take the lead in order to advance the development of electronic platforms and markets in a timely manner for rationalization or demonstrative purposes.
Governments and public administrations use ICTs in order to create and sustain electronic platforms and markets for public needs (national infrastructure, procurement, public calls for bid, public regulated markets).
It is observed that worldwide, governments sometimes take an active and leading role in the creation of trade-related EDI networks, platforms and markets. The involvement of public administrations such as customs authorities makes this a certainty. Another major reason is the importance of government procurement business which justifies the use of ICTs for improving public rationalization in the interplay with private suppliers.
The public sector takes the initiative when the competitive posture of the nation or a region is threatened, when key elements of an electronic platform require the major actions of a government administration or one of its associated service agencies (such as the PTT), and when standardization has to be enforced.
For these reasons, an inter-industry partnership may be actively led by the government, such as the TradeNet in Singapore:
TradeNet in Singapore
The TradeNet electronic platform is one of the most comprehensive trade-related EDI systems in the world. This system demonstrates the role that government sponsorship of ICT can play in improving the competitive position of the nation. The Singapore government has spent a significant effort to facilitate trade documentation processing and link all the trade partners (port authorities, customs, freight forwarders, shipping companies, banks and insurance companies) of one of the world's largest ports.
This effort was successful for the competitive posture of the Singapore transportation and trade industries: approval for declarations, which used to take a couple of days involving much paperwork, now may take as little as ten minutes using a unique EDI document. Therefore, the Singapore port is much more attractive (than other south-east Asia ports) to shippers sending freight to Asia, by allowing them to save time, and therefore money.
Moreover, this effort served to develop growing computerization skills that Singapore wanted to leverage in many other areas. The role of government was essential because it provided the means to create and sustain this electronic platform, to obtain the partners agreement on the new organization, and to improve the nation's technological skills.
[Konsynski, 1993]
In the United States, the CALS initiative, originally fashioned to provide the Department of Defence with computer-aided logistical support, linking governmental agencies and their suppliers, has recently been redesigned as a technical, standards-based platform to support company integration and electronic commerce.
The Danish MedCom initiative aims at developing a national electronic platform for healthcare.
Many examples could be cited to illustrate government initiatives launched to rationalize their internal processes and promote technologies for the private sector by adopting electronic platforms for its own needs.
International electronic markets
Meanwhile, another globally promising experience is emerging. After having set the EDIFACT standard, the United Nations [UNCTAD, 1995] is launching its Global Trade Point Network (GTPN) to stimulate the trade competitiveness and trade efficiency of national economies. This network is going to connect electronically all the Trade Points at which public and private sectors cooperate to improve trade efficiency in six areas: customs, banking and insurance, transport, business information, business practices, and telecommunications. The central on-line document of each trade point is the Electronic Trade Opportunities (ETO) and many applications are designed to allow firms to manage, maintain, and query these documents on a worldwide basis. Until now the main focus was on improving the availability of business information but the next step (1995-98) deals with the execution of transactions over the network. This infrastructure is being developed using international standards (EDIFact, Internet, X.400) and will be one of the largest trade platforms in the world; the United Nations expects to save a portion of the transaction costs (10%) out of the yearly 4,000 billion dollars of global trade. After 4 years, the experience seems successful: 400'000 access per day, 7 million users in 148 countries!
The World Trade Centers and Chambers of Commerce have recently launched the same kind of projects to allow their members to engage in international trade (Global Business eXchange or GBeX). Some big players (AT&T, Dun & Bradstreet, Chase Manhattan, Microsoft, ...) recently unveiled an on-line service to let business use on-line traffic to line up suppliers, negotiate contracts, make and receive bids, and arrange the delivery of goods and services around the world.
Towards strategic networks
Information technologies enables independent companies to transform their boundaries, to work closely together, and to build partnerships or strategic networks, allowing control without ownership [Jarillo, 1993]:
Traditionally, one distinguishes two basic ways to organize and coordinate economic activities: vertical integration and subcontracting.
A first managerial way to coordinate value chains [Porter, 1985] or configuration of activities [Revaz, 1996] is to put somebody in charge of them and to integrates within the company's boundaries most of the activities needed to deliver the final product or service to customers. This vertical integration often requires to build a hierarchical structure in order to coordinate a large number of various activities.
Subcontracting is essentially a second organizational form, market-based, where a company, which needs an input, goes to the market and has it delivered by an external party.
These two coordination mechanisms, hierarchy- and market-based, have advantages and disadvantages. Simply stated [Malone, 1993] [Benjamin, 1995]:
market-based subcontracting often induces lower production costs than hierarchy-based vertical integration within the firm, because an small autonomous unit can produce cheaper. Production costs include the physical or other primary processes necessary to create and distribute the goods or services being produced, but conversely
subcontracting often requires higher coordination cost than vertical integration, because it is necessary to manage the subcontracting process (selection, negotiation and settlement). Coordination costs include the transaction costs (Williamson) of all information processing necessary to coordinate the work of people and machine that performs the primary process. For example, coordination costs include determining the design, price, quantity, delivery schedule, and similar factors for products transferred between adjacent step on a value chain.
With the advent of the new information and communication technologies, strategic networks [Jarillo, 1993] is becoming an emerging way to coordinate value chains and configurations of activities, providing companies with the advantages of the two old organizations. Such a strategic network could be defined as a partnership of independent and competitive companies which consider their relationship a cooperative one, because they believe there will be more to share by cooperating.
Benetton - a vertically de-integrated company?
Benetton is probably the world's best known apparel company. The general company's strategy is defined as developing 'industrial fashion' trying to balance fashion appeal and ability to quickly respond to shifting tastes, and industrialization with its plans and low costs; flexibility versus planning!
Benetton relies on external people and companies for the major part of its manufacturing and selling activities. For sales of $2 billion, it only employed directly 1000 people in 1993. The styling and design of the garments is done outside by international free-lance stylists. More than 80% of manufacturing is done outside the company, by 350 subcontractors, which employ more than 10'000 people. Logistics and distribution activities are also performed mainly by outsiders, who deliver the finished garments direct to every shop in the world. Finally, Benetton uses an external sales organization of about 100 agents that take care of a retailing system of 6000 shops spread all over the world.
A good alignment of its strategy, its organization and the information & communication technology provide Benetton with a high degree of both flexibility and ability to plan ahead, with a good balance of autonomy and control, and with both low production costs and coordination costs.
Thus Benetton achieved most of the advantages of vertical integration (planning, direct coordination, unity of purpose, no need to constantly renegotiate) and also captures the advantages of market-based subcontracting (most efficient size for each activity, maximum motivation, ability to respond quickly to special demands).
[Jarillo, 1993] [Bressand, 1995]
The Colliers [Applegate, 1996] is another example of a networked, sometimes called virtual, organization, knitting 34 independent local real estate firms with 100 offices in 12 countries within Asia, Europe and North America; each partners having access to an electronic network of global information and local expertise.
Just as open teamwork within the firm (see above chapter 2), strategic
network of firms is a co-opetition structure for coordinating
business activities, balancing a high autonomy (competition) and
a high control (cooperation), as illustrated on figure 3.
The information technologies should facilitate the sharing of information, the communication between partners, and the coordination of value chains using more market-based but under control coordination mechanisms.
4 ìCustomworkî and intermediation
According to [Rayport, 1995] ìin today's world of overcapacity, in which demand, not supply, is scarceî there needs to be a shift from supply-side to demand-side thinking, and organizations need to ìsense and respondî to customers' desires rather than simply make and sell products or services. The focus is therefore on establishing relationships with customers, based on learning their needs and desires, proposing the right products and keeping this relation active throughout the years.
Firms communicate with their customers through various media. For several years, the ICTs have been deeply altering the traditional view of marketing, shopping and retailing media. The computer-mediated environments such as the Minitel, Compuserve, and the Internet allow another way to reach consumers and on-line marketers plan to increase their on-line spending [Breton, 1994] [Kalakota, 1996] [Taylor, 1994] in order to be (§4.1) better at gathering and diffusing information within their environment, (§4.2) more efficient in their relations with their customers, and (§4.3) more attractive on their consumer markets.
This phenomenon of interactively reaching customers allowed by the information technologies also enables companies to experiment new ways for coordinating a value system and customers.
4.1 Sharing information with customers
Whoever controls information in many cases controls the business. Today, information is more valuable than ever in the relation with the customers and sentences like ìthe customer is kingî are suddenly all the rage.
Pharmaceutical distribution, information and margins
Not long ago the most valuable information in the pharmaceutical industry was the drugs preparation know-how that was accumulated in the companies' labs. Then pharmaceutical distributors began collecting information about what drugs individual patients were using. Armed with this information and under governmental pressure, distributors pressed the doctors to prescribe cheaper drugs. As distributors got better at gathering information about their customers, they won a bigger share of the consumer's dollar (33% in 1972 and 40% in 1992); manufacturers a smaller one.
Moreover, pharmaceutical distributors that are part of managed-care networks, like MedCo Containment Services in the United States, exploited customer data better than their traditional counterparts did. As a result, they got bigger supplier discounts (11% in 1987 and 27% in 1992) and gained market share (25% in 1987 and 55% in 1992).
When Merck & Co, a drugmaker, bought MedCo in 1993, it wasn't vertically integrating but it was actually buying its database, an intangible asset that now allows it to recoup the margin it was losing in manufacturing. At the same time, it is signalled to the industry that the availability of digital detailed information would become key in competing.
[Stewart, 1995]
Therefore, every interaction with customers and consumers is considered as an opportunity to learn and be more effective in marketing. ICTs can help companies to gather more and better data about their customers and provide them with improved information.
Realizing the growing importance for consumers of offering services in addition to the products they market, companies are actively using ICTs to get information about their customers, customize their products and provide customers with up-to-date accurate information about their products and services.
More and more companies consider that each interaction with a customer is a chance to learn how they view their products or services. Some of them invest a lot in computerized systems that capture data about customer's ongoing interactions with them. Today, gathering and storing data from customers is getting easier, not only since the ICTs prices are decreasing but also since many customers interact with companies via fax, smart cards, Internet or Minitel access, and other digital means. Moreover, these new ICT-enabled media have entailed a redesign of marketing strategies of the companies [Hoffman, 1995].
Among the media used by firms to gather or distribute electronic information, two are especially remarkable: the French Minitel and the international Internet with its World Wide Web extension. Among the others are Compuserve, America On-line, and Prodigy
The French Minitel [Théry, 1994] [Jelassi, 1995] was the first interactive service ever available to an entire country. The experiment was initiated in 1983 with 120,000 terminals and reached 6,272,000 terminals for 20'112 services in 1992. The terminals were first distributed free of charge to the users, but as the product evolved they finally got charged on a monthly basis. The demand was boosted by the free on-line telephone directory and the yellow pages that still represented 43% of the calls in 1992. The business applications rank second with 19% of the calls but are first for their share in the connection time with 23% against 21% for the electronic telephone directory. Ranking third in the time connection % are the chat services with 15%. The Minitel is still very active in France. But as the Minitel is using slow transmission rates and does not integrate multimedia, it is facing the competition of the Internet.
The Internet emerged from the connection of numerous private networks that have finally created a web of networks all over the world. First used by the military and universities, it now includes millions of users, commercial firms, non-profit organizations, discussion groups and other activities. It is currently facing the fastest growth of its history with a more than 50% increase per month in some countries. Parallel to this boom of users, firms are more and more developing servers to get and provide services and information about their products.
The World Wide Web, sometimes referred to as WWW or the ìWebî, is the Internet-based hypermedia environment. It includes a standard set of software, protocols and conventions that make it possible for people to search, retrieve, browse, and add information to the environment at will. It is the add-on which allowed and facilitated the growing commercial use of the Internet one year ago.
These ICT-enabled environments modify the nature of consumer interaction. They can be used not only to gather information about consumers but also to adopt new communication strategies with consumers for presenting products and services. But these environments will require new and yet unknown approaches for marketing activities compared to traditional media and other interactive multimedia (pay-per-view, video-on-demand and interactive TV).
Most on-line marketers are adopting a trial-and-error method to find the best approach to integrate these new media in their marketing strategy [Bloch, 1996b] in order to (a) learn about customers and get their feedback, (b) build a brand or corporate image, and (c) make product promotion and increase the number of different visits:
Learning about customers
Electronic commerce systems can allow to build more personalized relationships with the customers, thanks to their ability to collect information on customers needs and behavioral patterns.
The role of technology in learning about customers is its ability to record every event in the relationship, such as customers asking for information about a product, buying one, requesting customer service, etc. Throughout all these interactions, either over the phone, in person or on-line, the needs of the customer are identified and will feed future marketing efforts [Pine, 1995]. For example, if we use the illustration of the on-line travel agency, its ability to store and remember customer habits (e.g. always flies out of this specific airport, likes window seats and requests vegetarian meals) and particular data (e.g. frequent flyer numbers and preference for a particular rental car company) will establish a relation where the customer feels comfortable in dealing with this particular travel agency [Bloch, 1996a].
Moreover, a historical analysis of the data will reveal who are the most profitable customers and products, therefore allowing to reduce the scope of products to target the most profitable ones, and extend a product line to add products likely to cater to the needs of these most profitable customers. Then, by understanding the segment of customers which are most interesting, specific marketing efforts can be targeted to similar individuals, currently non customers [Grant, 1995].
Key in maintaining these relationships is becoming a trusted partner of a customer, by providing him or her with valuable information. This pro-activity is the ability to use the direct channel with the customer to inform him of specific offers which would match his/her needs and buying patterns. An example of such a strategy is currently used by Amazon, an electronic bookstore on the Web. Amazon allows its customers to program agents, which will send them relevant information. This information is sent through electronic mail and links with the on-line bookstore.
What electronic commerce brings as a lever to such strategies is the automation of the customer profile, his needs, buying patterns, etc. All that data can then be analyzed through computer applications and the right answer chosen. Therefore, personalized service strategies which were before only achievable with a small number of customers suddenly become possible on a wide scale [Ing, 1994].
Making product promotion
Through a direct, information-rich and interactive contact with customers, electronic commerce can enhance the promotion of products.
One of the first use of electronic commerce is to provide product information to customers, through on-line electronic brochures or buying guides. The advantages of electronic commerce as a way to deliver product information is its availability anytime, anywhere, provided the customer has the right infrastructure (e.g. PC, modem, on-line service) to access this information. But using an electronic medium also allows for interactivity and customization. Different ways to customize the advertising content, based on the customer profile or input, are to change the content description (simple or complex), display only a range a products which are relevant to the particular customer, change the price (e.g. discount for club members), allow for new functions in some cases (e.g. coupon available only in certain conditions) or change the path used to navigate in the service.
For instance, an electronic supermarket could provide different graphical user interfaces for kids, teenagers or housewives, with a look appealing to each of these segments. The advertisements appearing on the pages would also be different, with toys for the kids, music for the teens and jewellery for the housewives. This is coherent with trends in marketing, such as micro-marketing or one-to-one marketing [Pine, 1995] which try and target each consumer with a specific message, according to his needs and desires.
Another good example is Hewlett-Packard and its reference guide to buying a printer, which will ask the customer to identify its needs (e.g. price range, need for color, etc.) and present her with a customized version of the catalog, selecting only the printer models which match her needs. In the services industry, the Bank of America allows to customize its ìhome pageî on the Web, allowing the customer to bundle all the information services the bank provides in one convenient, easy to access page.
In a world with products being increasingly harder to differentiate, shrinking life-cycles, an abundance of traditional media messages and customers having too little time, electronic commerce offers an opportunity for new promotion strategies, enhancing the branding of products.
Building a brand or corporate image
Electronic commerce systems can become one of the components of a brand or corporate image, especially while targeting technology-friendly customer segments.
This might be one of the most intangible aspects to measure, but building a brand or corporate image is of prime interest in some industries, those with commodity products or high competition.
All of these brands use their Web presence as a way to affirm their corporate identity and their brand image, in addition to providing product information. For instance, in the telecom industry, all the major operators spend huge amounts of money to try to differentiate basically similar products. The same is true in the food industry where companies such as Nestlé carefully design the Web site with this brand preoccupation in their mind.
4.2 Interacting with consumers
It is not enough to get better in gathering information about consumers and in communicating with them, companies also have to sell their products or services and make transactions with their customers. For this also, ICTs can change the rules of the game.
New distribution channels, products and services have been created in order to satisfy the needs of a growing, wealthy- and technically-skilled population. These channels are based on technologies such as on-line services and the Internet, but also CD-ROMs and interactive TV.
In order to decide to sell through a computer-mediated environment, a critical mass of customers is necessary. This critical mass existed in the French Minitel network and it is emerging in the Internet. A recent report [Rebello, 1996] mentions that
the Internet merchants this year will hawk some $518 million worth of goods, from CDs to computers; total cyber-sales could swell to $6 billion by 2000
sales of subscription services on the Web will hit $120 million this year; by 2000, the number is expected to be $1 billion
that spending on Web ads will hit $312million this year; growing to $5 billion by 2000.
An important component of the business value of electronic commerce is in its opportunity to save on costs. By sharing a digital infrastructure such as the Internet compared to owning a physical one, marketing, distribution and customer service costs can be drastically reduced. The case of SunSolve, for instance, Sun Microsystems' on-line support service on the Web, is widely reported for having saved them over $4 million.
By using automated systems and a digital transmission architecture, personnel, phone, postage, and printing costs can therefore be reduced. This is of especially high importance in service industries, where the cost of customer service usually exceeds the product costs (e.g. for banks, credit card or telecommunications companies). Checking order status, getting a usage statement or a bill are examples of activities which can be delivered much more cheaply using electronic commerce. In each case, the customer value is also higher, through a quicker reporting, or through the added information value (e.g. delivering not only a statement, but also historical statistics or graphics, adding advice to reduce some of these costs, etc.)
Reducing cost from direct sales is certainly a way of getting value out of electronic commerce. Nevertheless, there are many others such as (a) adopting new sales channels, (b) improving the customer service, and (c) creating new products:
New sales channel
Thanks to their direct reach to customers and their bi-directional nature in communicating information, electronic commerce systems can represent a new sales channel for existing products.
Considering electronic commerce, and in particular the Web, as a sales channel makes sense for two kinds of products:
physical products, sometimes also sold in conventional stores, which can be advertised and/or ordered on-line, such as computer hardware or wine
products which can additionally be delivered over the electronic commerce medium, such as information or software.
Examples of the first type are the so-called electronic catalogs such as the Internet Shopping Network, selling all sorts of electronic and computer related goods, or Virtual Vineyards, selling wine and food products. These catalogs offer information on the products, support on-line ordering and payment, and sometimes on-line customer service.
Virtual Vineyards
How many new shops pull in $1 million in sale during their first year in existence? Very few, no matter if you're on-line or not, but the on-line enterprise Virtual Vineyards did it.
Starting from scratch six months ago, Virtual Vineyards is a successful shop which sells California wines only through the Internet, at retail prices between $6 and $100. Its marketing and sales strengths relie on the reputation of California wineries and an exclusive offering of products.
The company did have a reasonable amount of investment capital ($600'000) to start with, to buy equipment and to build its on-line marketing, distribution, and customer service structures. Moreover, Robert Olson, its president, understood not only the attractive value of the new ICTs but also the special needs of an on-line marketing strategy building an interesting and ever-changing Web site, containing a lot of information and user interaction.
In the case of information products, the electronic commerce medium actually becomes the delivery medium. As such, an electronic newspaper does not use paper anymore and can be fully delivered digitally. In some cases, (for instance ZDNet, a service reporting on the computer industry), there is actually no paper version of the service. In another case, Software.net, a company selling software, currently sells more than 300 packages which can be delivered digitally and used literally minutes after buying them.
Customer service
Through intelligence built into systems and the extended availability of intelligent support systems, electronic commerce systems can enhance customer service.
We already mentioned the case of Sun Microsystems using the Web to provide customer support. The ability to provide on-line answers to problems, through resolution guides, archives of commonly encountered problems, electronic mail interaction (and in the future audio and video support), and all that 24 hours a day, 365 days a year, builds customer confidence and retention. Monitoring how customers use this support information also provides insights on improvement areas in current products and the list of issues encountered with products can be a significant source of product feedback for the design of new products. As consumers start using these systems in growing numbers, industries other than software will take note of these opportunities and deliver on-line customer service. Today, the Wells Fargo and the Security First National Bank are two examples of banks offering on-line statements and answering electronic mail queries on bank accounts, as the Cortal Bank did it In France using the Minitel [Jelassi, 1995].
Two likely developments in this area are
products which diagnose themselves, and use an on-line connection to call a support specialist which can arrive on-site with the full knowledge of the problem to fix
knowledge-based systems which assist customers in finding solutions for their problems.
Both have already been seen in specialized fields (such as high-end copiers from Xerox) but will be more widely accessible, to a broader range of customers, for a wider range of products.
Product innovation
The information-based nature of the electronic commerce processes allows for new products to be created or existing products to be customized in innovative ways.
A large source of the business value electronic commerce can provide comes from changing the products themselves, in addition to the way they are advertised, ordered or delivered. This is mainly due to the potential of collecting information which will be used to customize products.
Mass customization has been used for some time now [Pine, 1995]; it endeavors to create specific products for each customer, based on his or her exact needs, but with the low costsof mass-production. For instance, thanks to an information network and advanced production techniques, Motorola is able to gather customer needs for a pager, transmit them to the manufacturing plant, manufacture a specific model (varying the form factor, color, features, etc.) and send it by overnight mail, all that in a few hours. Levi's, the jeans manufacturer, has brought similar techniques to the apparel industry, with the ability to custom produce a pair of jeans, based on specific customer requirements; thanks to technologies linking the retail store, the producers and assemblers of jeans, and the shipping company.
In both of these cases, the key is the ability to store customer preferences, use a flexible manufacturing technique to adapt a product to their particular needs, and operate a network of suppliers (see §3) to manufacture and deliver a product; for these requirements, a high-quality information system is essential.
Moreover, in the future, electronic commerce links between customers and suppliers will suppress the need for an heavy infrastructure to gather customer data (a shop in our case) and will allow customers to do it from home, their office or on the road. This direct link also allows the supplier to gather very detailed data on customer profiles, their needs, patterns of buying, etc. Database marketing techniques can then be used to analyze this data, in order to improve new product development and target specific offers to certain customers. Gateway 2000 is a good example of a supplier custom-manufacturing personal computers, and offering product information which can be adapted to personal needs through their Web site.
Another opportunity in mass customization is to have the customer design part of the product himself. For instance, we could imagine a watch manufacturer with advanced production techniques, such as Swatch, providing its customers with computer-based tools allowing them to design part of the watch (e.g. the drawing on the background of the watch) and send these designs through a computer network to the watch manufacturing robot, before shipping the personalized watch to the customer. The ability to sell unique-design watches to customers at a retail-like price would be a great differentiating factor.
This creates a paradigm shift in the design of products, which is not perceived by every actor today. For instance, the Credit Card Network is a Web site which basically lists different types of credit cards offered by US banks, both on-line and off-line. All of these cards offer different features, such as interest rate, membership fees, credit limits, insurance, assistance programs, frequent flyer bonuses, etc. The customer is asked to look at the different offerings, and then choose the package which best conforms to his or her interests. It seems that the business model of this service could be changed, to take opportunity of customizing products. We would envision a service where the customer would be asked to check the features which matter most to him/her (e.g. a frequent traveller paying his invoices in full every month might choose only frequent flyer bonuses and rental car insurance). A custom credit card package could then be designed especially for this customer, who would receive exactly the features he asks for, and no more, therefore avoiding to pay fees for services he doesn't use. The interest rate or annual fee would be adjusted for each customer, based on the services that need to be provided and the expected revenue for the credit card company. This is similar to the Swatch example above, in the sense that the customer designs himself the product he wants to buy.
4.3 Information malls and brokers
A long time ago, people realized that creating a centrally-located ìhubî for exchanging goods and services was the most efficient way to organize commerce. After the bazaar (near water-based transportation) and the shopping malls (related to road transportation), the information malls (linked to information transportation) is the last step of this evolution [Sheth, 1993].
Electronic markets or information malls, open to the public at large, federate individual businesses and allow consumers to cost-effectively access, compare and discuss more data about the products they are willing to buy. These new institutions are strongly changing the consuming habits.
An information mall could be considered as a place or a ìhubî where a large number of on-line buyers and sellers can easily congregate and where commerce can be centred. Many experiences are in progress; most of them on the Internet. Innovative solutions are tested in order to support some of the shopping activities (localizing buyers or sellers, finding products, and bargaining).
New intermediaries, sometimes called information brokers, are appearing in order to help customers to shop.
The new ICTs, such as the Internet, allow (a) learning organizations, (b) new business opportunities, and (c) new intermediaries:
New learning organizations
If what we mentioned in the previous sections is true, electronic commerce will have a large and durable impact on the strategies of most organizations. Therefore, it is critical that these organizations quickly become familiar with the technology. The learning curve of mastering such technologies, and understanding their power to reshape customer relationships, is steep and can't be achieved overnight. It is very often an iterative process, requiring organizations to trial new offerings, and tweak them according to customer feedback.
Rapid progress in the area of electronic commerce will force companies to adapt quickly and offer them an opportunity to experiment with new products, services and processes.
In a similar fashion, new technologies require new organizational approaches. For instance, the structure of the group dealing with electronic commerce might have to be different from the one typically used in the organization, in order to be more flexible and responsive to the market, or new processes have to be put in place, for instance to deal with the authorization of publishing corporate information on the Internet. This type of corporate change needs to be planned and managed, and before getting it right, organizations might have to struggle with different experiments.
The value of both types of learning resides in the new capabilities the organization acquires, and the potential of using these capabilities in the future, as the market develops and customer expectations become clearer. The product and process innovation which appears in one corporate division is also positive, as it can be reused across divisions if success is achieved.
New technologies can allow an organization to quickly catch up on its competition. With time, technologies gain maturity, which reduces the cost and effort to implement systems.
But also, if not used, they can become a potential source of strategic disadvantage. If a company offers services or products through the Internet for instance, and its competitor does not, customers might well switch suppliers, especially in industries where switching barriers are low. For instance, an ìearly adopterî customer might decide to switch banks if one can offer him electronic banking capabilities, such as electronic bill payment, interactive on-line (therefore always up-to-date) bank statements with statistics or information on companies where he owns stock, such in the case of the Banque Cortal [Jelassi, 1994].
Some large companies are well aware of that phenomenon: when Federal Express launched its Web site in November 1994, allowing customers to track packages on the Web, United Parcel Service (UPS), its major competitor, quickly accelerated its development efforts, which resulted in the launch a similar service, although six months after FedEx. Today, both services are very close functionally.
New business opportunities
Changing industry structures and electronic commerce systems allow for new business models, based on the wide availability of information and its direct distribution to end-customers.
Going further than new ways of selling existing products or services and the opportunity for new products or services, we also see new business models emerging. Key among these new business models are information brokers [Resnick, 1994] [Kalakota, 1996]. The new ICTs will offer new opportunities for actors re-packaging information. The early examples are currently the directory providers or the search engines, such as Yahoo & Lycos. Also, in the car industry, Dealernet offers comparisons between any type of car, with pictures, product specifications and third-party reviews. Although it is true that electronic commerce will disintermediate some industries, by directly connecting buyers and sellers, new business model will appear for information brokering and intermediation.
New intermediaries
Due to the advent of electronic commerce, new players or intermediaries will emerge (a) reducing the cost of looking for the cheapest or most attractive product, (b) integrating various services to provide one-stop shopping, and (c) using third-party content to validate the quality or reputation of their offering.
The change in the distribution structure of an industry is an interesting one, in particular the impact on intermediaries. These were traditionally providing an infrastructure such as a sales network (physical places such as shops, specialized personnel, etc.) and were managing the complexity of handling customer requests. Electronic commerce can replace some of the functions traditionally performed by these intermediaries.
Advanced forms of information intermediaries could soon emerge, thanks to the integration capacity of electronic commerce. Integration is the ability to sell a package of products to customers, based on a very fine understanding of their needs. For instance, in the travel industry, once you understand a customer's needs for a specific travel, an on-line travel agency service could dynamically put together a package of air travel ticket, hotel reservation, car reservation, travellers' checks, restaurant guide, etc. which would serve these needs [Bloch, 1996a]. In the banking industry, integration would mean the ability for a bank to analyze its customers records and offer integrated services to those with a certain revenue level, demographic profile or complexity of financial activity. The bank would then offer them mutual funds to maximize their savings, life insurance to protect their future and tax preparation services to simplify their life. The Security First National Bank, the first bank on the Internet, seems to be moving quickly towards such systems.
Towards intermediated customwork
This phenomenon of interactively reaching customers allowed by the new information technologies also enables companies to manage intermediated customworks, co-opetition structures for coordinating a value system and customers.
Traditionally, economies has two basic mechanisms for coordinating the flow of materials or services through adjacent step in the value system that terminates with the consumer: supply chains and market-based direct sales.
A traditional managerial way to coordinate the distribution process is to put somebody (intermediaries such as wholesalers and retailers) in charge of activities needed to deliver the final product or service to the consumer.
Direct sale is essentially a second distribution form, market-based, where a consumer, which needs an product or a service, gathers information on the product or the service, compares the offers of different companies, chooses one of them, negotiates with it and settles the sale by carrying the physical transaction directly with the selected company.
These two coordination mechanisms, hierarchy- and market-based, have advantages and disadvantages for the consumer:
direct sales can give product costs less high than traditional retail supply chain, but conversely
direct sales can induce for the consumer higher coordination cost for comparing, selecting, bargaining and settling the transaction.
The reason direct connections between buyers and sellers are not always the optimum form of commerce for customers are multiple:
when doing comparison shopping, the cost and time required to access multiple suppliers systems increases rapidly, this is the famous information overload problem
most often, customers look for total solutions, whereas suppliers are specialized in one area
customers need a trusted third-party to provide them with information about the reputation of a particular supplier, this is a role magazine reviews play well.
With the advent of the new information and communication technologies, ìintermediated customworkî is becoming an emerging way to coordinate sales channels, providing companies with the advantages of the two traditional sales organizations. Customwork is another word for new intermediaries (see above §4.3) such as market maker [Benjamin, 1995], electronic market [Kalakota, 1996], information mall [Sheth, 1993], information broker [Resnick, 1994].
How Peapod is customizing the virtual supermarket
Peapod, a grocery-shopping and delivery service based in Chicago and San Francisco, is a company that is exploiting an electronic mall in retailing services. It allows its customers to use an on-line system for accessing the databases of the supermarkets at which Peapod shops for its customers.
Moreover Peapod lets each customer create his or her own virtual supermarket. Using a personal computer, customers can shop in the way they prefer (list of items by category, by brand, by package size, by unit price, by nutritional value, by special shopping lists).
Despite the company's rate ($5 per month and a per-order charge of 5% of order amount), the customers save money because they do better comparison shopping, buy fewer impulse items, use more discount actions. In addition, they save time because they can shop at anytime and from anywhere.
After four years, this on-line service has 7,500 customers, revenues of about $15 million, and a customer-retention rate of more than 80%. Peapod accounts for 15% of the sales volumes of the 12 stores where it shops for its customers.
(Pine, 1995)
Just as open teamwork within the firm (§ 2) and strategic
networks between firms (§ 3), intermediated customwork is
a co-opetition structure for coordinating sales and distribution
activities, balancing the advantages obtained from a market-based
approach and from an integrated supply chain, as illustrated on
figure 4.
Impacts of new intermediation
The emergence of these new information-based competitors is not without danger for current industry actors. The ability of non-industry competitors to take a significant part of the business should not be under-estimated. For instance, in the banking industry, a recent report from a consulting company [Killen, 1996] predicts that 25% of the global electronic payment market will be taken by non-banks and high-technology companies.
Another danger we can forecast after the emergence of these intermediaries is their reliance on their brand name to take a big part of the market (i.e. industry concentration). For instance, in the personal computer market, if PC Magazine, which owns a great brand and achieves recognition in the marketplace, were to create an electronic catalog with its Editor's Choice (i.e. the computers the magazine recommends as best buys), this could lead to customers going to the most reputable magazine, to buy the most renowned computers, maybe from the most well-known mail-order company. This could turn the market in a difficult place to compete for smaller actors.
An evidence that suppliers fear these systems is shown through an experiment of automatic shopping agents for audio compact disks, by Andersen Consulting which has shown that most retailers close their electronic doors to such programs, as they believe competing on price only is unfair.
The issue of intermediation is generic and affects many industries such as automobile distribution, banking, retail and travel. Dangers are appearing both for current intermediaries and for product suppliers. We just showed that opportunities were emerging for new intermediaries to appear. Therefore, current third-parties should look very carefully at their business model, in order to reposition themselves, when the added value they provide over an electronic commerce system is minimal.
In the travel industry for instance, repeat business travellers see no point in using a traditional travel agency when an automated system can handle a simple request just as well, with the convenience of an automated reservation platform, accessible anytime. Gradually, increasingly complex requests will be handled by these systems, and travel agencies will have to find new ways of differentiating themselves.
SABRE [Hopper, 1990] is an example of a company which is currently repositioning itself. It used to leverage a huge data network and computer operations in travel agencies around the world, providing them with information and reservation services. The advent of cheap computer hardware and open computer networks (such as the Internet) makes it much more feasible for them and for airlines to go directly to consumers. Therefore, SABRE is repositioning its added value by outsourcing its computer and network operations and focusing more on the added value of their information database (the content vs. the infrastructure).
Product suppliers could also potentially lose ground in the marketplace with the emergence of electronic commerce systems. We mentioned before how valuable was the information on the profile of customers, their buying patterns, their needs and desires, etc. If that information is kept by the intermediary, which simply aggregates customer requests before passing them on to the product supplier, the latter loses touch with his market [Killen, 1996].
In the banking industry, the emergence of on-line banking platforms from suppliers such as Intuit raises interesting questions. Through their personal finance management software, Intuit has created a huge customer recognition in the marketplace (they have about 7 million very dedicated users). They currently have links between their software and 37 US banks to allow customers to get on-line statements, transfer money between accounts, pay bills or get portfolio updates.
5 Conclusion
This paper endeavored to describe the rationale for an organization to
adopt teamwork for coordinating activities
build or join networks for coordinating values chains
establish customworks for coordinating value systems and customers
This paper also showed the link with the competitive advantage that could be derived. The real point therefore, is that building any kind of teamwork, network and customwork requires a strategy, i.e. a vision of the goal to achieve, a clear rational of the business value and a picture of the process to achieve such a goal while avoiding common dangers This is the only way of getting real benefits from such a system.
Then this paper showed the implications it had for the management of these organizations and some of the roadblocks they would have to avoid.
Information and communication technologies allow companies to manage their contradictory search for both autonomy and control when they adopt teamwork, when they join strategic network, and when they build customer-oriented value systems.
The opportunities and critical success factors exist but need to be actively sustained, quickly improved and permanently developed. Obstacles, threats and side effects also exist and must be detected and circumscribed.
This 3-by-3 framework has given a first insight of the current situation focusing on the competitive posture of companies but it needs to be refined by a set of more detailed studies.
The appropriate use of the information and communication technologies may be a source of more efficient competitiveness for companies in their supply, manufacturing, and distribution activities.
Nevertheless, there are some potential risks [Scheer, 1995] [Talbot, 1995]:
Companies could be unable to re-engineer their business processes at the right time and integrate ICTs in their commercial strategies in order to maintain their competitiveness
The ICTs could generate ICT winners and losers: highly educated's able to learn and master the ICTs versus unskilled or old-generations without any effective access to these ICTs
The public sector could have some difficulties to act as a promoter, an educator and a regulator in this modernization process.
If companies, consumers and public authorities realize the change in the trade and commerce practices, perceive the potential of the ICTs and master the risks inherent in these ICTs, a voluntaristic and pro-active approach has to be adopted to face the challenge of the global, information-based and highly competitive society briefly sketched in the introduction.
Acknowledgement
I thank Michael Bloch for the stimulating discussions which have contributed to this work; the nine propositions of the chapter §4 is mainly based his essential contribution in [Bloch, 1996b]. The work briefly presented in chapter §3 was sponsored by the Swiss Science Council and first appeared in [Klein, 1996].
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