Beyond the Information Revolution

The Meaning of E-Commerce

E-commerce is to the Information Revolution what the railroad was to the Industrial Revolution—a totally new, totally unprecedented, totally unexpected development. And like the railroad 170 years ago, e-commerce is creating a new and distinct boom, rapidly changing the economy, society, and politics.

One example: A mid-sized company in America's industrial Midwest, founded in the 1920s and now run by the grandchildren of the founder, used to have some 60 percent of the market in inexpensive dinnerware for fast-food eateries, school and office cafeterias, and hospitals within a hundred-mile radius of its factory. China is heavy and breaks easily, so cheap china is traditionally sold within a small area. Almost overnight this company lost more than half of its market. One of its customers, a hospital cafeteria where someone went "surfing" on the Internet, discovered a European manufacturer that offered china of apparently better quality at a lower price and shipped cheaply by air. Within a few months the main customers in the area shifted to the European supplier. Few of them, it seems, realize—let alone care—that the stuff comes from Europe.

In the new mental geography created by the railroad, humanity mastered distance. In the mental geography of e-commerce, distance has been eliminated. There is only one economy and only one market.

One consequence of this is that every business must become globally competitive, even if it manufactures or sells only within a local or regional market. The competition is not local anymore—in fact, it knows no boundaries. Every company has to become transnational in the way it is run. Yet the traditional multinational may well become obsolete. It manufactures and distributes in a number of distinct geographies, in which it is a local company. But in e-commerce there are neither local companies nor distinct geographies. Where to manufacture, where to sell, and how to sell will remain important business decisions. But in another twenty years they may no longer determine what a company does, how it does it, and where it does it.

At the same time, it is not yet clear what kinds of goods and services will be bought and sold through e-commerce and what kinds will turn out to be unsuitable for it. This has been true whenever a new distribution channel has arisen. Why, for instance, did the railroad change both the mental and the economic geography of the West, whereas the steamboat—with its equal impact on world trade and passenger traffic—did neither? Why was there no "steamboat boom"?

Equally unclear has been the impact of more-recent changes in distribution channels—in the shift, for instance, from the local grocery store to the supermarket, from the individual supermarket to the supermarket chain, and from the supermarket chain to Wal-Mart and other discount chains. It is already clear that the shift to e-commerce will be just as eclectic and unexpected.

Here are a few examples. Twenty-five years ago it was generally believed that within a few decades the printed word would be dispatched electronically to individual subscribers' computer screens. Subscribers would then either read text on their computer screens or download it and print it out. This was the assumption that underlay the CD-ROM. Thus any number of newspapers and magazines, by no means only in the United States, established themselves online; few, so far, have become gold mines. But anyone who twenty years ago predicted the business of Amazon.com and barnesandnoble.com—that is, that books would be sold on the Internet but delivered in their heavy, printed form—would have been laughed off the podium. Yet Amazon.com and barnesandnoble.com are in exactly that business, and they are in it worldwide. The first order for the U.S. edition of my most recent book, Management Challenges for the 21st Century (1999), came to Amazon.com, and it came from Argentina.

Another example: Ten years ago one of the world's leading automobile companies made a thorough study of the expected impact on automobile sales of the then emerging Internet. It concluded that the Internet would become a major distribution channel for used cars, but that customers would still want to see new cars, to touch them, to test-drive them. In actuality, at least so far, most used cars are still being bought not over the Internet but in a dealer's lot. However, as many as half of all new cars sold (excluding luxury cars) may now actually be "bought" over the Internet. Dealers only deliver cars that customers have chosen well before they enter the dealership. What does this mean for the future of the local automobile dealership, the twentieth century's most profitable small business?

Another example: Traders in the American stock-market boom of 1998 and 1999 increasingly buy and sell online. But investors seem to be shifting away from buying electronically. The major U.S. investment vehicle is mutual funds. And whereas almost half of all mutual funds a few years ago were bought electronically, it is estimated that the figure will drop to 35 percent next year and to 20 percent by 2005. This is the opposite of what "everybody expected" ten or fifteen years ago.

The fastest-growing e-commerce in the United States is in an area where there was no "commerce" until now—in jobs for professionals and managers. Almost half of the world's largest companies now recruit through Web sites, and some two and a half million managerial and professional people (two thirds of them not even engineers or computer professionals) have their résumés on the Internet and solicit job offers over it. The result is a completely new labor market.

This illustrates another important effect of e-commerce. New distribution channels change who the customers are. They change not only how customers buy but also what they buy. They change consumer behavior, savings patterns, industry structure—in short, the entire economy. This is what is now happening, and not only in the United States but increasingly in the rest of the developed world, and in a good many emerging countries, including mainland China.

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