E-business is transforming the global marketplace and how business is conducted. It impacts all aspects of business from customer interactions to internal operations to supplier relationships. While moving to a fully digital business model is complicated by existing assets, market survival depends on effectively leveraging e-business. Companies must assess the business impact, identify strategic response options that may include offensive and defensive plays, manage their business portfolios accordingly, develop new capabilities, change their organizations, and understand the new economics of both short-term investments and long-term industry redefinition. Failure to adequately respond to these challenges risks losing value to more adaptive competitors.

1. E-Business Today, Big Business Tomorrow
E-Business Strategy Perspectives
Revolutions are often difficult to forecast. When James Watt discovered the power of steam, who would have
imagined the changes it would bring. Many said at the time we will never replace horses, canals will always be the
most efficient mode of transportation, products can only be produced by hand and man will never fly to the moon.
Now we know differently.
We are on the cusp of another revolution - one enabled by the digitalisation of business. Let's call it "E-Business".
Initial discussions about often-called E-Commerce, focussed on the mutual exchange of value by electronic means.
Whilst there were some companies introducing dramatic product and service innovations via the Internet, we at
Booz·Allen were counselling our clients to assess carefully what they wanted from their E-Commerce initiatives.
However, now the real impact of E-Business is much more profound and far reaching - it changes the game because
in the future this will simply be how business is done. Our emphasis has shifted from thinking about how best to
harness the Internet for differentiation to realising that much more - in fact, nothing short of market survival - is at
stake.
Around the world, senior executives will transform the global marketplace by 2001 and many industries are already
witnessing this transformation. Market leaders are using the Internet as a springboard to re-craft their corporate
strategies and build successful organisations for the Digital Age. As Y2K investment subsides, this is the next great
challenge. Each company should ask itself today where it has positioned E-Business on its corporate agenda.
E-Business strategic imperatives
We should be very clear, E-Business impacts every dimension of business, from reaching its customers over the
Internet, through changing the way the internal operations run, to enabling new business models with suppliers and
other external parties. For example, customers can interact with a company via the Internet or web TV and other
devices, including next generation telephones; internally a company can process work via intranets, enterprise data
networks, e-mail and voicemail; and trading partners can transact via business-to-business channels such as
electronic data interchange, extranet-based applications and groupware.
On-line commerce is growing rapidly. In 1998, business-to-business purchases totalled US$43 billion and is
expected to increase to US$109 billion by the end of 1999. Internet users are growing worldwide at a compound
average growth rate of 57% with no signs of this growth abating*.
As companies realise the power of the Internet, how to deal with the E-Business Revolution is becoming the CEO's
number one agenda item. A recent joint study by Booz·Allen and the Economist Intelligence Unit found that of the
525 senior executives surveyed worldwide, 90% believe that the Internet will transform or have a major impact on
the world marketplace by 2001. Indeed, one-third believe the impact has already occurred. Perhaps most
significantly, the Internet will affect companies in all regions - North America, Europe, Latin America and Asia-
Pacific.
However, moving towards a full electronic business model is complicated by the fact that most companies have
substantial assets committed to doing business in a non E-Business environment. It will take considerable effort to
re-task the enterprise to take advantage of this powerful phenomenon and this re-tasking will not be simple. The
Digital Age introduces a different set of dynamics including much lower entry barriers, changed industry
competitive structures, a redefinition of business around emerging E-Business value chains (for example, the
emergence of the portal or infomediary), profit redistribution across industries and buyers, as well as new, often
consortium based, alliance competitors.

2. Assessing an E-Business Response
The question is not, should we respond, but rather, how should we respond? From the work we have completed with
a number of our clients, we believe there are seven critical dimensions to assessing your E-Business response.
1. Business Impact Assessment - How will E-Business impact my business?
This can be answered by assessing the ease of digitalisation and the uniqueness for each of the parts of the business.
The less bittable (e.g. ordering groceries is bittable as it can be done electronically - but delivering them is not) and
the more highly differentiated the product or service, the lower its vulnerability to E-Business. Let's use a financial
services example to demonstrate this.
Exhibit 1 demonstrates that much of a financial services company's product portfolio is highly bittable and hardly
unique. Consequently, the impact on financial services organisations will be profound. Even if E-Business is "All
Hype", we believe incumbent players could lose up to 15% of value added profit to new competitors. At the other
end of the spectrum, in "eWorld" where we believe there will be aggressive margin/fee/balance erosion across the
board driven by the mass-market penetration of Internet usage, the loss could be as high as 80% of profit.
Significantly, the impact will not be uniform across the customer base. Lose the wrong 15% of customers and
financial services companies could lose as much as 80% of their profit. Their most valuable customers are already
early adopters of the Internet and are at risk from Internet based competitors. These customers are being targetted
because they have a high degree of discretionary spending and expect high quality customer service.
Exhibit 2 shows these multiple demand scenarios for both retail and business-to-business organisations and this
scenario driven approach can be applied to other industries just as effectively.
2. Strategic Option Identification & Responses - How do we identify the right
strategic option and corresponding response?

3. Because E-Business is driving multiple dynamics across many industries, responding to the challenges presented by
E-Business requires a shareholder perspective, not just an organisational one.
Services businesses, like financial services companies, must examine a very broad range of options. In fact, the
concept of "options" is helpful because the end game is not yet clear. We believe companies will need to pursue
multiple plays, recognising that some will fail and others will be very successful.
Defensive and offensive options will need to be considered. These dynamics will truly bring to life portfolio
management capabilities across the three fundamental business defining dimension: (1) customers, (2) products and
(3) value chain.
There are a number of potential responses, or strategic options.
· Do Nothing: The first and easiest strategy is to be a follower. This requires low investment while you adopt a
"wait and see" approach and continue to focus on other priorities. However, we believe a first mover advantage does
exist in some industries and the "wait and see" option gives competitive advantage away.
· Enhance Existing Business Execution: This can involve incremental or dramatic cost efficiencies and potential
revenue gains from channel expansion. An example is the implementation of an intranet to improve the efficiency of
a business. E-Business channels can be "bolted on" to existing propositions for existing customers though essentially
you are manufacturing and distributing products the same way as you are doing it today. Many company web sites
today are in this category as they publish "brochureware" which replicates existing material through the new
channel.
· Extend The Enterprise: By identifying and pursuing a portfolio of focussed, high potential opportunities to scale,
you can extend away from the traditional franchises through "spikes" into new customers and/or propositions. The
aim is to lead the competition in your chosen areas of focus while widening the spike positions once penetration has
been established. A good example is Dell Computers - at www.dell.com customers can specify their own computer
on-line then have it built to order and delivered direct. This gave Dell a major advantage in terms of inventory
management and customer service.

4. · Create a new business: This option extends the realm of possibilities beyond the existing business domain. New
revenue streams may be created with a new market position. For example, www.woolnet.co.nz has been created as
an electronic marketplace for New Zealand wool under the auspices of the Wool Board. Another example could be a
financial services company allowing customers to select from their own and competitor products on a single Internet
site. Microsoft has moved into the car buying business at www.carpoint.msn.com and one Australian mining
company has moved into Internet pornography! If you act as agent or provider of best advice, you are adding value
through packaging, consolidated reporting and leveraged buying power. You are essentially seeking to capture a
greater share of "eyeball" from the Internet community. As an aggregator, you create virtual retail space in order to
capture loyalty and payment flows. You can choose to be a regional or global player and extend beyond your
traditional industry segment. Many of these business opportunities will demand the acquisition of new capabilities
creating the imperative for alliances and acquisitions.
· Exit The Current Business: Under this scenario, you need to be willing to sell existing franchises and exit the
business. Be prepared to value your investments or attract parties to share the risk. Encyclopaedia Britannica sold
the book business for $1 when multi-media CD- ROMs arrived.
The challenge here is to identify the range of possible strategic options, some of which may be beyond the purview
of most organisations and to agree the level of investment required to explore each one.
3. Portfolio Management - How does this impact the current business portfolio?
Almost certainly, you are likely to want to place multiple bets for each element or building block of the business.
These building blocks may be a decomposition of the current business portfolio or a cut across the business stream.
For example, in the financial services industry, these blocks may be specific products, like mortgages, loans and

5. credit cards. On the other hand, it might also be orientated around a particular customer cluster, for example,
retirees, pet owners or Colorado Mountain Bikers, with a tailored set of products and services targetted at this group.
Exhibit 3 provides a framework for thinking about this. We would not expect every option to succeed, but by
managing the problem on a portfolio basis, the best longer term opportunities can be developed. This portfolio
approach requires quite different approaches to business case justification and risk analysis. As the owner of one
Internet company said, "if everything I pursue succeeds, I have not pushed the thinking far enough!"
4. Competitive Dynamics - Should we be offensive or defensive - is there a first
mover advantage?
The digitalisation of the business creates a new customer orientated value chain with a new set of competitors
positioning along it. Strong competitors like telecommunications, media and software companies are now playing in
the same customer domains. Some are very new, like Amazon.com, others are older but just as aggressive. These
players are not shackled by the traditional cultures found in most large incumbents, they have deep pockets and are
committed to the development of E-Business opportunities. In some cases, new Internet based brands are emerging
like Prudential's www.egg.com. This presents both opportunities and threats for traditional players.
In terms of opportunities, it is possible to migrate sales and service to the new lower cost channels and so attract new
customers on a cost effective basis. Internet transactions cost just a few cents, compared with telephone or face-to-
face. The Internet enables targetted propositions to be developed, including individual customisation and bundling.
For example, at www.nextcard.com, you can shop on-line for a tailored credit card, or at www.cdnow.com you can
select individual tracks for compilation to a compact disc. It is possible to gain access to new revenue streams, and
to build new alliances and partnerships in less time and less effort. For example, at www.ariba.com a network of
business-to-business partners have created an on-line procurement network, at www.integrion.com, a group of banks
and IBM created a new on-line financial services network, and at www.iown.com you can find all the elements
assembled to guide you through the home purchase event, from finding the location, the property and the loan.
On the other hand, customers will have a proliferation of choice through lower entry barriers, squeezing costs and
transferring value to the buyer. This price transparency drives towards a more efficient market. At
www.priceline.com you can state the price you are prepared to pay for a hotel room or flight and see if vendors will
provide the service at that price, or at www.thelendingtree.com you can get a home loan quote from many different
lenders in one place. New intermediaries are appearing, creating new relationship gateways. For example at
www.acompany.com, individuals can form an ad hoc buying group to gain bulk discounts from suppliers. The
outcome is increasing customer sophistication and control and an acceleration of the innovation cycle demanding
superior products to counter the threat of substitution. In addition, services and products are being unbundled. For

6. example at www.utility.com individual consumers can bid for electric power.
In some cases there are clear first mover advantages, in other businesses, waiting longer to preserve existing value
may make more sense. Often businesses are realising that they need to cannibalise their own customer base before
someone else does. The likelihood of material market share shifting, disproportionately focussed on incumbents'
most valuable customers, is very real.
5. Capability Requirements -What capabilities are required - where do we
source them?

7. E-Business players have distinctive capabilities. To navigate the uncertain future, they have adopted new flexible
approaches to business development. Traditional approaches to strategy development are replaced by real time
experimental methods. Nowadays we talk about "creating strategy by doing". Exhibit 4 shows the planning cycle
required to support this capability. Many existing businesses find that their lumbering planning processes are not
able to accommodate this new imperative. In contrast, wargaming is one powerful technique we use with clients to
illustrate the range of options available, and the possible range of competitor responses.
On-line players have augmented their internal innovation capabilities with an antenna to detect innovation beyond
their current event horizon allowing them to acquire and innovate new products and services in real time. Often their
business units are empowered to make local decisions because the traditional command and control based
organisation is not able to respond effectively. Finally, they carefully select which capabilities will be developed
internally and which will be sourced through alliances and partnerships.
6. Organisational Impact - How will the organisation need to change?

8. There are a series of organisational and cultural hurdles to overcome. Making these changes are complex and
challenging and a number of different approaches are possible. They lay on a continuum between "inside out"
transformation and "building anew" - see Exhibit 5. The "inside out" transformation (i.e. make the dinosaurs dance)
involves reconfiguring the existing organisation for new behaviours and capabilities, that is, in-place transformation
from "bricks and mortar" to E-Business enabled service delivery. The "build anew" approach (i.e. lose the baggage)
taps the resources of the existing organisation to build new companies with new capabilities. It uses the cash cow of
the parent company to build the new and offers the opportunity ultimately to migrate and dispense with the old. The
optimal approach will depend on the nature of the opportunity being explored and the state of the exiting
organisation's value and culture.
7. The New Economics - Short term or long term gains?
Many Internet companies are not making profits today. This is because either they are engaged in large-scale
investments to grow their business venture, or because the business model is intrinsically unprofitable until scale in
reached. However, in the long view they are redefining their industry. For example, Amazon.com started as an on-
line bookseller and has put traditional book shops under severe pressure. Now Amazon has expanded to CDs and
videos, and are driving a structural change in these industries too - despite remaining unprofitable in the short run.
E*trade, the on-line stocktrader, has yet to show a return despite significant customer uptake. The prime focus is the
number of hits or registered customers, rather than the bottom line profit in the short run. This is creating a new set
of economics. Many incumbents find it hard to compete when they have to maintain short term shareholder returns
alongside trying to position for E-Business when these new competitors do not appear to have similar constraints.
Nevertheless some Internet businesses are profitable, and in addition, some of the best examples - like Dell
Computers - are of businesses who have integrated the Internet into their business model.
There are also new revenue generating opportunities. For example, Citibank paid Netscape US$40m to occupy the
prime financial services position in its Netcentre portal. Nextcard pays a fee each time a new customer buys a credit
card from a referral via banner advertising, one of its 12,000 affiliate web sites. In the UK, Internet access is given
away for free as part of a battle to own the customer relationship. Another example is www.mypoints.com - a web
based affinity program where visitors collect bonus points just for visiting featured sites.
Finally, the costs of establishing a web business can vary from just a few hundred dollars to many millions of
dollars, depending on the scope and complexity of the site and its capacity. Managing the capacity cost equation for
a growing E-Business is complex and potentially expensive. Getting to grips with the economics of the E-Business

9. venture will require some quite different capabilities and approaches and many propositions would fail the
traditional business case and hurdle rate assessment.
Conclusion
These are revolutionary times - a response is required. However, we believe that most large incumbents will fail to
respond to these new challenges adequately. Some are watching the world change, but do not know how to respond.
Others believe that customers simply will not run from big safe brands. Similarly, shareholder expectations enforce
a short-term earnings focus leaving most companies constrained and tied to traditional environments. Companies are
locked into serving all current customers with largely lowest common denominator infrastructure and are too busy
fixing current business systems to build new ones.
Entering the E-Business world takes something of a leap of faith which companies are generally unwilling to do
until the need to change becomes obvious, usually late in the game. History is littered with companies that failed to
adapt, allowing competitors to capture the advantage.
101 Park Avenue - New York, New York 10178
Offices and Partners · More about the E-Business Group
About the Authors
Martin North is a Principal in Booz·Allen & Hamilton's E-Business Group. He has experience in both the
financial services and information technology industries, with a special interest in the effective business leverage of
technology and digital business. He has deep industry experience as well as significant consulting experience in the
USA, UK, Eastern Europe, Asia and Australia. He has specialised in strategy development, information technology,
project management and implementation assignments. Martin can be contacted at +61 2 9321 1900 or
north_martin@bah.com.
David Osborn is a Director in Booz·Allen & Hamilton's Global Financial Services Practice with particular
focus on E-Business strategy development. He has practised strategy consulting across numerous industries and
across Europe, the US and Australasia. David can be contacted on +61 2 9321 1900 or osborn_david@bah.com.
David Moloney is a Principal in Booz·Allen & Hamilton's E-Business and Financial Services Groups. He has
experience in corporate and business strategy development within the Banking, Insurance, Investment and
Telecommunications industries. David has special interests in E-Business and strategic alliances. David can be
contacted on +61 2 9321 1900 or at moloney_david@bah.com.

10. venture will require some quite different capabilities and approaches and many propositions would fail the
traditional business case and hurdle rate assessment.
Conclusion
These are revolutionary times - a response is required. However, we believe that most large incumbents will fail to
respond to these new challenges adequately. Some are watching the world change, but do not know how to respond.
Others believe that customers simply will not run from big safe brands. Similarly, shareholder expectations enforce
a short-term earnings focus leaving most companies constrained and tied to traditional environments. Companies are
locked into serving all current customers with largely lowest common denominator infrastructure and are too busy
fixing current business systems to build new ones.
Entering the E-Business world takes something of a leap of faith which companies are generally unwilling to do
until the need to change becomes obvious, usually late in the game. History is littered with companies that failed to
adapt, allowing competitors to capture the advantage.
101 Park Avenue - New York, New York 10178
Offices and Partners · More about the E-Business Group
About the Authors
Martin North is a Principal in Booz·Allen & Hamilton's E-Business Group. He has experience in both the
financial services and information technology industries, with a special interest in the effective business leverage of
technology and digital business. He has deep industry experience as well as significant consulting experience in the
USA, UK, Eastern Europe, Asia and Australia. He has specialised in strategy development, information technology,
project management and implementation assignments. Martin can be contacted at +61 2 9321 1900 or
north_martin@bah.com.
David Osborn is a Director in Booz·Allen & Hamilton's Global Financial Services Practice with particular
focus on E-Business strategy development. He has practised strategy consulting across numerous industries and
across Europe, the US and Australasia. David can be contacted on +61 2 9321 1900 or osborn_david@bah.com.
David Moloney is a Principal in Booz·Allen & Hamilton's E-Business and Financial Services Groups. He has
experience in corporate and business strategy development within the Banking, Insurance, Investment and
Telecommunications industries. David has special interests in E-Business and strategic alliances. David can be
contacted on +61 2 9321 1900 or at moloney_david@bah.com.