For many large business organizations, adjusting to the "digital" economy" is proving difficult. Particular challenges face the public sector parastatals whose processes and "competitive advantages" are entrenched in the old economy and thus based on criteria that are rapidly becoming archaic. To survive, these "elephants" must acquire e-competency and become e-friendly – learn to "surf" on the Internet.

Yet the fundamental changes required – both in terms of technology and of management – are only slowly being introduced. This must be of major concern to many national export strategy-makers: in many developing and transition economies, large public-sector enterprises account for a significant proportion of national export earnings. And in the vast majority of cases, these "elephants" have yet to begin adapting to the demands of the digital economy.

Globalization and trade liberalization, growing power for the buyer, the diminishing influence of government on economic activity, the reductions in funding to state enterprises – and, of course, the business practices of the "digital" economy – have combined to compel enterprises to restructure both their organizations and the way they do business:

• They need to develop new efficiencies and response capabilities through the acquisition of e-skills.
• They need to learn to transfer technology and power to collaborators and partners.
• They need to formulate international strategies no matter how insular or local (they may think) their business is.

This is the ‘digital challenge’ of e-commerce and the new economy.

The first of the sectors and industries in which the "elephants" felt the ripples of e-commerce were those where it was easy to digitize content and service: software, music, entertainment and travel². Not only does the Internet facilitate the establishment of start-ups and smaller players but it also raises questions that challenge traditional business precepts. For example, should traditional companies start direct retailing on the Internet and run the risk of eroding carefully constructed distribution chains?

In recent months many established firms in "old economy" sectors have rushed out new on-line strategies, not just to confront new competition, but to remain relevant to traditional stakeholders. Established industrial groups, such as Sweden’s MoDo Paper and France’s Suez, have revised their overall business strategy to attract finance. Other old "elephants" have recognized the Internet as being more of an opportunity than a threat and recast their approach to business accordingly. Some, like Valeo, (a French car-parts group), are maximizing the potential efficiencies of the Internet by moving all their supplier and customer relations online.

In financial services as well, the impact of the Internet has been dramatic. Attracting investors by charging low commissions and providing easy access to online information, several start-ups in the stock trading arena in the US have captured closely guarded turf from the major brokers on Wall Street.

Internet-based share dealing has now spread to Scandinavia, Germany, the U.K., the Republic of Korea and India. "Tamed by Net Stocks, Tiger Stops Prowling" was the piquant headline in the International Herald Tribune (April 1-2, 2000) announcing the closing down of Tiger Management, an American investment giant. It represented yet another elephant that had failed to learn how to surf, while smaller creatures were joyfully riding its waves.

Several major banks are adapting to the benefits of Internet banking. For them, e-consumer transactions cost a small percentage of branch-based transactions or even through ATMs³. Perhaps surprisingly, the world’s largest Internet-based bank today is not in the US, Germany or Japan (where the largest banks are found) but in Finland. MeritaNordbanken today has 1.2 million online customers, far ahead of Citigroup’s 850,000 or Deutsche Bank’s 750,000. For several years MeritaNordbanken has been expanding its telephone and PC-based services. Today its rapid adaptation to e-commerce has enabled it to offer several financial services to customers⁴. As its latest step, it has established a "virtual mall", which links its online customers to some 1,000 merchants. By connecting consumers directly to suppliers, the bank guarantees the creditworthiness of both parties and for a fee conducts instant cash transactions – with no risk to retailers, no costly float of funds and no accounts-receivable bookkeeping needed. The application to developing countries is worth considering.

Over the past couple of years large industrial corporations in developed countries have given special attention to responding to the opportunities of sourcing and selling through the Internet. Several have established, or are in the process of establishing specialized B2B e-marketplaces. This is also, in part, a reaction to the e-based initiatives of new competitors and large e-based product exchanges and portals. In that sense, the moves represent an attempt by the giants to preserve their turf.

The B2B e-marketplaces were really an innovation of a handful of pioneers such as Ariba and Commerce One. They became darlings of the stock market being among the highest valued technology stocks⁵. Recent fluctuations in the stock market have hit them hard. But more important, traditional manufacturing companies around the world are beginning to realize the potential benefits of automated transactions in the supply chain.

The trend is therefore for these companies to also seek to capture the e-marketplaces. And in this trend, the older players are beginning to collaborate with traditional rivals in setting up sector-specialized e-marketplaces. Such collaborations first came about in the automotive, retail and agribusiness industries but are now embracing other sectors. Some recent examples that show the wide range of this trend:

 The big aerospace companies, Boeing, Lockheed Martin, Raytheon and BAE Systems, announced an online trading-exchange to buy and sell parts and supplies worth up to US $71 billion a year. In addition to cost savings, the companies are likely to make a handsome return when the new business is floated next year (assuming, of course, that anti-trust legislation does not prevent such alliances from developing further).

 General Motors, Ford, DaimlerChrysler and several other auto-makers are creating the world’s largest e-marketplace by linking up their procurement needs in a single online trade exchange. These three already account for some US $200bn of yearly purchases. This e-exchange could eventually link literally tens of thousands of suppliers from across the globe.

 Fifty of the world’s largest consumer-product groups have joined together in an e-marketplace being co-ordinated by the Grocery Manufacturers of America that is going to bring together rivals such as Proctor & Gamble and Unilever, Nestlé and Kraft Foods.

 Metalsite, a US group and its three Japanese partners Itochu, Marubeni and Sumitomo are launching an Internet metals market.

 Six of the biggest US health insurance companies are developing a health insurance Web site tentatively called MedUnite to directly enrol and interact with patients and doctors lest they be lost to the new Internet health-care companies appearing online.

 Several countries and their public sector power companies are setting up online spot-trading exchanges in energy supplies. Plans are afoot in Germany, Poland, Austria and Italy.

 Uvine.com has set up the first Internet wine exchange targeting the US $1.5 billion-a-year market for top wines.

For many giants (and particularly for many developing country "elephants"), to be successful in this new e-game, they will need to shed several of their conventional trading habits⁶. The companies involved need to be ready and willing to bring suppliers and customers deep into their business and purchase processes and to develop similar links with those of their partners⁷. In an open and transparent environment, traditional behind-the-scene, "golf-club" deals with old buddies, are not effective.

Also, the lack of appropriate software applications for the wide and new types of emerging e-markets keeps them in an ‘e-commerce kindergarten’ which will mature only when there are new applications architecture and software, and a revamped vendor community supports the full trading cycle⁸.

As implied above with regard to intra-industry B2B portals, another question is whether these arrangements contravene anti-trust laws⁹ or international trade rules promoting competition. The US Federal Trade Commission is already examining the implications. Developing country anti-monopoly bodies need to do the same.

Companies will also need to think of alternatives and innovative ways to collaborate. Traditional companies are already joining hands with the new Internet start-ups to jointly exploit the e-marketplaces. Referred to as multi-channel retailing, this represents a convergence between traditional retailers and their online upstart competitors¹⁰. Two leading U.K. retailers, Marks and Spencer and Kingfisher have taken stakes in e-commerce start-ups. So has the famous US fastfood chain, McDonald’s, investing in an online food delivery and takeout company (food.com). Such deals represent an attempt by both sides of the Web to benefit from each other’s strengths.

Another formula combines virtual marketing with bricks-and-mortar marketing. The most celebrated example, to date, of a giant learning to surf is Barnes and Noble,the largest bookseller in the United States, which began Web marketing as a reaction to the emergence of Amazon.com, while continuing with its stores. Some car dealers are attempting to work with such combinations. The online dealer referral site, Autoweb.com, and CarsDirect.com Inc., one of the largest direct-sales players on the Internet, announced an alliance that would allow consumers the choice to surf the Web for deals and then clinch it at a bricks-and-mortar dealership. Perhaps this type of combined strategy is the way to the future.

Mergers and acquisitions are proving to be a major component of the "new digital economy", especially in the telecommunications sector and the Internet. There are innumerable examples of mergers, the largest reported being AOL (America On line Inc., the biggest Internet service provider in the United States) and the whole Time Warner empire (entertainment and content company). This trend will not be restricted to the realm of big business. SMEs, too, will be affected as new opportunities and relationships emerge in the digital economy, both locally and across borders.

Mergers have been particularly active recently in telecommunications. Since telecoms companies have changed from lumbering, low-growth giants into high-tech companies with exploding Internet and mobile businesses, they seem to have developed the urge to merge. In 1999, nine of the top 10 deals in the world were in telecommunications.

Since conventional companies and particularly the multinationals employ a very large percentage of the world’s workforce, the impact of e-commerce on their future plans is very important. Since e-commerce itself is still emerging as a force in its own right and an influence, it is difficult to say what the long term effects of e-commerce will be on employment.

A study for the European Commission¹¹ published in 1998 confirmed the long-term uncertaintities but in the short-term it is expected that e-commerce will have a negative impact on jobs as more and more services and skills go digital. When the New Economy expands, however, new jobs and new skills will be required and created.

On the whole e-commerce enterprises require fewer workers. For example, perhaps the most famous of e-commerce start-ups, Amazon.com, had only 614 employees for sales of US $148 million in 1998, as against the largest American bookstore, Barnes and Noble, which had a sales force of 27,200 for sales of US $2.8 billion (which converts to sales per employee of US $267,000 at Amazon, compared to US $103,000 for B&N). To take an indirect measure, Federal Express, the world’s largest courier service, reported in 1999 that its online customer service system represented a saving of 20,000 new recruits!

Although most developing countries are only now embracing the digital economy, its impact on their existing business empires may be even greater. The South is still far behind the United States and Europe in terms of connectivity, but once the Internet and e-commerce become more pervasive, they may, in combination, turn out to be the greatest of all the forces bearing down on traditional management practices, for three reasons.

• First, they undermine established old business models, which are based on existing networks (for example the so-called Asian ‘tycoons’¹² and their connections with the Chinese Diaspora) and on privileged information (usually backed by strong political and bureaucratic connections).
• Second, they allow -- in fact, they encourage -- the rapid rise of new competitors.
• Third, Internet businesses rely, to a much greater extent than old-economy operations, on equity funding by venture capitalists or market investors, as well as on stock options as compensation to employees, and these groups demand much more transparency.

In many parts of the developing world where businesses are family-owned, the shift is going to be slow but once the trend and reality hit home, change may take place even faster than elsewhere. In fact, the changes and reactions to the New Economy are already beginning to produce some interesting transformations in developing countries, both in the private and public sectors.

 Arvind Textiles, a leading retailer of textiles in India, has announced plans to convert its very extensive distribution network into Internet kiosks.

 ECNet in Singapore supplies Internet-based supply chain management solutions to large companies and now has 35 large companies as its customers.

 More online brokering, as a proportion of total transactions, is being done in the Republic of Korea than anywhere else in the world¹³. And the country has an Internet dot.com boom. Scores of new e-commerce ventures are starting up and shaking up what many consider to be the stodgy national business culture.

 Several traditional sectors of the economy, including retailers and property developers, are going online in Hong Kong.

 PUNCOM, a public sector telecommunications company in Punjab, India, is consciously and successfully moving from telecom hardware and parts to becoming an Internet Service Provider (ISP) and chief implementing agency for the e-governance initiative of the state government.

 In the services area, Pakistan Telecommunications Ltd., the state run monopoly, has taken innovative steps to solve the problem of inaccurate telephone number listings in hard-copy directories. It has set up a 24-hour online directory service through the Internet. It is now planning to export this expertise.

Just three-four years ago the Internet was essentially seen as just a fringe tool for business. It was there, but not taken very seriously. ‘Infomediaries’ (New Economy intermediaries) showed the way to becoming the big new players.

But these also are still emerging. The top 25 Internet companies together -- the eBays, Yahoos, Amazon etc. -- collectively generated only about US $5 billion in 1998. For several commentators, the Internet today is still only witnessing the sparkle of the fireflies before the real storm arrives. That is going to be when the elephants start moving and creating a thundering herd effect on the thousands and thousands of traditional companies to which they are directly or indirectly linked.

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