The E-Corporation More than just Web-based, it's building a new industrial order.
By Gary Hamel and Jeff Sampler Reporter Associates Patty de Llosa, Jane Hodges, Len A. Costa

(FORTUNE Magazine) – Somewhere out there is a bullet with your company's name on it. Somewhere out there is a competitor, unborn and unknown, that will render your business model obsolete. Bill Gates knows that. When he says that Microsoft is always two years away from failure, he's not just blowing smoke at Janet Reno. He knows that competition today is not between products, it's between business models. He knows that irrelevancy is a bigger risk than inefficiency. And what's true for Microsoft is true for just about every other company: The hottest and most dangerous new business models out there are on the Web.

Since the new kinds of organizations being spawned by information technology's rapid reshaping of global business don't yet have a name, FORTUNE's editors have decided to give them one--"E-corporations." As the term suggests, a real E-corp. isn't just using the Internet to alter its approach to markets and customers; it's combining computers, the Web, and the massively complex programs known as enterprise software to change everything about how it operates. Elsewhere in this package of articles, you'll read about two companies in the middle of just that transformation, Schwab and VF Corp., plus assess the current state of the huge and growing war among enterprise software suppliers. But our subject here is the infotech revolution's most immediate demand--confronting the promise and threat of the Internet.

Okay, so the Web has been hyped to the point of absurdity by fanatical true believers, but when you strip away the frenzied predictions of the digirati, you're still left with an inescapable fact: The Internet will change the relationship between consumers and producers in ways more profound than you can yet imagine. The Internet is not just another marketing channel; it's not just another advertising medium; it's not just a way to speed up transactions. The Internet is the foundation for a new industrial order.

The Internet will empower consumers like nothing else ever has. Think about this: Already 16% of car buyers shop online before showing up at a dealership, and they aren't comparing paint jobs--they're arming themselves with information on dealer costs. So forget all the patronizing nonsense about being market-led or customer-focused. The new reality is consumer control, and it's as ominous as it sounds if you're not prepared for this radically different future. Indeed, the Internet represents the ultimate triumph of consumerism. Sure, you know the Internet is going to be important, but if you don't have a deep, visceral sense of how radically it's going to change today's industrial order, you're going to lose.

Main Street in the 1950s, malls in the 1970s, superstores in the 1990s--since World War II we've seen a fundamental shift in the retailing paradigm with each new generation, and now we're on the verge of another revolution. It's worth noting that each time the business model changed, a new group of leaders emerged. Woolworth's never really escaped Main Street. Sears, for the most part, remains stuck in the mall. Again and again, incumbents missed the early warning signs because they were easy to ignore. Who was really paying attention when Sam and James Walton opened their first Wal-Mart Discount City in 1962? Who really understood the impact that superstores and category killers would ultimately have on the supply chain? Are you convinced that you really understand the potential impact of the Web? Are you sure that your company will be one of the few that define the new Net-centric industrial order?

Though the Internet still represents a minute fraction of total purchases, its growth is mind-boggling. In a spring 1998 study, Jupiter Communications reported that 10 million people in the U.S. had bought something over the Net in 1997, and it expects 17 million to do so this year--up from virtually none a few years ago. Just three years ago only 4% of Americans used the Internet every day. Today the figure is 25%, says the Pew Research Center. Though most connect from work rather than home, the trend is clear: This is not a rising tide, it's a tidal wave.

There is no other channel where revenues are growing anywhere near this fast. There is no other way a business can grow unimpeded by the need to build commercial space and hire legions of sales staff. It doesn't matter how small the Internet's present base of customers, this kind of compounded growth will change the face of business. Of course the Web won't replace off-line retailing. Main Street still exists, so does the mall, and Wal-Mart and Costco aren't going to disappear anytime soon. On the other hand, the Web will fundamentally change customers' expectations about convenience, speed, comparability, price, and service. Those new expectations will reverberate throughout the economy, affecting every business in eight major ways. So read on--and consider yourself warned.


Increasingly consumers would rather spend an hour exploring cyberspace than sit through another execrable sitcom or overhyped sporting event. This trend is a direct challenge to Procter & Gamble, Unilever, Gillette, and other mass marketers, many of which spend as much as 80% of their ad budgets on television. They recognize that the Net threatens to shatter the mass market into millions of individual consumers doing their own thing online.

The Net is not just another medium; it is a profoundly different experience. The Net is about choice, freedom, and control. It is a place to escape, at least temporarily, the incessant interruptions of vendors whose products are more or less indistinguishable save for the advertising.

Any Net advertiser that tries to revoke this freedom will be viewed as little more than a sophisticated spam merchant. It's not that Web users aren't interested in learning about new products and services or getting a great buy on an old standby, but they want to learn on their own terms. They want the choice to click or not, to view or not, and anything more than the gentlest form of persuasion from an advertiser is likely to be construed as an intrusion.

Online advertisers used to talk about push--the ability to put an ad on your computer screen whether you like it or not. Others tried "buying eyeballs," paying AOL, Yahoo, or some other cyberlandlord millions of dollars to put an ad in a prime place on an oft-visited page. Yet these concepts are in many ways antithetical to the Web. The Web is not about push; it's about suck: Online consumers can suck out of cyberspace whatever interests them and leave behind whatever doesn't. You push stuff at passive users, and Web users are anything but passive. You may be willing to let some uninvited advertiser take your TV screen hostage for 30 seconds, but you'd probably throw a fit if they took over your computer screen. Online customers simply aren't going to be pushed around.

For the online advertiser, the challenge is to educate, entertain, and entice, for no one can be compelled to pay attention online. If you want to advertise toothpaste online, you need more than photogenic lovers with toothy smiles. Unilever has created a Website for Mentadent toothpaste that offers potential customers the chance to order a free sample, get oral-care advice, and send questions to a dental hygienist. Every week American Airlines sends E-mail to more than a million NetSAAver subscribers listing rock-bottom fares for undersubscribed flights on the coming weekend.

When I click on an ad, I should get paid. Why should an advertiser send money to AOL or Yahoo--or to CBS, for that matter--when the money could be sent straight to me? This idea is not as farfetched as it sounds. A company called Yoyodyne calls it permission-based marketing, which stands in contrast to interruption-based marketing. Working for clients as diverse as H&R Block, Reader's Digest, and MCI, Yoyodyne designs games and contests--with prizes--that drive traffic to client Websites. Players must provide an E-mail address and choose Websites to visit or ads to view--helping advertisers build relationships with consumers and learn more about them. Having signed up a million players in 1997, Yoyodyne (just bought by Yahoo) hopes to double this number by the end of 1998.

The Net threatens to invert the traditional logic of advertising. Suddenly, the hunted have become the hunters.


As advertisers have pegged the hype-o-meter at 100, consumers have developed ever more sensitive b.s. detectors. No wonder more and more consumers are looking to get their information from someone who is unbiased. Neutrality was the foundation for the success of Consumer Reports, and it accounts for the value consumers find in the rankings of J.D. Power or Morningstar.

In the off-line world, the cost of directly comparing products or services was often prohibitively high. No more. Online, mediocrity will have no place to hide. Typical of the new breed of neutral brokers is CompareNet ( The name says it all: Here's where you go if you want to compare products feature for feature and dollar for dollar. Whether it's lawnmowers, camcorders, or treadmills, skeptical customers can read unbiased product reviews and participate in online discussion groups. In this environment, it's pretty hard for a vendor to spin a second-rate product into a first-rate buy.

Today's consumers demand not just independent advice but also vendor-neutral distribution channels. While Sony's Website languishes--you can buy only Sony, offering 250,000 titles from all five major labels, grows like crazy. Neutrality also means not being told where to shop. E-commerce visionaries like Junglee and C2B Technologies are developing powerful search engines that allow consumers to search for products and bargains all across the Net. Using a virtual database that integrates information from dozens of online merchants, and intelligent agents that scan that information to find the best deal on a particular product, Junglee aims to let consumers comparison-shop on a scale previously unimagined. Suddenly, instead of searching ten different sites, would-be buyers can view the results of a Netwide search in one easy-to-read table. C2B's shopping platform--being offered for license by the company's new owner, Inktomi--gives Web shoppers information on nearly a million products and connects them with hundreds of merchants. It can also do hard-core bargain-hunting. A partnership with Consumers Digest helps C2B deliver Best Buy recommendations and detailed product reviews. Thanks to companies like Junglee and C2B, online buyers are going to have a very big stick with which to hammer down prices and fend off bogus product claims.

Junglee and C2B are the vanguard of a new generation of information intermediaries that help customers get at the truth. This is not disintermediation; it is reintermediation. Online, brokers rule. They will be the new market makers, and they will call the shots.


In the off-line world, products and services were designed and built far in advance of customer needs, and there was little customers could do to configure those products and services to their own requirements. No more. The Net currently allows a vendor to build to demand, thus keeping inventory to a minimum. Increasingly the Net will enable building to spec. Already Gateway and Dell let customers configure PCs and servers to their liking. With Dell, customers can specify their choice of sound card, videocard, video monitor, speakers, and memory capacity from a pull-down menu on Dell's Website. Dell will even tell a customer whether choosing a particular part would delay shipment or cause a compatibility problem with some other part. It's no wonder that Dell is selling $6 million of products a day over its Website and believes that 50% of its sales will be Web-based by the end of 2000.

Why should some producer decide which tracks you get when you buy a CD? Why shouldn't you be able to custom-build your own CD, track by track? This is difficult to accomplish when you have to take your music home on a silver disk but will become effortless when you suck music off the Internet and store it in your home audio-video server. In letting customers download specific tracks, has been taking the first few tentative steps in that direction.

In many cases consumers don't want products, they want solutions. Say you want to build a backyard deck. Why can't you go online to a do-it-yourself site, review a dozen potential plans, select the one you like best, have it instantly adjusted to fit the dimensions of your house, compile a complete parts list, order the parts, and have them delivered to your home with a step-by-step instruction sheet? Today this is just an E-dream, but solution selling will be de rigueur on the Net, and it will allow online merchants to substantially differentiate their service from that of off-line retailers.

Solution selling and online advice are ways in which online merchants can find some relief from the Web's tendency to drive prices to zero. There are also cost advantages in letting customers construct their own online solutions. Think about the economics of teaching thousands of Home Depot employees to give helpful advice to weekend do-it-yourself enthusiasts. Now think about the economics of making that advice available on the Web. No contest.


Think about all the purchases you've made this year. How many of them did you put out to bid? Maybe you got a couple of quotes on that new deck you had installed, but that was probably it. In the future you might put just about everything you buy out to bid. The Web will make it possible to hold real-time auctions for just about everything. allows would-be fliers to name their price for travel between any pair of cities. If an airline is willing to issue a ticket at the requested price, the passenger is obligated to buy. says it has been issuing more than 1,000 tickets a day in recent weeks. Already airlines make millions of fare changes a month in an effort to maximize the revenue they get for each seat. Ultimately, we can expect some enterprising E-broker to link consumers directly to the computer yield management systems of the major airlines in an all-the-time, real-time auction.

One of the most successful online auctioneers is eBay. Essentially a national classifieds listing, where potential buyers bid against each other, eBay claims to have more than 900,000 products for sale in 1,086 categories. The site receives 140 million hits a week. For many years the notion of a list price has been under attack from hungry car dealers, aggressive computer dealers, and department stores addicted to never-ending sales. But even in a world of superdiscounters, it is difficult to know whether you're getting the best possible price on any given item. While retailers may offer to beat any competitor's price, they rest secure in the knowledge that few consumers have the time and patience to shop aggressively for and document the best price on anything other than big-ticket items.

Now imagine a world in which you put your weekly grocery shopping out to bid. Who will bring me my Double-Stuff Oreos, Levi 501s, and that hot new Callaway fairway club for the lowest possible price? Suddenly, individual consumers will be issuing RFPs just like the largest industrial buyers. Make no mistake, the Web will drive the last nail into the coffin of set prices. Customer ignorance--about prices and relative product performance--has been a profit center for many companies. But consumers are about to get much, much better informed--and the consequences will be awe inspiring.

The auction economy will certainly bring benefits to producers. They will be able to instantly calculate whether it will pay to add more capacity. They will be able to slash inventory carrying costs because they will always know the market-clearing price. And they will know that they have maximized the revenue yield on every sale. But like everything else online, the auction economy will be even better for consumers. Through the years producers have made billions of dollars in profits from the inability of customers to compare prices quickly. Which customer can put his hand on his heart and swear he got the best possible price on a refrigerator, a pair of Nike shoes, or a hotel room? Online, customers will be able to get producers to bid against each other in a way that seldom happens in the off-line world. And it will be difficult for industry leaders to enforce any kind of price discipline in a world in which there are no list prices and newcomers are more than willing to underbid established players to win market share. So if your product is anything close to a commodity, prices will trend downward toward variable costs, and margins will be skinnier than an anorexic supermodel.


E-commerce breaks every business free of its geographic moorings. No longer will geography bind a company's aspirations or the scope of its market. spans the globe, selling 20% of its books to foreign destinations. A physical bookstore serves an area of a few square miles, and you can't peruse its inventory without getting in your car and making a little contribution to global warming. But whether you're in Albania or Zambia, is a click away.

For every early mover who uses the Web to blow out the geographic boundaries of its business, there will be dozens of companies that lose their local monopolies to footloose online merchants. Customers, as well as producers, will escape the shackles of geography. Until recently, if you needed a mortgage, you'd humble yourself before your local banker. Now you can go to and shop for the best mortgage rates from financial institutions across the country. It's easy for a big retailer, with a local monopoly, to mistake captive customers for loyal customers. In a world where customers are no longer hostages to geography, loyalty will, for the first time, really have to be earned.

The death of geography will make it difficult for producers to set different prices around the world. This is already a reality for software that is paid for and downloaded over the Internet. No longer is a customer willing to pay 150 [pounds] in London for a piece of software that costs $150 in New York City. Online commerce will destroy these anomalies. No company will be able to charge a premium when consumers know precisely what things cost elsewhere.


Distribution economies drove the growth of superstores like Wal-Mart and Costco, which offer zillions of products in stores the size of small countries. Wal-Mart reaps huge distribution economies from putting groceries, clothing, garden tools, sporting goods, auto supplies, and a plethora of other products under one roof. Consumers benefit from these economies through lower prices.

Bundling all those products together in one location may save Wal-Mart distribution costs when compared with a dozen Main Street retailers, but as a consumer you can waste hours wandering the soulless canyons of Wal-Mart in search of that elusive kitchen pail or can opener. Online, search economies trump distribution economies. The boomers and their progeny--the most harried consumers in history--are flocking to the Net because it's simply the most efficient place to shop for a whole range of goods and services. Say you're looking for a digital camera with a 3X zoom and at least 500,000 pixels. I'll race ya. You drive to your friendly electronics superstore, try to nab a salesperson who knows digital cameras from refrigerators, wait while product literature is dug out from behind a counter, and then make your purchase. I'll visit and beat you by at least an hour. In a world of single-parent families, demanding jobs, and quality time that's measured in nanoseconds, search economies will become hugely attractive to consumers.


Search economies are one-half of the new convenience equation. Fulfillment is the other half. The goal is not just to minimize the hassle of finding something but to minimize the hassle of getting it as well. While companies have spent a decade optimizing the supply chain that runs backward toward suppliers, the delivery chain that runs forward toward customers has changed hardly at all in the past 100 years. Retailers still tell customers, You have to come to us. But online consumers are saying, No way--you have to come to us. My place, my time is the new mantra of consumers everywhere.

A few months ago I was sitting with a group of senior executives from some of America's largest grocery companies. None of the august executives present had yet ordered groceries online. When asked whether a significant share of grocery buying might go online, the universal response was, Nope, it's just too expensive to deliver groceries to every household; consumers will never pay to have groceries delivered to their door. Well, I asked, how much is a customer willing to pay to have a pizza delivered to his door? A pizza (frozen) is about $5 at the supermarket and $10 to $15 delivered. You don't need the Net to order a Domino's pizza, but the point's the same: If consumers are willing to pay this kind of premium for a single pizza, what might they pay to get the week's groceries delivered to their doorstep?

My time will be as important as my place. Think of all the times you've tried to make a phone order or call a tech-support line at the other end of the country and heard a recording that says, I'm sorry, we're closed now--we are open from 8.30 a.m. to 5.30 p.m. Eastern Standard Time. Can you imagine an E-consumer's response to this kind of message on the Web? No one sleeps in cyberspace, and the store is always open.


Word of mouth has an upside and a downside for every company. Both the upside and the downside are magnified exponentially online, where opinions propagate like E. coli in room-temperature chicken.

On the upside, consider Hotmail. Within 18 months of its launch, Hotmail had garnered nearly ten million customers for its free, advertising-supported E-mail service. In December 1997, Microsoft bought Hotmail for an initial payment estimated at more than $400 million. The secret of Hotmail's vertical takeoff? Word of mouse. Every time someone sent an E-mail to a friend, the message carried an offer to sign up for free E-mail. At Hotmail they call it viral marketing: Harnessing word of mouse, Hotmail's message spread like a contagion.

This kind of multiplier effect is every marketer's fantasy, but no amount of hype can produce an online buzz. Viral marketing of the type perfected by Hotmail is the product of an offer too good to refuse multiplied by exponential word of mouse. More modestly, the Web means that potential consumers can always get some kind of opinion--delighted or scathing--from someone who has experience with your product or service. I may not know anyone who's taken the QE2 across the Atlantic, but someone out there is dying to tell me. Edward R. Tufte's lavishly illustrated Visual Explanations: Images and Quantities, Evidence and Narrative is virtually impossible to find in bookstores, yet in 1997 it ranked No. 7 on Amazon's bestseller list. The book's reputation was built almost solely on word-of-mouse buzz.

On the Web all customers have a megaphone, and most are willing to use it. Like the eager combatants who will shout down a bumbling orator on Speaker's Corner in Hyde Park, E-customers will ultimately decide which messages get heard online.


How can your company thrive in the exciting and frightening world of customer control? First, don't fight it. Many of the scenarios painted by fervent Web-heads suggest an apocalyptic future, with consumers huddled in the dark confines of their homes clicking their way through cyberspace. Such obvious hyperbole makes it easy for the uninformed and the fearful to simply dismiss the Web. I'd love to have a buck for every time an exec has said to me, People are always going to enjoy the social experience of shopping. Of course they are! Even a bullish forecaster like Forrester Research sees E-commerce as no more than 6% of retail purchases by 2003. Yet the impact of the Web can't be captured by such numbers.

Imagine two stores in town that have divided the local market for widgets between them. Now, imagine that a newcomer opens a store and immediately drops prices by 20%. The incumbents may not have to match the new price, but they sure as heck can't ignore it and hope to hang on to their customers. Online competitors will undermine the price discipline in cozy markets, even if they don't dominate a segment. They'll also attract the most profitable customers--youthful, tech-savvy, big-volume buyers. Given the high fixed costs of many retailers, it doesn't take a big drop in customers to produce a precipitous decline in profits. So you can't ignore the Web.

Instead, you can--and must--dive into it. In the off-line world it often takes months and millions of dollars to retrain a sales force or adjust prices, and if a company gets these things wrong, it pays a big penalty to put them right again. Not surprisingly, this makes companies highly cautious; any changes have to go through a tangle of red tape. Off-line, it's difficult to get rapid feedback from customers on what part of a company's marketing mix is or isn't working. Increasingly, customers can't be bothered to write a letter or even make a call. Result: Companies are slow to learn from their customers and even slower to act on what they learn. All this changes with the Web.

The Web lends itself to immediate customer feedback and rapid adjustment. Learning cycles are much shorter on- line than off-line. Companies that are quick to try, quick to learn, and quick to adapt will win. Those that learn fastest, and keep learning, will stay ahead. Companies that take months to assess what they've learned, whose internal processes don't run on Internet time, will get left behind. Zipping through the learning cycle creates positive-feedback effects: The faster a company learns and adapts, the more customers it wins; the more customers it wins, the faster it can learn and adapt.

So it's pretty simple. If you don't believe deeply, wholly, and viscerally that the Net is going to change your business, you're going to lose. And if you don't understand the advantages of starting early and learning fast, you're still going to lose.

Producers may have to rethink some of their deepest loyalties. You know that Polo sweater they didn't have in your size? Don't bother trying to order it online. Ralph Lauren and a host of other companies are caught in a quandary: Should they go direct to consumers via the Web or protect their traditional channels?

Surprising as it may seem, when some companies talk about customers, they don't mean the people who use their products; they mean the retailers that stock their products. Many of these companies have held back from E-tailing for fear that they'll offend their customers. But this may be shortsighted. Any company that denies its ultimate consumers convenience and value in the interest of protecting an entrenched channel is swimming against the tide of retailing history. Consumers will not be denied.

Before assuming that the Internet will cannibalize sales from traditional channels, companies need to get a better sense of the demand that goes unfulfilled by those channels. Most companies that are protecting their traditional channels have no idea how many sales they lose because of out-of-stocks. When Peapod began offering its pioneering online grocery service, it filled orders by pulling products off of partner grocery stores' shelves. (Peapod is now big enough to run its own centralized facilities.) In trying to fill customer orders for specific brands and products, Peapod found that out-of-stocks were three to four times more prevalent than supermarket managers had thought. Most consumers will grudgingly make a substitution in stores where they can't find exactly what they want. So loyal customers end up buying from a competitor, or simply not buying at all.

You want a squeeze-the-Charmin kind of shopping experience? Get in your car. Know what you need and are in a hurry? Boot up. No customer is going to do all his or her buying on the Web, and very few will do all their buying off-line. Clever producers and retailers are going to develop hybrid models that give customers the chance to combine the best of both online and off-line buying. In a study of 850 consumers, Ernst & Young found that 64% of Internet users research products online and then buy them at stores or by telephone. The Gap lets customers have it both ways. If you need to try on a pair of jeans, visit the Gap at the mall. If you have a pair of Gap jeans that fit great and you want to order another pair, just go to


So let's review. No more holding people hostage through 30-second commercials. No more hype. No more ignorant customers. No more local monopolies. No more search costs. No more Get in your car and come to us. If you've been paying attention, you're sweating by now.

Sitting atop a 90%-plus market share, it's easy enough for Bill Gates to swoon over the advantages of "frictionless capitalism." But let's be clear: In frictionless capitalism nobody makes any money! So how are people going to survive in the so-called New Economy? Well, ultimately the same way they survived in the old economy--through relentless innovation, unparalleled service, and an attitude of genuine helpfulness, but delivered in new ways.

To thrive in a Net-centric world, a company is going to have to offer consumers products with real performance advantages. Like royalty whose whims are satisfied by simpering servants, online customers will demand flawless service. Consumers will have to be given the information they need to make the best possible buying decisions--in a form that is eminently usable and entertaining to boot. Efficiency advantages and low prices won't be enough--they'll be ruthlessly matched online. The bottom line isn't very complicated. The Net is a noose for mediocrity. But it's a humongous springboard for products and services that are truly great and truly consumer-friendly. Consumers everywhere, stand up and cheer!

GARY HAMEL is a bestselling author and chairman of Strategos, an international consulting firm specializing in strategy. He is also visiting professor of strategic and international management at the London Business School.

JEFF SAMPLER is associate professor of information management and strategy at the London Business School.

REPORTER ASSOCIATES Patty de Llosa, Jane Hodges, Len A. Costa