Whod a Thunk!

01/01/2000

Charles E. Bauer, Ph.D.

Welcome to the year 2000! I hope your Y2K issues were minimal, and you`re now ready to prepare for the beginning of the new millennium next January. What will your business look like next year? In five years? In 10? Only a couple of years ago, this column discussed significant paradigm shifts in technology development, business models and value perceptions for the electronics industry. And while these shifts continue to progress, e-business and the Internet have stimulated even newer thinking about core values and business models. Although Internet stocks may be hot, their impact on the business world has little to do with the Internet per se. So, what is the business paradigm of the future?

Look at Amazon.com as one of the very first examples of a new business model. By selling books and other personal entertainment goods essentially at the cost of acquisition and distribution, where will the profit (as opposed to revenue) stream come from? Access! To sell other products and services, marketers require access to potential customers, and to maximize their cost efficiency, they want these potential customers pre-qualified. Every time you buy something, you provide a bit of characterization data about yourself, by which the seller can infer what other products might interest you.

Consider a few other value shifts in the marketplace. Just a few years ago, only registered stock brokers had access to real-time stock quotes and could execute trades, which put them essentially in control of the markets. In less than a decade, we have progressed through discount brokers to low-cost, real-time quotes to on-line trading! In the next year or two, if Mr. Hambricht succeeds, even IPOs will be on-line, sidestepping most of the added costs from the investment banking industry and providing IPO stock access to people outside of the large institutions and pension funds (where insiders generally grab all of the profits during an initial IPO). Will stock brokers and investment bankers go the way of the dinosaur? Don`t bet on it because they will be paid for their knowledge and insight, not for the execution of trades - it still takes time to understand the value of each opportunity, and many investors don`t have the time to do this thoroughly.

Another example can be found in the real estate market. Real estate listings, in the traditional MLS, have long been a valued asset to real estate sales agents and brokers, but now sellers can list their homes on-line or even in the traditional MLS through special service brokers. Agents and brokers now must shift their income streams from monopolistic listings and commission fees to transaction support and after-sale service referrals. Here, we encounter the pre-qualified customer gambit where the real estate agent can sell information on house buyers to local businesses, such as landscaping services, insurance brokers, moving companies and interior decorators.

My favorite example hits the automobile industry. Credit unions and a few other lenders offer new cars for just a few hundred dollars over dealer cost, but what happens when an auto insurance company sells you a car at, or even a little below, cost on the condition that you insure the vehicle through them for a period of, say, three years? They don`t care about the car and neither does the manufacturer because they both still capture their revenue and profits. The affected party is the network of local car dealers who probably still think other local dealers are their competition! Some local dealers have become mere showrooms, storage depots and service centers for buyers. Local dealers should change their value paradigm or they`ll soon be out of business. They can no longer buy and sell cars to make a profit, but rather they must sell display and storage services to the manufacturers. Dealer service centers now must compete with independent shops and large service chains, meaning that they better keep the customer happy because the customer is no longer captive.

Value shifting in our industry results in "free" computers and cellular phones that emulate the business models described. The hardware becomes a commodity and revenue streams move up to the service level either through pre-qualified marketing (computers with continuous on-line advertising clutter) or pure value shifting (cell phone usage fees). Original equipment manufacturers also installed this model during the past decade by shifting to contract manufacturing en masse and focusing revenue streams on their core expertise in design, product management and distribution.

The next major business shift is already on the horizon for electronic manufacturing services (EMS) providers as they recognize that true value lies not in the manufacturing technology and equipment they own, but rather in the ability to minimize costs by optimizing manufacturing logistics. Technology, equipment and facility infrastructures will rapidly become more localized, and the value of EMS providers will come from their ability to integrate and manage these infrastructures effectively. Getting components and sub-systems to the right place at the right time is critical under this model, so who will be the competitors? Watch out for Federal Express, DHL, etc. - they already possess the best parcel distribution logistics in the world. Add a bill of materials input and they instantly enter the EMS business!

Future opportunity lies in leveraging today`s core products and/or services for unrelated, and often surprising, revenue sources. The greatest challenge, as always, remains in timing decisions to maximize the benefits from the ongoing value paradigm shift. All ships still go up and down with the tides, so keep your eyes open for opportunities to ride the wave or someone else`s product or service. Or better yet, be the side car to their motorcycle.

Who`d a thunk our industry would play such a key role in the new business value paradigm? It all comes full circle as electronics created the Internet, which stimulated new business models, which powered the value shift, which opened new markets, which demand great portability for more access, which drives technology advancement in packaging, interconnection and assembly. What a wonderfully exciting time to be part of the electronics revolution!

CHARLES E. BAUER, Ph.D., can be contacted at TechLead Corp., 31321 Island Drive, Evergreen, CO 80439; (303) 674-8202; Fax: (303) 674-6978; E-mail: [email protected].