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And as we all know, institutional change is hard. But more and more institutions are deciding to change because the incentives are powerful. Let me just list a few.
First, networks alter the basic economics of industry. They slash the costs of transactions. Airlines around the world estimate that, on average, it costs about $8 to process a ticket. The same transaction on the Net costs only $1.
Banks estimate that a face-to-face transaction with a teller in a branch office costs a dollar or more. On the Net, that same transaction can be completed for about one cent, one-hundredth of the cost.
Across most of Asia, the time-honored ways of trading stock remain in place. But that's beginning to change. Daishin (Da-shin) Securities in Korea this summer took the plunge into secure online trading over the Net. It's estimated that 5 million people worldwide now use the Net to execute trades in this way.
One strictly online brokerage based in the U.S., E-Trade Securities, has been in business for only six years. They already have more than $10 billion under management, and the only way they deal with their customers is over the Internet. And the leader in the field of electronic stock trading, Charles Schwab, trades more than $2 billion in securities every week on the Net.
Another incentive very important to China:Networks dissolve barriers like time and distance that once limited market opportunities. This means that networks fundamentally alter the nature of competition. The networked world levels the playing field, especially for smaller businesses, in a way that has never been true with prior generations of information technology.
There's a little four-man brewery in a remote Scottish hamlet that's using the Net to take orders from beer lovers all over the world. They're reaching a global market at nominal cost. There's a supermarket chain in Peru that estimates it costs them $4 million to $5 million to open a new physical office. For an investment of about $100,000, they've created a virtual storefront that allows customers to shop online for thousands of items. Revenues are up, and with the Net they can advertise sales and specials without having to print up special materials.
One of my favorite examples is a little company called LeHigh Valley Safety Supply in Allentown, Pennsylvania in the United States. They make industrial workboots that workers wear in factories. The territory that they sell their workboots has always been limited by how far they can drive the truck, because the only way they sold boots was right off the back of a truck that they would drive to the parking lots of industrial sites. IBM put them up on the Web. Now, they are now taking orders from Thailand from workers and offshore oil rigs all over the world. They have became a global company overnight, without creating a new subsidiary, hiring a bunch of lawyers or setting up a new management system.
And all this isn't just about commercial transactions.
At Monterrey Tech in the University of Mexico 70,000 students use the Net to access 2,500 courses. At the MBA program at Athabasca University in Canada, they've gone a step further. There are virtually no students on campus, because there is no campus. All coursework is delivered over networks. The faculty is spread across Canada, the U.K. and the United States. And they have captured 30 percent of the executive MBA market in Canada.
Governments are using the Net to build competitive advantage, to improve services to citizens, and to provide very tangible evidence of efficient use of tax monies. The government of Valencia in southern Spain is wiring entire villages, allowing citizens to do online transactions with local businesses, to schedule a doctor's appointment, to get information from their kids' schools.
Shanghai and all the major Asian port cities are competing to gain an advantage as centers of regional and international commerce. Singapore has just upped the ante in that battle. Singapore is putting 10,000 suppliers online. If you want to do business with Singapore, you're going to have to do it electronically. They're building applications that reduce cost and cut down cycle times -- very important when your competitive advantage is based on the ability to move ships and goods in and out of port.
So governments that in the past have competed for industrial investment or jobs based on traditional incentives like tax structures or access to skilled labor will compete in the future in very large measure on their electronic capability.
The third thing the Net does is that it redefines traditional models of distribution.
Any institution that stands between the creator of a product and the consumer of the product is going to have to rethink its value because the Net is going to make direct connections between those parties possible, especially in cases where the product or service can be reduced to bits and bytes.
So in an age of electronic commerce, financial firms, banks, insurance companies, will have to ask "What does it really mean to be a bank?" which is by definition an intermediary between buyers and sellers, or between people who have money and people who want money. What does it mean to be a university when it's possible to deliver the expertise of faculty to students without regard to the physical limitation of classrooms or a centralized campus?
Next, and closely related to issues of distribution, are the implications around brand management in a networked economy. This one cuts both ways: The Net allows you to extend your brand, and it also creates new threats to your brand identity. Virtually any company with a Web site is positioned to challenge even the most entrenched brands, anywhere in the world.
And there's another dimension to the issue of brand management. This is the issue of online aggregation, a term that describes how certain companies are forming around the world that will pull together disaggregate products and services, and sell them under an electronic marketplace.
There are many examples of this today. In the U.K. many grocery store chains are getting into financial services. In the U.S. you can apply for a mortgage on your house through American Airlines. The airline won't process the mortgage, they'll just take a finders fee from their very best frequent flyer customers.
It is going to be very important as you think about your global reach whether your company and your customers see your brand or an aggregators brand. So utilities, cable TV companies, phone companies, Internet service providers, (and one very large software company) are all trying to position themselves as the aggregator between your customers and you.
This creates major issues. Not technology issues but strategic issues. How do we protect and propagate our brand if that brand can be hidden behind the brand of a software company or an online service provider? If we're going to offer our product or service on these electronic channels, who do we partner with? Who controls the transaction and the customer information?
Big decisions. Because control of the customer information means control of the customer relationship.
I want to wrap up this discussion with a few questions that I encourage all senior executives to start asking. They're the questions we ask ourselves inside of IBM.
First, do we talk about these issues in our company, in our government unit, in our healthcare institution, in our university? Are they part of our important agenda? Do we talk about what our competitors are doing? Do we talk about how we're going to take advantage of this electronic world?
And by the way, you know we can't assume that the competitors you have today will be the ones you have in the future. Because again, the Net alters the whole structure of competition in industry.
A major encyclopedia company in North America watching the rise of the Net created very inexpensive access to the entire world of learning. This encyclopedia chain decided to lay off its entire sales force.
Now we could have a very meaningful and important discussion this topic of job creation, and job elimination. Because in fact all of the great transformational technologies that have hit the world over the hundreds of years, whether it was the electric light, the automobile, the manned flight or new networked technology...they all initially tend to destroy jobs. But then they tend to be a net creator of jobs. And its a transition that all industrial societies must face. The jobs that are created also tend to be higher-paying jobs.
This dynamic comes with huge implications for any nation, its system of education, and its ability to compete for these new jobs in a networked economy. China has hundreds of thousands of children to educate. What role can the Net and distance learning play?
The second question I urge all of you to think about is: At a minimum, are we experimenting? Are we getting our feet wet in a networked world? You don't have to be a pioneer. You don't have to jump in and change your enterprise overnight. It is possible to be a watcher of the leader, and a fast follower.
But this technology is changing so fast that, I believe the most practical strategy will include at least some preliminary investment with e-business. You can't wait for every other institution or nation to move to fully capitalize on this technology.
So that includes getting started with e-business inside your own enterprise. At IBM, we're connecting every employee and increasingly an external network of partners-- over 300,000 people -- through an Intranet site, and a powerful collaborative software called Lotus Notes.
We are also driving to establish leadership in our industry based on our ability to move ideas and insights around and through hierarchical organizations. You may have heard of this described as knowledge management, or knowledge sharing.
I have no doubt that in the 21st century, the most important skill for any institution will be its ability to turn information into insight, and get that insight to the people who need it. We will still compete with the traditional tools of labor and capital. But the biggest winners will be the enterprises that can best capture, use and turn information into wisdom.
