Digital business strategy Read the following Case Setting the Internet revenue contribution at Sandvik Steel, a company selling into many international markets, provides a good illustration of how Internet revenue contribution can be used to set objectives for different geographical markets. When dot‐com mania was at its height, so‐called old economy companies, such as Sweden’s Sandvik, tended to be overshadowed as the brash new online stars took the limelight. But now that the collapse of the Internet and other technology stocks has injected a harsh dose of reality into the stock market and business scene, many established names are back in favour again. As the experience of Sandvik, founded in 1862, shows, skilful use of the Internet can lead to huge improvements in links with customers and suppliers, bringing considerable cost savings. Based north of Stockholm in Sandviken, the com‐ pany’s activities seem remote from the virtual world of the Internet. It makes cutting tools, speciality steels and mining and construction equipment. However, the group is a long‐time advocate of IT.
Its annual IT budget is some SKr1bn. ‘We first formulated our IT strategy in 1969,’ says Clas Ake Hedstrom, the chief executive. ‘We didn’t fore‐ see the Internet.’ Only recently, he adds, has IT moved from serving the company to benefiting customers. Transferring its 30‐year‐old IT experience to the age of the web requires more than a deep understanding of technology, says Arnfinn Fredriksson, director of Internet business development at the group’s Coromant tooling business. ‘The major challenges are not IT and systems, but “soft” things such as attitudes, insights and getting people to understand and accept that this is part of their daily work.’ This means focussing hard on business needs and cutting through the Internet hype. Sandvik Steel, the speciality steel operation, also goes beyond transactions to find solutions for its customers. Its extranet enables users to obtain worldwide stock information, catalogues and training aids, as well as take part in online discussions. At both Coromant and Sandvik Steel, digital business activities are mainly directed towards enhancing links with customers. ‘Customer value comes when our product is used, not when it is purchased,’ Mr Fredriksson says. Thus, Coromant allows customers not only to buy tools over the web but also to design their own products – within parameters set by Coromant – and receive advice on how best to use them. Choosing the right cutting tools and using them effectively can save around 10% of the total cost of manufactured components. The digital business strategy had to take account of this. It also had to avoid channel conflict, the bypassing of its traditional sales outlets. Most Coromant tools are sold directly to customers, but 40% goes through resellers. Moreover, there are big regional variations: more than 80% of sales in the Nordic region are direct, while most North American sales are indirect. The company’s approach was to work with traditional sales channels. ‘So many companies try to bypass traditional channels and lose sales and relationships,’ Mr Fredriksson says. It is the relationship with the customer – including greater personalisation and an extended reach into global markets – which will be the most important pillar of its digital business strategy in the long term, he says. This is what provides a real competitive advantage. Shifting existing customers to the Internet, winning new ones and saving costs are also important. But other companies will be doing the same. At present, only a small part of Coromant’s orders are transacted over the web. Nordic countries are lead-ing the way. Around 20% of all orders from Denmark are online and 31% of those from Sweden. The proportion in the US, however, is only 3%, since most business goes through distributors and is con-ducted by EDI (electronic data interchange), the pre‐ Internet means of e‐commerce. Over the next six months, the company hopes to raise the US figure to 40%. Mr Fredriksson hopes that in two years, between 40 and 50% of total orders will come via the web. To enhance its online service to customers, Coromant plans to offer each one a personalised web page. This will enable the company to offer new products, materials and advice on productivity improvements. Training will also be part of this expanded web offering, which Coromant aims to have in place later this year. For both Coromant and Sandvik Steel, the value of the web lies in strengthening and expanding relationships with customers. In the case of Coromant, with some 25,000 standard products, there are numerous customers buying low volumes. With Sandvik Steel, however, a small number of customers buy a high volume of products. ‘Our aims were to have 200 key customers using the extranet by a fixed time; and a confirmation from at least 80% of key customers that they consider the extranet to be a major reason to deal with Sandvik,’ says Annika Roos, marketing manager at Sandvik Steel. By putting the Internet at the heart of its business, the Sandvik group intends to penetrate deeply into the minds and ambitions of its customers. ‘The challenge is not just doing digital business, it is becoming a digital business,’ she adds. Source: Andrew Fisher, Sandvik Steel, 4 June 2001. Tutorial Questions – Debate in classes 1. Summarise Sandvik Steel’s digital business strategy as described in the article? 2. Suggest why the proportion of online purchases varies in the different countries in which Sandvik trades? Get Accounting homework help today