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E-Chocolate

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DQI Bureau
New Update

1.

Taking Orders







HOW IT WORKS



Since July, U.S. storeowners have had the option of ordering Nestlé

chocolates and other products via a new Web site, NestléEZOrder.

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THE BENEFIT

Nestlé hopes to eliminate most of the 100,000 phoned or faxed orders a year

from mom-and-pop shops. That would reduce manual data entry and cut processing

costs by 90%, to 21 cents per order.

2. Getting Ingredients

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HOW IT WORKS



Nestlé

buyers have purchased cocoa beans and other raw ingredients on a

country-by-country basis, with little info about how colleagues were buying the

same products. Now they share price info via the Net and pick suppliers that

offer the best deals.






THE BENEFIT

Nestlé has reduced the number of suppliers by as much as two-thirds and cut

procurement costs by up to 20%.






3. Making the Chocolate





HOW IT WORKS



Nestlé has traditionally processed its own cocoa butter and powder and

manufactured most of its own chocolate. The Web lets Nestlé better communicate

with suppliers, making outsourcing a more viable option.


THE BENEFIT

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Last year, outside contractors in Italy and Malaysia won orders to produce

raw chocolate. Expect more such deals: Nestlé plans to sell or close a third of

its 86 chocolate plants in coming years.

4. Cutting Inventories

HOW IT WORKS



In the past, Nestlé guessed at how many KitKat or Crunch bars it might be

able to sell in a promotion. Today, electronic links with supermarkets and other

retail partners give Nestlé accurate and timely information on buying trends.

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THE BENEFIT

That lets Nestlé trim inventories by 15% as it adjusts production and

deliveries to meet demand.

5. Marketing the Candy Bars

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HOW IT WORKS



Nestlé spends $1.2 billion on advertising through traditional print and TV ads.
Within two years, more than 20% of that will go online.

THE BENEFIT

New marketing approaches include a chocolate-lover’s Web site with advice,

recipes, and paeans to the pleasures of chocolate. Nestlé has similar sites for

coffee, Italian food, and infant nutrition.

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BEA is off to a promising start. In just five years, the

company has landed 8,000 customers, ranging from Old Economy stalwart General

Electric Co. (GE)

to Net pioneer Amazon.com Inc. (AMZN)

The draw: BEA's specialized computer-server software that allows corporations to

custom-build their Web site operations. For the quarter ended on Oct. 31, BEA

reported revenues of $224 million, up 77% from a year earlier, and a $31.3

million profit. This year, analysts figure the company will hit sales of $925

million. That may seem like small change in the grand scheme of things, but it's

a far sight more than Microsoft's $7.5 million in revenue when it was the same

age. ''BEA has an opportunity to be a major platform for this new wave of

computing for the Web,'' says analyst Rick Sherlund of Goldman, Sachs & Co.

Indeed, it's the promise of radically new ways of doing

business that could catapult these small fry into the big leagues. Using the

Internet, companies are tackling big and small projects alike--from capturing a

company's storehouse of expertise on Web pages so employees can do smarter work

to comparison-shopping for tape dispensers and toilet paper with the click of a

mouse. The explosion of ways that companies are squeezing out new efficiencies

via the Web holds the tantalizing possibility that Internet software will

eventually grow to dominate the market. Today, e-business software is a $13.5

billion market--just 13% of the entire corporate-software market. Yet in just

three years, e-biz software will account for $44.7 billion in revenues and 24%

of the whole, according to Merrill Lynch & Co.

Even the threat of an impending economic slowdown hasn't

dampened enthusiasm for the brash upstarts. Experts say the young software

makers are likely to fare better than the rest of the industry because they sell

must-have products that can improve productivity or help open new markets. Boise

Cascade Corp. (BCC),

for example, is automating the way it handles transactions with suppliers and

customers, using the Internet to speed up communication and share information.

The paper-products company is spending $100 million on technology this year,

including about $1 million on marketing software from E.piphany Inc. in San

Mateo, Calif. Says Robert Egan, Boise Cascade's director of information

services: ''You have to keep moving ahead. Five years out, all of our

competitors will have these capabilities.''

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It's spending plans such as Boise Cascade's that have kept

the stocks of the insurgents afloat in a market that's under water. In the past

six months, shares of our 16 upstarts have risen an average 13%, vs. -5% for the

Nasdaq Composite Index. And some have soared. The stock of Ariba, a maker of

e-marketplace software, is up 44%, BEA's shares have climbed over 93%, and

Interwoven, whose software manages Web content, is up a startling 200%.

That doesn't mean that every one of these pipsqueaks will

grow to be a Goliath. Any Microsoft wannabe must first contend with Microsoft,

which is also angling for a fat slice of the Web-software pie. Then there's IBM,

Oracle, SAP (SAP),

and Siebel Systems (SEBL),

today's software kings, each with its own strategy for grabbing market share in

the new Net fields. And they wield key advantages: Gobs of money, existing

relationships with customers, and the ability to price low on key products to

edge out the whippersnappers. Says Oracle CEO Lawrence J. Ellison: ''You have to

distinguish between companies that have endurance and meteors.'' Are the

upstarts cowed? ''Oracle and SAP are dying a very slow death,'' responds Sanjiv

S. Sidhu, CEO of rival i2 Technologies.

Who will be the winners and who will be the losers? After

the dust settles 5 or 10 years from now, analysts predict that just a handful of

companies will end up being the royalty of software. Microsoft seems almost sure

to be among the winners, though not likely the king of kings that it is in the

PC world. Microsoft's software for heavy-duty server computers is shaping up as

a solid foundation for e-business applications. But so far, it's the software

platform of choice for only one of the 16 upstarts--Commerce One Inc. (CMRC)--to

develop its programs on. Worse, customers have yet to clamor for it (page 42).

Other giants that seem likely to retain their thrones: Oracle, because its

databases power many of the largest e-commerce sites, and IBM, thanks to its

mighty consulting business.

And the new kings? A handful of the upstarts will carve

out sizable niches where they can thrive--such as Vignette Corp. (VIGN)

for handling Web-site content, and Commerce One and Ariba (ARBA)

in e-marketplaces. To become a true giant of the industry, the upstarts will

have to branch out to offer a broad set of products or create software so

powerful that it becomes a platform--much like Windows--for customers and other

software companies to build on. Two of our 16 insurgents have those qualities:

i2 can help corporations automate a huge swath of their businesses--from

ordering and inventory management to collaboration with suppliers--while BEA has

the best chance of supplying the basic building blocks upon which Net computing

is built. ''BEA is probably the next big infrastructure company,'' says Charles

E. Phillips, a managing director at Morgan Stanley Dean Witter.

In each case, the Net pioneers spotted an opportunity when

others simply didn't see it. Four years ago, for example, Commerce One CEO Mark

Hoffman foresaw that there would be a need for software to support

e-marketplaces in which buyers and sellers could meet and make deals. Most of

the established companies didn't figure that out until late last year.

Often, these CEOs took huge risks to get their companies

off the ground. i2's Sidhu bootstrapped his company with $200,000 of his

personal savings. He didn't collect a salary for the first two years, and, to

save money, he insisted that new employees assemble their own desks when they

first reported to work. Others walked away from bucketloads of money by leaping

from sure-bet mature companies to the uncertainty of shaky startups. BEA's

Coleman left behind 50,000 shares of not-yet-vested Sun Microsystems (SUNW)

stock, which would now be worth $72 million. His reward: His BEA shares are now

worth $650 million. Whether he can turn that nest egg into a fortune of Gatesian

proportions depends on what happens next.

Taking an early lead with the latest technology plays a

major role in separating winners from losers. Unlike the established giants,

which are trying to adapt their old products to the Web world, the upstarts have

been able to build from scratch. That often means that their programs are easier

for customers to install and use and easier to update when new features become

available. ''Running these companies is not so much about the competition as it

is figuring out the next generation of technology,'' says David C. Peterschmidt,

CEO of Inktomi Inc. (INKT)

in Foster City, Calif., which makes software that speeds content delivered on

the Net.

Keeping that technological edge is a necessary but costly

proposition. Inktomi, for example, is spending over 20% of its revenues on

research and development. And that's not unusual for the top tier of

Web-software makers. The 16 insurgents we cite are, on average, funneling 23% of

their revenues into R&D--compared with just 7% for Siebel, 11% for Oracle,

and 16% for Microsoft.

Some upstarts have learned the hard way that old-time

technology could hurt them dearly. Last July, BroadVision Inc. (BVSN),

a maker of software for running online shops, lost one of its blue-chip

customers, American Airlines Inc. (AMR),

to startup rival Art Technology Group (ARTG).

American Airlines declined to comment on the deal, but analysts estimate that it

may be worth at least $150,000 to Art Technology. The reason for BroadVision's

loss: It was slow to embrace a new kind of software programming called

Enterprise Java Beans that makes software products from different suppliers fit

together like bricks do at different construction sites. The fallout was

immediate. Although BroadVision was profitable and growing at a 300% annual

clip, the Redwood City (Calif.) company's market cap was cut to a third of its

June value in September when the shares bottomed out at $17.62. Stung,

BroadVision went so far as to forge an alliance with sometime rival BEA Systems

to incorporate BEA's Java technology into BroadVision products.

Most of the young software makers, BroadVision included,

got off the ground by focusing intensely on doing a few things really well. That

gave them breathing room because they could invest all of their relatively

meager resources in one place and concentrate on small but promising markets

that haven't yet attracted the attention of the big players. For four-year-old

Ask Jeeves Inc. (ASKJ),

the bull's-eye is Web-search technology. Ask Jeeves has kept its 725 employees

focused on creating cutting-edge search technology. That made it the choice for

Ford Motor Co. (F)

when the auto giant went looking for a search service for its consumer Web site.

The service, on fordvehicles.com, allows buyers to ask questions about Ford

products and services, such as information about discounts for recent college

grads.

For other upstarts, the key has been to get critical mass

in their niche--fast. That way, customers don't spend as much time sizing up the

alternatives. Ariba is a good example. Last November, Ariba, which at the time

was selling only corporate-purchasing software, spent nearly $2 billion on

auction-software maker TradingDynamics and e-marketplace software maker Tradex

Technologies. That gave it the complete package of software for companies

seeking to set up business-to-business e-commerce Web sites.

Those that don't broaden their portfolio are destined to

run into trouble. Lower-tier outfits, such as e-sales specialists InterWorld

Corp. (INTW)

and Web-marketing company NetPerceptions Inc., posted disappointing revenues for

the third quarter and watched their stock prices crater by as much as 90%.

''Those companies that haven't moved beyond being a small piece are getting

killed,'' says Internet software analyst Greg Vogel of Banc of America

Securities.

That's why forming alliances with major tech players looks

mighty attractive to some of these emerging companies. Back in March, for

example, Ariba and i2 Technologies made a three-way partnership with IBM, which

bought small stakes in Ariba and in i2. The idea is that by making their

software work well together, selling each other's products, and approaching

customers as a team, they'll be able to land major buyers. It seems to be

working. So far, the alliance has won 25 customers, including such online

exchanges as e2open, MetalSpectrum, and Worldwide Retail Exchange.

But it's not just the upstarts that badly want these

partnerships. The tech giants need the little guys every bit as much--if not

more. Look at SAP. It got caught flat-footed last year when corporations started

clamoring for software to run e-marketplaces, connecting manufacturers and their

suppliers. The German powerhouse is expert at operating, financial, and

manufacturing software, but it would have taken too long to create top-notch

e-marketplace software. So instead, it swallowed its pride and made a deal with

Commerce One. Using Commerce One's products as a starting point, the two agreed

in June to jointly develop and sell e-marketplace software.

When push comes to shove, will these David-and-Goliath

partnerships fall apart? Already, there are signs of fraying. In November, 1997,

Oracle and i2 launched an alliance to sell software for managing orders from

suppliers to large industrial customers. But a year later, Oracle came out with

its own version of i2's product, and the two began feuding and poaching

customers from each other. ''These are two independent companies. These

relationships will not last forever,'' says former Oracle Executive

Vice-President Gary Bloom. Indeed, chronicles of the tech industry are littered

with relationships gone awry. So the smart upstarts will hedge their bets--doing

their own development while keeping a potential partner in reserve.

When it comes to hooking up with the large consulting

companies, however, there doesn't seem to be a downside. Since the upstarts

don't have armies of salespeople and consultants, they're wise to align with

large consulting companies that design, install, and maintain computing systems.

Experts estimate that more than half of software purchasing decisions are now

made or heavily influenced by such integrators. That's why webMethods Inc., a

Fairfax (Va.) maker of software for tying together disparate computing systems,

forged partnerships with service giants such as Andersen Consulting and KPMG,

plus 92 smaller consultancies. The impact: Thousands of consultants employed by

others extend the reach of its 70 sales reps and 110 consultants.

Those linkups are paying off. In the summer of 1999,

Andersen recommended webMethods (WEBM)

to PolyOne Corp. (POL),

a $3.5 billion plastics manufacturer based in Cleveland, to connect its own

manufacturing and planning software to systems used by its three largest

suppliers. As a result, PolyOne has shortened the time it takes to create orders

from days to seconds and reduced its inventory by 13%. ''WebMethods is a very

good tool, but Andersen Consulting has a deep understanding of how our system

works,'' says David Honeycutt, director of e-business for PolyOne.

For the software upstarts, buddying up won't necessarily

overcome the advantages of the giants. Consider the power of IBM. With annual

1999 software revenues of $12.7 billion, it's the world's second-largest

software company after Microsoft. It has 8,000 software sales specialists,

compared with just 511 for BEA. Now that IBM has wised up to BEA's market, it's

gaining ground. In 1999, BEA claimed 32% of the market for e-commerce

application servers, vs. 16% for IBM, according to tech research firm Giga

Information Group. But by the end of this year, Giga estimates that BEA and IBM

will be tied, with 24% each. Giga analyst Mike Gilpin says that even though

BEA's technology has the edge, IBM's long track record reassures potential

customers. ''We're gonna be here 20 years from now,'' says Steve Mills, an IBM

senior vice-president who runs the company's software division.

As mighty as they seem, the software powerhouses have some

chinks in their armor. Because they already have thousands of customers, they

spend a lot of their time and energy maintaining and updating old software. IBM,

for instance, has to make versions of its software for at least eight different

server operating systems. That slows down the release of product updates and

makes it hard to break from the past and deliver innovative technology. It's one

reason why companies that have had tremendous successes in one business era find

it hard to replicate them in the next. IBM dominated the mainframe market but

was overshadowed by Digital Equipment Corp. in the minicomputer market. DEC, in

turn, missed out on the shift to PCs.

''The leading companies always get toppled,'' warns

Clayton M. Christensen, a Harvard Business School professor.

The bigger you are, the harder it is to shift course.

Consider Oracle, which sold nearly $600 million worth of database software last

quarter. Its future growth rate hinges on the sales of its e-business suite of

applications, which includes software for e-commerce, procurement, and online

marketplaces. But it's having trouble switching its focus. During the third

quarter, Oracle's application software sales disappointed Wall Street.

Application sales grew 42%, to $156 million, from the previous year, but

analysts were expecting 60% growth. Insiders say Oracle's sales force has a

greater incentive to sell its core database product because they know it

better--and they get bigger commissions.

Despite Oracle's hiccups, the incumbents won't give way

without a fight. Kana Communications Inc. Chief Executive Michael J. McCloskey

says that heads of big software companies use their clout to try to undermine

the small fry. He says the CEO of a large software company, which he would not

identify, recently berated a consulting firm for recommending Kana's products.

Separately, that same CEO called the head of a large Kana customer to point out

that his company's software was already installed on its computers. The

not-so-subtle message: You depend on us for help. ''They call very high in the

organization and try to unhook our deals,'' says McCloskey.

The upstarts fight fire with fire. Roger Siboni, CEO of

E.piphany, takes advantage of his decade as a top executive at high-tech

consultant KPMG to land customers. A personal plea he made to Greg Carmichael,

CIO at Emerson Electric (EMR),

helped E.piphany edge out Siebel Systems. ''Roger Siboni called me,'' says

Carmichael. ''Tom Siebel didn't.'' At i2, CEO Sidhu went so far as to peg a

portion of i2's fee to its ability to deliver savings. That has won him instant

credibility. The company's most recently quarterly revenues hit $319.5 million,

up 118% from a year earlier.

It's not enough, however, to go toe-to-toe with the Old

Guard. The would-be software kings must also look over their shoulders at the

up-and-coming startups. In October, Wal-Mart Stores Inc. (WMT)

selected virtual unknown Atlas Commerce Inc., a one-year-old software maker in

Malvern, Pa., to improve coordination with its suppliers. Atlas' product allows

numerous Wal-Mart stores to combine orders from various suppliers into a single

purchase order--the procurement market that Ariba dominates. As a result, the

retail giant can get volume discounts and trim shipping costs. ''I worry less

about the big guys,'' says Interwoven (IWOV)

CEO Martin W. Brauns. ''I worry more about the three guys in the garage building

something no one has thought of yet.''

When it comes to predicting who the new leaders will be,

one thing is clear: It's unlikely that any single company will gain the same

kind of dominance of Web computing that Microsoft enjoys in the PC realm. While

some of these young companies rule their markets, a total Net monopoly isn't

likely since no one company can own the operating system of the Net, as

Microsoft did with personal computers. ''There's more of a level playing field

than there has ever been,'' says Dave Winer, who runs the popular

software-developer Web site, DaveNet.

Ironically, that level playing field may not be the best

thing for the software upstarts. There are some advantages to having one company

call the shots. A single standard-bearer can get the whole industry moving in

sync, minimize incompatibilities between technologies, and assure customers that

they're making smart investments. These days, many in the software industry hope

that Internet standards can fill the role that Microsoft plays in the PC realm

and that IBM plays in mainframes. But there's still a lot of work to be done to

assure that Internet software knits together. It's vital to the upstarts that

these complex systems don't devolve into a computerized Tower of Babel.

Otherwise, corporations and consumers alike may end up wishing that Microsoft

remains king of the software hill.

By SPENCER E. ANTE and JIM KERSTETTER



Contributing: Jay Greene

Copyright 2001 , by The McGraw-Hill Companies Inc.

All rights reserved.

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