It has become a truism that the Internet is revolutionizing how information flows and how people and businesses interact with each other. As the Internet challenges established business practices, chemical and pharmaceutical firms are finding that delivering value in this changing environment requires new business models among suppliers, partners, and customers.

The Department of Commerce reports in its newly released study, "The Emerging Digital Economy II," that electronic commerce--the use of information technology to exchange information and execute transactions between enterprises and individuals--is a small fraction of the overall U.S. economy. However, the rate of expansion is surpassing all expectations, and it calls e-commerce the "engine for economic growth in the next century."

E-commerce among chemical and pharmaceutical companies has existed for decades, mostly through a system called electronic data interchange (EDI). EDI is a standards-based, computer-to-computer link for transmitting orders and payments between companies. It requires costly hardware and software and connections through a third-party network. Among Fortune 500 firms, 80% say they have used EDI to conduct transactions.

Both the chemical and pharmaceutical industries use EDI systems and others (for example, e-mail and fax) mostly to procure raw materials, order maintenance and office supplies, and manage inventory. Since the 1960s, EDI has been the transactional drivetrain in many companies' supply networks and, in the near term, it is likely to remain a dominant e-commerce tool.

"Some claim EDI is being replaced by the web," says Bill Worthington, a senior business systems consultant at Engelhard, Iselin, N.J. "The magnitude of investment in EDI says it won't be replaced soon." Instead, many companies are hoping to integrate tools such as EDI and enterprise resource planning (ERP) with convenient, accessible, flexible, and easy-to-use Internet applications.

E-commerce experts say newer technologies are changing the face of e-commerce and it's no mystery why. "Two dynamics are coming together to impact technology and e-commerce," says Jim Montgomery, vice president of global strategy for Electronic Data Services Health Care, Plano, Texas, "Moore's law and Metcalfe's law."

Moore's law--named after Gordon Moore, one of the founders of Intel Corp., Santa Clara, Calif.--states that every 18 months chip density, and thus computing power, doubles while costs stay constant. Metcalfe's law--named after Robert Metcalfe, cofounder of 3Com Corp., Santa Clara--says that the value of a product or service correlates with the number of users, specifically that the value of a network is the square of its number of users.

Moore's and Metcalfe's laws partly explain the explosive rise of Internet use among businesses and individuals. More than 40 million Americans use the Internet annually to surf for information and products, according to New York City-based consulting firm Deloitte & Touche.

Cambridge, Mass.-based Forrester Research reports that 100% of large companies in the U.S. have Internet connections. Forrester also projects that U.S. business-to-business trade of hard goods over the Internet hit $43 billion in 1998 and will surge to $1.3 trillion by 2003--an annual growth rate of 99%.

Boston Consulting Group (BCG), Boston, says the situation is similar for business-to-consumer selling. BCG analysts estimate online revenues generated by North American retailers exceeded $13 billion in 1998. Although that number accounts for only 1% of U.S. retail sales, it does represent an annual growth rate of 200%.

Chemical and pharmaceutical companies have been slower to adopt Internet-based e-commerce than other industries, but they are beginning to take notice. Concrete and strategic business interests and concerns are now influencing e-commerce initiatives. Although the Internet is not likely to replace older e-commerce applications in the near term, it is a competitive pressure on how both chemical and pharmaceutical firms conduct business.

For most chemical firms, the challenges of e-commerce are being played out in the business-to-business arena, while for the pharmaceutical industry the greatest impact appears to be on the business-to-consumer front. In this report, C&EN examines the impact of e-commerce on both industries.

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Copyright © 1999 American Chemical Society