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Emerging Market Mechanisms in Business-to-Business E Commerce: A framework*
B Mahadevan
Indian Institute of Management Bangalore Bannerghatta Road,
Bangalore 560 076, INDIA. e-mail: [email protected]
International Conference on
Advances in Infrastructure for e-Business, eEducation, e-Science, and e-Medicine
on the Internet (SSGRR 2002s),
Rome, ITALY
July 29 - August 4, 2002
* Word Count – 6005.
1
Emerging Market Mechanisms in Business-to-Business E Commerce: A framework
Abstract
Several researchers have predicted a significant growth trajectory for Business-
to-Business (B2B) applications of E Commerce. Over the last five years, a
variety of market mechanisms have emerged to address various issues pertaining
to B2B E Commerce. However, there is a general lack of understanding among
the researchers and practitioners on two key issues: What are the key
characteristics of these market mechanisms? What factors drive the choice of one
market mechanism over the other? Our current research addresses these questions
through a study of 13 different market mechanisms in operation today.
The study shows that B2B market mechanisms have the potential to enable
organizations overcome the limitations of traditional markets such as poor market
liquidity, high transaction costs and low operational velocity. The study reveals
that while several market mechanisms promote competitive market behaviour
among the participants, some others facilitate newer collaborative mechanisms.
Four factors significantly drive the choice of an appropriate market mechanism
for an organization. These include asset specificity, degree of fragmentation,
complexity of product description and complexity of value assessment. We have
developed a framework using these factors that unambiguously positions these
market mechanisms. The framework will help organizations devise appropriate
strategies to exploit B2B market mechanisms.
2
I. INTRODUCTION
The growth of electronic markets has dwarfed the historical growth patterns of other
sectors of the industry. Kshetri and Dholakia [1] presented Business-to-Business
(B2B) market projections by several consulting firms. According to them, worldwide
B2B market is estimated to grow from US $ 919 Billions in 2001 to about US $ 6
Trillions by the end of 2004. Over years, several market mechanisms have sprung in
electronic market space to tap new value creation opportunities. For instance, Free
Markets introduced the idea of conducting reverse auctions using the electronic media
during 1995. GEIS pioneered the concept of Trading Partner Network (TPN) in the
mid 1990’s. Similarly, the big three auto players created in February 2000
COVISINT, a consortia-based market structure. Other examples include catalogue
aggregation by Sciquest and virtual community building by Vertical Net. Many others
such as Oracle, i2, SAP and Ariba developed a variety of supply chain collaboration
tools.
Researchers, and Consultants have coined alternative classification schemes to
describe B2B market mechanisms. Mahadevan [2] generically divided the electronic
market space into three: Portals, Market makers and Product/Service providers and
suggested that B2B applications will be increasingly concentrated in market making.
Barrat and Rosdahl [3] presented a brief overview of alternative taxonomies to
classify B2B markets. Blodget and McCabe [4] classified B2B markets as either
vertical or horizontal. While vertical markets are industry specific, horizontal markets
are based on specific functions. Kaplan and Sawhney [5] proposed a 2x2
classification of B2B markets on the basis of “how” and “what” of the procurement
process. This classification scheme can be applied to traditional markets also. There
3
have also been attempts in the past to classify a sub-section of B2B markets. For
instance, Philips and Meeker [6] identified four types of B2B exchanges viz., Buyer
managed, Supplier managed, distributors and content aggregators. Le [7] identified
three market structures in B2B: Third party independent exchanges (3PXs), Industry
Sponsored Market places (ISMs) and Private Trading Networks (PTNs) and
concluded that leaders in B2B markets will have to eventually provide value through
aggregation and collaboration.
Despite several attempts in the past to classify B2B market structures, they are
inadequate for several reasons. First is the significant change in the character B2B
sites. Tomak and Xia [8] reported that B2B models are witnessing a move towards
newer market structures such as privately owned and consortia. Moreover, initially a
large number of them operated in pure market structures. However, currently several
B2B sites provide in one virtual place multiple market structures such as an exchange,
an online community, software for hosting a private market place, facility to conduct
forward and reverse auctions, and a catalogue. A case in point is
www.chemconnect.com, which offers auctions, commodity exchanges, online
community resources and collaboration with trading partners (see Figure 1 for a
screen shot). Similarly, Free Markets started by conducting reverse auctions.
Currently, they also conduct forward auctions (asset auctions), and sell site licenses
for their bidding software. Consequently, there is a greater need for an organization to
know how to benefit from a B2B market place offering multiple market mechanisms.
Moreover, no efforts have been made to systematically enumerate alternative market
structures in operation today. Earlier studies have addressed only a sub-set of market
structures. Finally, there is no robust taxonomy available to classify the market
4
structures. Since most of the earlier studies chose to address only a partial set of
market structures, the classification scheme adopted was also limited.
For the most part, earlier studies on alternative market structures and the benefits that
they offer to organizations have resulted in an “either or approach” when it comes to
recommending appropriate market structures for organizations. We, on the other
hand, would like to provide an alternative perspective to this issue. We focus on how
organizations could benefit from all the available market structures. We shift the
discussion to “when” alternative market structures are appropriate. This paper
addresses these issues and proposes a new framework for understanding the emerging
market mechanisms in B2B.
We begin the paper with a brief description of thirteen alternative B2B market
structures available today. We follow it up with a discussion on the specific areas in
which electronic B2B markets provide value over traditional market structures. We
also identify key factors that will differentiate the market structures on the basis of our
understanding of the role of electronic markets. We use the key factors to propose a
framework to classify the thirteen market structures. We finally end the paper with
some managerial insights and implications of the proposed framework.
II. ELECTRONIC MARKETS FOR B2B
There are several types of markets structures operating in the B2B electronic market
domain. However, we have identified 13 dominant structures based on our study of
about 200 B2B market sites in operation today. The selection of B2B market sites for
this study was primarily on the basis of Forbes.com’s 2001 listing of Best of Web –
B2B sites [9]. Table 1 has the list of B2B market structures and some representative
5
examples for each of them. Popular among the list includes auction sites, catalogue
aggregators and exchanges. However there are others that are least understood. These
include extranets, trading partner networks and buyer and supplier centric market
structures and consortia market places.
One set of market structures includes Extranets, TPN and web EDI. These are enabled
when computers cutting across organizational boundaries are connected to a single
network for the purpose of sharing vital data of interest to the network members. An
Extranet uses Internet protocols and public telecommunication system to securely
share part of a business’s information or operations with suppliers, vendors, partners,
customers, or other businesses. However, two narrower applications of Extranets are
TPN and web EDI. These market structures increase the collaboration capability of
the network members and help in speeding up business processes. They also help
eliminate duplication of resources, cut costs and improve responsiveness of the supply
chain.
In the second set of market structures, one or a small group of either the buyers or the
sellers will initiate the market place, host and monitor, enroll market participants and
moderate the market behavior if required. In a buyer centric marketplace, buyers take
the initiative to host the market and appropriate greater benefits than other market
participants and so the suppliers in a supplier centric market. Two well-known
variations of seller and buyer centric market structures are forward and reverse
auction sites respectively. Alternatively, a few buyers belonging to a sector of an
industry or a few suppliers of products to get together and create a consortium market
place. Examples include www.covisint.com (auto), www.transora.com (consumer
packaging industry), and www.globalnetexchange.com (retail industry).
6
The third set of market structures includes Neutral Auctions, Exchanges, Catalogue
Aggregators, On-line community and Click & Mortar. We define a neutral auction as
one in which several forward and reverse auctions are hosted simultaneously. Bidders
understand that there are substitutable products available for the item that they may be
bidding for in one such auction. For instance, when a second hand capital goods or
surplus inventory is put on sale in a site, the items are not unique to give any
significant advantage to the seller. Neutral auctions have contextual relevance only in
electronic markets. In traditional markets, it is practically not possible to know the
existence of such substitutable auctions hosted at other places and participate in those
auctions due to high search costs. In some sense, we introduce a new market structure
through our definition of neutral auctions. However, it is consistent with the
observation made by Bakos [10] that when search costs come down, new markets
(those infeasible in an era of high search costs) are invariably created.
Unlike an auction, exchanges promote many-to-many relationship. In our definition,
any market structure where both buyers and suppliers negotiate prices, usually with a
bid and ask system, and where prices move both up and down would be classified as
an exchange. Typical examples of exchanges include trading in commodity markets
such as metals, crude, bandwidth in telecommunication networks and energy.
Catalogue aggregators standardize information coming from diverse sources to enable
comparisons of similar products. Catalogue aggregator acts as a neutral intermediary
and may also provide additional services to buyers such as comparison across
multiple vendors, trust, logistics, and payment mechanism.
It is also possible to virtually host a community or special interest group belonging to
one sector of the industry. For instance, a group of neurosurgeons could be organized
7
into an online community. As the community grows in size and reaches a threshold a
virtual market place can be organized. A large online community attracts the attention
of several suppliers of products and services pertaining to the group. Several firms
operating in that sector could target their marketing. Several reputed players operating
in traditional B2B markets have established their presence in the electronic market
domain also. The market in such cases is more appropriately defined as click &
mortar.
Our definition of the 13 market structures fall under three distinctive categories:
collaborative mechanisms, quasi-market mechanisms and neutral market mechanisms.
Collaborative mechanisms consist of market structures that fundamentally enable the
market participants to engage in a variety of collaborative exercises. The first set of
three market structures belong to this category. The second category consists of a set
of market structures that have an inherent bias towards one of the market participant
viz., the buyer or the supplier. The bias arises on account of several factors including
the rules governing the market place, the ownership and the market participant
initiating it. The second set of five market structures that we have introduced belong
to this category. The last five market structures are characterized by neutrality in the
market.
Irrespective of the type of the market structure each one of them respects several
governing principles behind the functioning of electronic markets. For instance,
catalogue aggregators significantly bring down product search costs and improve
transactional efficiency. Auction sites increase the reach of the market and make the
price discovery process very efficient. However, each market structure has specific
relevance to organizations.
8
III. NEW VALUE PROPOSITIONS IN B2B ELECTRONIC MARKETS
Our study of B2B sites suggests that electronic B2B markets provide several
promising benefits to organizations. Due to certain characteristics of electronic
markets, it is possible to overcome some limitations of traditional markets. We
particularly identify and discuss three generic features of electronic markets and show
how they provide new value propositions.
A. Increased reach Electronic markets play the fundamental role of connecting buyers and sellers situated
geographically far away through a virtual market place thereby significantly
increasing the reach. The in creased reach provided by electronic markets offers
several value propositions. Often, buyers perceive value arising out of reduced
product search cost and transaction costs. Similarly suppliers perceive value arising
out of reduction in customer search costs, cost of product promotion, business
transaction costs and lead time for business transactions. These benefits are likely to
be substantial in B2B markets. For instance, it was reported that car dealers spend on
an average about $ 25 to close business with a buyer referred by autobytel.com as
opposed to several hundreds of dollars in the brick and mortar operation [11]. There
was virtually zero customer search cost in such referrals.
Furthermore, the extensive reach attainable through electronic markets enables
suppliers to compete on a level playing field for business with global customers,
which may previously have been unattainable. For instance, nearly 19,000 suppliers
from 70 countries have competed in the last five years for about $30 billion worth of
business that was bid through FreeMarkets.com [12]. Similarly, Newview
technologies connected about 200 steel mills, 1700 stockists, converters and
9
fabricators, 250 end users and about 400 international trading companies through its
online exchange, e-STEEL [13].
B. Reduced Transaction Costs
Transaction costs include costs of negotiating, drafting and safeguarding an
agreement between trading partners as well as haggling, set-up and running costs
associated with the governance structures and bonding costs to effect secure
commitments [14]. Every organization operating in B2B markets incurs transaction
costs in several forms including the cost of discovering products and prices, the cost
of negotiating and concluding contracts and the costs of monitoring and safeguarding
the agreements entered into through the contracts. These costs are far in excess in the
case of paper based and semi-automated transaction processing environments. For
instance, The National Association of Purchasing Managers, USA estimated that the
average manual purchase order costs a company $79 to process, $38 of which is
related to internal processing [4]. In such traditional markets, organizations also incur
heavy costs in tightly integrating with their supply chain partners.
On the contrary, electronic markets typically reduce customers’ cost of obtaining
information about prices and product offerings [15]. They also can directly reduce
market transaction costs by providing cost effective means to access market
information and process transactions [16]. Furthermore, the suppliers’ cost of
communicating information about their prices and product offerings to additional
customers is negligible. For instance, a registered member of Alibaba.com gains
access to a vast database of over 296,000 trade leads of about 33,000 companies
pertaining to about 65,000 products worldwide as soon as she logs into its homepage.
When the search costs come down, buyers benefit from lower prices and better
10
allocation of their resources. Moreover, it opens up new markets that were infeasible
due to high search costs in traditional markets [10].
Furthermore, an organization could seamlessly integrate with its supply chain partners
and exchange complex technical drawings, sensitive business documents, voluminous
transaction data and even cash in real time. Approvals for purchases and other
complex business processes can be efficiently managed using innovative software
addressing workflow and business process management issues. Better demand
management will allow coordinated production planning and control among the
supply chain partners. Moreover, unwanted inventory will not be shipped across the
supply chain. All these lead to significant cost savings and rationalization of resources
and manpower.
In several sectors of the Industry, market participants have experienced these effects
leading to reduction in transaction costs by orders of magnitude. American Air
Transport Association estimated that while it costs $8 for a travel agent to book an air
ticket using computerized reservation system it may cost $6 for the travel agent to
book the ticket online and only $1 for the customer to book directly with the airline
[17].
C. Deep-customization capabilities
Evans and Wurster [18] concluded that electronic markets have enabled organizations
to overcome the trade-off between “richness” and “reach” that is characteristic of
traditional markets. They defined richness as the amount information that can be
shared between two parties, the level of customization and the degree of interactivity
and reach by the number of people reached. Consequently, electronic markets
11
permitted several capabilities to customize the transactions to specific parties. Some
of the prominent features include the following:
?? Pre-configure the virtual ambience in which the market participants will deal
with the organization. This involves pre-specifying the items procured,
preferred suppliers, documentation required for procurement and shipping
addresses. It also includes building preferred procurement lists from
dynamically updated electronic catalogues.
?? Allow an organization to build a product from an assortment of basic
components available in modules to suit its requirements. Such a feature
provides a wide product variety and throws open exciting opportunities for the
organization to procure minimum quantities of several variations. For
instance, a visiting customer desiring to buy a Dell Inspiron 8100 G1200VT
notebook from http://www.dell. co.in can configure her own system from
2,080,899,072 alternatives available for various system components such as
base system, OS, Optical drives (fixed, removable), carry case, battery, Zip
drive, video card, mouse, key board, and hardware maintenance (This has
been computed based on the information available at their site as of February
15, 2002).
?? Enable business customers to interact with the organization through a highly
customized environment for all pre- and post-order transactions and after sales
support. For instance, from the time an order is placed with an organization,
the buying organization can track the status of the order in real time through a
customized virtual environment. As information about the entire value chain
related to the transaction is available to the buying organization, it will be able
to rationalize its investments in inventories, make accurate production plans
12
and commit firmly to its downstream customers. Further, several resources
pertaining to after sales support will be at the disposal of the buying
organization through the customized interaction. These features help an
organization to convert its interactions with business customers from a pure
“transactional” to a higher “relational” form. It also allows organizations to
build virtual communities.
D. Value creation opportunities in electronic B2B markets
The three features of electronic markets clearly point to new value creation
opportunities that these markets provide to organizations. Dramatically increased
reach provided by electronic markets ensures high market liquidity. It also cuts
information search cost. Since information search costs form a predominant part of
the transaction cost in B2B markets, the transaction cost comes down and
transactional efficiency improves. Reduction in search costs also has a significant
impact on price. Buyers in B2B electronic markets fetch better prices for the items
that they buy, leading to lower input costs. Moreover, reduction in transaction costs
translates into new cost red uction opportunities. Finally, improved transactional
efficiency leads to improved operational velocity on account of reduced lead-time.
Figure 2 illustrates these benefits accruing to organizations.
IV. FACTORS DRIVING CHOICE OF THE MARKET STRUCTURES
The existence of such a large variety of market structures raises several questions in
the minds of practitioners. Are these market structures mutually exclusive? Is there a
better way of classifying these market structures? Are these market structures related
to different sectors of the industry in any manner? What sub-set of these are useful to
an organization? What factors drive the choice of one market structure over the other?
13
In order to gain a better understanding of these issues we introduce some factors that
critically influence the classification of these markets.
A. Degree of fragmentation
Clearly, the inherent ability of electronic markets to increase reach suggests that
“degree of fragmentation” will help in differentiating alternative market structures.
Markets with high degree of fragmentation may be immensely benefited from the
increased reach provided by electronic markets.
We define degree of fragmentation with two key attributes of the market. The first is
the number of players. A market, with large number of buyers (sellers), will be
considered to have a high degree of fragmentation of buyers (sellers) and vice versa.
The second attribute is the geographical spread. Given the same number of buyers and
sellers in two sectors of an industry, a sector with a relatively high geographical
spread will indicate a greater degree of fragmentation. The key motivation behind this
definition of degree of fragmentation is the degree of control or influence the buyers
or the suppliers can exert on the market place.
Fragmentation may exist either in the buyer side or in the seller side or in both. There
are a host of situations in which there is a large fragmentation of both the buyers and
the sellers. These primarily include B2B horizontal such as transportation industry,
packaging, and Maintenance, Repair and Office (MRO). Other sectors such as
healthcare, travel & tourism, and consumer goods, are also often highly fragmented
on both sides. However, there can be situations in which there is very little
fragmentation in both the buyer and the supplier side. Accordingly, we identify four
sub-classifications of fragmentation of market participants (see table 2 for details).
14
The degree of fragmentation points to a few behavioral patterns in the market. This is
illustrated in figure 3. As the degree of fragmentation is high on both the supplier and
the buyer side the market tends to be open and competitive. On the other hand, as we
move towards lesser fragmentation in either the buyer or the supplier side there is an
opportunity for control-oriented mechanism to characterize the market. However, as
the degree of fragmentation is very low, organizations tend to greatly benefit from
collaborative practices as opposed to control.
B. Asset Specificity
Transaction cost economics literature has clearly established the relationship between
asset specificity and governance structure. As asset specificity increases transaction
costs also increase if the governance structure is inappropriate and vice versa [19].
Furthermore, Malone et al. [20] argued that electronic markets reduce the costs of
coordination and communication leading to changes in governance structures and
asset specificity. Tomak and Xia [8] also suggested that asset specificity is an
important attribute to differentiate market structures. Asset specificity is, therefore,
another factor useful in classifying B2B market structures.
Asset specificity is a function of the costs of setting up a relationship between two
market participants in order to manage business transactions cost effectively. The
costs arise on account of specific resources (assets) that the two market participants
have to deploy apriori in order to transac t business. These investments could be in
dedicated machine tools, dies, tools and fixtures, information system and data format
to exchange information and investment in people of special skills. Clearly, all these
investments are specific to the relationship between the two market participants are
irreversible. For instance, in the case of an aerospace manufacturer, the asset
15
specificity will be very high in the case of procurement of engines from a supplier. On
the other hand, the aerospace manufacturer needs no relationship specific investments
to procure office stationary.
This has important implications to the behavior of the market participants. When the
asset specificity is high, the market participants will be better of by engaging in
collaborative practices and superior coordination mechanisms. On the other hand,
when the asset specificity is very low, competitive market practices and relationships
based on price will benefit both the buyers and the suppliers. In the medium asset
specific situations, quasi-market mechanisms that blend both collaboration and
competition will be a viable alternative for the market participants.
Figure 4 shows the classification of the market structures on the basis of degree of
fragmentation and asset specificity. Asset specificity and degree of fragmentation
have a relationship especially in the extreme cases. When asset specificity is very low,
the market is likely to be highly fragmented and vice versa. Hence the two diagonal
grid locations in the figure are not relevant. Our classification of the thirteen market
structures falls into this two dimensional framework. However, several neutral market
structures are grouped together into two grid positions in figure 4. Organizations
would require more clarity on when to use these neutral markets. In order to provide
this discrimination, we introduce two more factors.
V. CLASSIFICATION OF NEUTRAL MARKETS
Neutral markets suffer from poor market liquidity on account of several factors.
Prominent among them is the high degree of fragmentation on both the buyer as well
as the supplier side. Electronic markets fundamentally address the problems arising
16
out of fragmentation by providing spectacular reach to the market participants.
However, there are other factors that have significantly distinguished alternative
neutral market structures. We introduce two factors; complexity of product
description and complexity of value assessment and use them to classify the neutral
market structures.
A. Complexity of Product Description
Complexity of product description relates to the amount of information a buyer needs
to understand the functional and technical specifications of the product/service [20].
For instance, an automobile is highly complex in description. Similarly, airline ticket
is another example of product description complexity. There are numerous
alternatives for routing and several conditions are attached to each category of fare
structure. Electronic components, bearings and valves and many catalogue items
could also introduce medium to high complexity on account of large variety in their
offerings and detailed technical and commercial specifications pertaining to each
variety. Communicating numerous specifications that differentiate one variation from
the other, communicating price changes to clients, managing stock keeping units, and
improving stock visibility are issues that contribute to complex product
characteristics. Further, such a large menu of offerings induces additional costs
related to maintaining price lists and repeated communication of changes in price lists
usually known as menu costs [21].
Electronic markets add substantial value in situations involving complex product
characteristics. The deep customization capabilities characteristic of electronic
markets and their ability to efficiently communicate and manipulate data from several
sources tend to reduce the product description complexity as well as menu costs.
17
Malone et al. [20] argued that computer based information technologies can handle
and communicate complex, multi-dimensional product descriptions much more
efficiently than can traditional modes of communication. These new capabilities allow
organizations to efficiently manage catalogues and promote active relationships
through online communities.
B. Complexity of value assessment
Complexity of value assessment refers to the amount of information needed to
estimate accurately the worth of an item and use the information to either arrive at a
price or select items offered at a price. It is easy to assess the value of a new item than
to assess the value of second hand and surplus items, and very unique products and
services. Furthermore, products with no complexity in product description can pose
complexity in value assessment as in the case of commodities. The complexity arises
on account of several factors. First, the price setting mechanism could be dynamic
through a set of bids and offers. The benefits of operating in such markets are directly
a function of the size of the market participants. Second is the amount of information
and pre-assessment required before making a choice as in the case of auctions.
Finally, the complexity of value assessment is also due to info rmation asymmetry
problems. Electronic markets substantially eliminate information asymmetry
problems and help reduce the complexity of value assessment.
It is therefore possible to classify neutral markets on the basis of the complexity of
product description and the complexity of value assessment. Figure 5 shows the
classification of the neutral markets on this basis. Catalogue aggregation seeks to
address the problems arising out of complexity in product description. On the other
hand, exchanges address the requirement of a standard product having value
18
assessment problems arising out of dynamic price setting. Exchanges bring together a
vast set of buyers and sellers and facilitate the trade. Auction sites address the
problems of medium complexity in product description as well as value assessment.
By bringing together a community of bidders and auctioneers and enabling electronic
communications among them, they improve the market liquidity.
VI. MANAGERIAL IMPLICATIONS
Every organization will find itself in all the four categories of degree of fragmentation
depending on the nature of the product or service that it is either procuring or
supplying. For instance, Boeing will find itself in “low buyer fragmented - low
supplier fragmented” situation when it comes to procuring engines. On the other hand,
when it procures maintenance consumables or office stationary, it may be in “high
buyer fragmented - high supplier fragmented” situation.
Consequently, the notion that every organization will find only one or two variations
of the B2B electronic market useful is not sound. On the other hand, organizations
will have to strategically draw a blue print on how they will derive value by
exploiting all these market structures. In some situations, they may have to tap several
benefits from accessing neutral markets. Simultaneously, there will be value in
developing collaborative mechanisms for a class of products (suppliers and
distributors).
Online communities will play an important role in improving the market liquidity in
situations involving very complex product description and value assessment
characteristics. How does a cardiologist highly specialized in a particular technology
of treating heart ailments through surgery identify cutting edge developments in the
19
field including new technology pertaining to diagnostics, medication, and surgery and
bring it into practice? How do thousands of software developers developing numerous
business applications for organizations world -wide using a set of developer tools get
to solve the problems that they face in coding and debugging their software?
In a traditional market, they suffered on account of complex product characteristics
and value assessment problems and found it almost impossible to network with other
experts in their field. The crucial role online communities play is to provide a
distinctive focus [22], and bring together all resources pertaining to the field. Such a
market structure will improve market liquidity and will effectively address the
problems arising out of complexity of product characteristics.
There are several situations that warrant a combination of click & mortar strategies.
The framework suggests that these include situations in which the product
characteristics are fairly complex and difficult to assess the value. Several industrial
marketing issues govern procurement of capital equipments and services for MRO
situations. Typically, in a traditional market, several intermediary channels work with
the suppliers of equipment and services and the buyers and improve the liquidity.
However, electronic communication and electronic brokerage effects will help
organizations devise novel click & mortar strategies. Electronic markets will
eventually cause dis-intermediation of these channel partners by careful deployment
of click & mortar strategies.
Restructuring the logistics and supply chain network of an organization will become
inevitable. Some suppliers with whom an organization developed close relationships
will be asked to participate in more competitive mechanisms such as reverse auctions.
Still others may be replaced with more competitive sourcing decisions involving
20
neutral electronic markets. Electronic markets may also cause dis -intermediation of
some traditional channels. For instance, neutral auction sites may replace channels for
disposal of second hand capital goods, and surplus inventory. New opportunities will
emerge in recasting the distribution network in several industries. Resellers may be
eliminated and the role of distributors and other channel partners will be redefined.
VII. CONCLUSIONS
Electronic markets fall under three distinctive categories: collaborative mechanism,
quasi-market mechanism and pure market mechanism and provide several value
creating opportunities. Through increased reach, deep customization capabilities and
reduced transaction costs electronic markets enable market participants overcome
some of the limitations of traditional B2B markets. Using four factors that
significantly differentiate alternative market mechanisms in the B2B electronic
market place we have proposed a framework to understand how an organization can
exploit these market structures. The framework suggests that all the available market
structures have relevance to every organization. In order to gainfully exploit these
market structures organizations need to devise new strategies and reconfigure their
supply chain.
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22
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23
Table 1. List of B2B Electronic Market Structures
Sl. No. Name of the market structure Remarks & Examples*
1 Extranet www.aventail.com,
www.adventnet.com, www.citrix.com.
2 Trading Partner Network (TPN) www.geis.com, www.nexprise.com
3 Web EDI www.1edisource.com www.geis.com
4 Buyer Centric Private Market 5 Supplier Centric Private Market
www.ariba.com, www.i2.com, www.commerceone.com www.verticalnet.com.
6 Consortia Market Place www.avendra.com, www.aeroexchange.com
7 Seller-oriented (Forward) Auction Sites www.fedsales.gov 8 Buyer oriented (Reverse) Auction Sites www.freemarkets.com 9 Neutral Auctions www.dovebid.com,
www.assettrade.com 10 Exchanges www.eSTEEL.com (Now
renamed as New View), www.HoustonStreet.com
11 Catalogue Aggregators www.sciquest.com, www.officedepot.com
12 On-line community www.creativethought.com, www.dentalarena.com, www.electronicsweb.com.
13 Click & Mortar Office Depot * The URLs given against the first five market structures point to the service providers that
enable firms to create these market structures. They provide several supply chain collaboration tools to enable the features required for such market structures.
24
Table 2. Degree of fragmentation and its implications
Degree of Fragmentation Sl. No. Buyer Side Supplier Side
Industry examples Some effects on the market
1 Low Low
Buyers – Aerospace, Firms operating in cutting edge technology sectors. Suppliers – High-tech sub-contractors
Close cooperation between the two is a critical issue.
2 Low High
Buyers – Aerospace, Automobile, Telecommunication, Petro-chemical, Energy Suppliers - Low and medium-tech components.
Buyers are in a position to influence the market
3 High Low
Buyers – A large number of manufacturing & service organizations. Suppliers – Electronics, Telecommunication, High-tech capital goods
Suppliers are in a position to influence the market
4 High High
Buyers – Manufacturing & Service firms belonging to several sectors of Industry Suppliers – MRO Supplies, Commodities, Standard and low-tech components & services
Buyers’ and Suppliers’ behavioural patterns are governed by the guiding principles of pure market mechanisms
25
Figure 1. A screen shot of services offered by www.chemconnect.com1
1 Source: www.chemconnect.com as of March 8, 2002.
26
Figure 2. Value creation opportunities in B2B Electronic Markets
Reach Search Costs
Transaction Costs
Transaction Efficiency
Price Lead Time
Better resource Deployment
High Market
Liquidity
Huge Cost Saving
Potential
High Operational
Velocity
27
Figure 3. B2B Market classification on the basis of degree of fragmentation
Supplier Side EDI
Buyer Side EDI
Neutral Markets Catalogues, Exchanges,
Auctions, Online communities
Supplier Control
Buyer Control
One Supplier Few Buyers
Few Suppliers Many Buyers
Many Suppliers Few Buyers
Many Suppliers Many Buyers
One Buyer Few Suppliers
Open/Competitive Private/Control
Supplier Centric Marketplace
Buyer Centric Marketplace
Forward Auctions
Reverse Auctions
TPN
TPN
Supplier Consortia
Buyer Consortia
28
Figure 4. A classification framework for B2B market structures
Extranet/ Web EDI
Extranet/ TPN
Not Relevant
Buyer centric Private Market
Reverse Auctions
Buyer Consortia
Supplier centric
Private Market
Forward Auctions
Supplier Consortia
Not Relevant
Neutral E Market Places
Sup - Low Buy - Low
Sup - High Buy - Low
Sup - Low Buy - High
Sup - High Buy - High
Fragmentation
of
Market Partici-pants
High Medium Low
Asset Specificity
29
Figure 5. Classification of Neutral B2B Market Structures ` ̀
Simple Moderate Complex
PPrroodduucctt DDeessccrriippttiioonn
Easy
Moderate
Difficult
VVaalluuee
AAsssseessss--mmeenntt
EExxcchhaannggeess
AAuuccttiioonnss
CCaattaalloogguueess
CClliicckk && Mortar
OOnnlliinnee CCoommmmuunniittyy