b2b basics and exchanges by yrdB8k

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									B2B Basics and Exchanges
Today’s Class

 › B2B basics
   – Differences between B2B and B2C
   – Primary conceptual foundation for B2B
 › B2B Exchanges
   – Types of exchanges
   – Major benefits and barriers
   – Framework for classification
B2B
›   B2B e-commerce is, by far, the most successful form of e-
    commerce so far; accounts for over 90% of all e-commerce
    transactions
     – Over US$1 trillion in 2006
     – Global Multinationals are the biggest users
›   B2B e-commerce covers a broad spectrum of applications that
    enable businesses or enterprises to form electronic relationships
    with their distributors, resellers, suppliers, customers, and other
    partners
›   The name of the game is integration, which can have a major
    impact on the firm’s supply chain activities
     – Supply chain management has become a core focus of B2B
       activities
›   The relative success of B2B (vs B2C) is primarily due to the
    tangibility of the benefits (e.g., lower costs, lower inventories, etc.)
Scope of B2B E-Commerce

 ›   B2B e-commerce includes both intra-organizational and inter-
     organizational systems and the links between them
 ›   Intra-organizational systems
      – Built around Intranets (internal corporate networks that use
         Internet protocols; next week)
 ›   Inter-organizational systems
      – Include all systems that connect two or more organizations
         together for commercial or collaborative purposes
      – Extranets (externally accessible Intranets; next week)
      – B2B exchanges (today)
      – Supply chain management systems (next week)
      – EDI (next week)
B2C versus B2B

  B2C                                  B2B
  ›   Low value, high volume           ›   High value business critical
      transactions                         transactions
  ›   2 constituents
                                       ›   Multiple constituents
  ›   Simple transactions
                                       ›   Complex transactions
  ›   Payment by credit card
                                       ›   Payment by P.O.
  ›   Limited customer
      relationship/ integration        ›   Strong customer relationship/
  ›   Low switching costs and              integration
      customer retention               ›   High switching costs and
  ›   Fulfillment important, but not       customer retention
      critical                         ›   Fulfillment critical
  ›   Small to medium network          ›   Huge network effects
      effects
B2B vs B2C—Key Concepts
 › B2C
    – Physical and virtual service and the ability to scale
      (infinite scalability)
    – Price and information transparency
    – Information intensity
    – Dominant Web site design
    – Pricing flexibility through bundling and unbundling
 › B2B
    – Transparency in its many forms
    – Network effects
    – Coordination and transaction costs
    – Trust in its many forms
B2B and Transparency

 › At the core of B2B e-commerce is the concept of
   transparency
 › 4 basic dimensions:
    – Price transparency
    – Availability transparency
    – Supplier transparency
    – Product/service transparency
 › Lack of transparency accounts for a lot of the
   inefficiencies in industrial markets; more
   transparency also means greater efficiencies
Other Key Concepts
 › Network effects
    – The value of a network increases as the number
      of participants (users) increases
    – Metcalfe’s law—value is proportional to (n2-n)/2
 › Coordination costs
    – The costs involved in managing relationships and
      coordinating activities (internal or external)
      between different parties
 › Transaction costs
    – The costs associated with the process of buying
      and selling (i.e., the whole process)
Trust
 › Psychological status of involved parties who are
   willing to pursue further interactions to achieve a
   planned goal
    – It is a complex concept
 › Three forms of trust
    – Deterrence-based trust: related to the threat of
       punishment
    – Knowledge-based trust: grounded in the
       knowledge of the other trading partner
    – Identification-based trust: based on empathy and
       common values with the other trading partner’s
       desire and intentions
Key B2B versus B2C Success Factors
› In general, B2B has been more successful due to:
   – Tangibility of benefits for both parties
   – Greater technical sophistication of businesses
   – Extensive experience of many businesses with older e-
     commerce technologies such as EDI
   – More homogeneous and rationale behavior of businesses
     versus consumers
   – Greater focus on transactions and transaction processing
   – Greater importance of “deeper” relationships
   – Trends towards closer relationships with business partners,
     supplier rationalization, outsourcing and strategic alliances,
     and globalization
B2B Exchanges

 ›   B2B exchanges still play a critical role in B2B e-commerce
 ›   Like B2C, the original model for exchanges was poorly
     developed and flawed
      – Dot-com exchanges that focused on transaction processing
      – Few, if any, value-added services
      – Lack of integration with back office systems
      – Focus on matching buyers and sellers
 ›   Most of the dot-com exchanges have ceased operation
      – Could not generate sufficient revenues
      – Sources of funding dried up after the crash
 ›   The private and consortia exchanges have gained the
     advantage and are focusing on supply chain integration
Benefits—Buyers

› Ability to more easily locate suppliers on a
  global basis (reduction in search costs)
› Potential for lower procurement costs
  (transactions cost less and can obtain lower
  prices)
› Ability to form buying consortiums (i.e.,
  volume discounts)
› Ability to more easily and accurately measure
  supplier performance
Barriers—Buyers

› Existing long-term contracts (60% in some cases)
   – Penalties for exiting existing contracts are
     prohibitive
› EDI already widely used by some businesses,
  especially larger businesses
   – These businesses have made significant
     investments leading to high switching costs
› Very dynamic environment
   – The high number of exchanges makes it difficult to
     select the best (most appropriate)
Benefits—Suppliers

› Ability to aggregate small orders
   – Reduction in transaction and production costs
› Potential for lower selling costs
› Ability to liquidate excess capacity anonymously
› Ability to locate additional buyers on a global basis
› Ability to develop closer relationships with buyers
   – Increased chance of locking buyers in
   – Improved level of trust between buyers and
     suppliers
Barriers—Suppliers

 › Serious potential for decreasing margins
    – Auctions and transparency gives buyers
      additional bargaining power
 › Exposes weaknesses along several critical
   dimensions
    – Product and service quality, ability to fulfill
      orders, etc.
 › Overall, the distribution of benefits between
   buyers and suppliers has clearly favored the
   buyers
Classifying B2B Exchanges
 › B2B exchange models differ on four specific
   elements:
    – User concentration: number of buyers and sellers
    – Ownership: firm-owned or third party
    – Focus: horizontal or vertical
    – Functionality: breadth of services offered
 › Combinations of these elements lead to 3 basic
   types:
    – Independent (public) exchanges (vertical or
      horizontal)
    – Industry consortia exchanges (vertical)
    – Private exchanges (vertical)
Public, Consortia, and Private Exchanges

 › Public exchanges are open to all
   participants that meet basic requirements
 › Consortia exchanges are formed by leading
   firms in the industry and limit the number of
   participants
 › Private exchanges limit the number of
   participants and are usually sponsored or
   administered by a single organization
 › Benefits to the organization tend to increase
   as we move down the list
B2B Exchanges—Characteristics

 Elements              Public           Consortia          Private

 Users              Many-to-many       Some-to-many       One-to-many


 Ownership          Independent (3rd   Founding firms      Focal firm
                         party)

 Focus                 Horizontal          Vertical         Vertical
                        Vertical
                         Niche
 Functionality       Varied—little     Medium—some           High
                     collaboration      collaboration

 Other features   Unbiased ownership   Partners + other   Customizable
                                         participants




                  Adapted from Richard and Devinney
Public (Independent) Exchanges

 ›   Public exchanges were the first to emerge in B2B markets and
     have been the least successful
 ›   Their primary purpose has been to bring a large number of
     buyers and sellers together
      – Improves market competition, matching, and transaction
        efficiency
      – Auctions add transparency
      – Lowers search costs for all parties
 ›   The challenge has been to get suppliers to participate
      – Once matching has occurred there is no obligation for
        participants to continue use of the exchange
      – Almost like a dating service!
Public Exchange—Vertical vs Horizontal

 › Horizontal exchanges serve multiple industries
    – Usually include services that are utilized by a variety of
      industries such as maintenance and administrative services
    – Horizontal exchanges can service vertical exchanges as well
 › Vertical exchanges focus on a specific industry and provide
   deep expertise
 › Niche exchanges focus on single product, service, or process
 › The vertical exchange is clearly a better and more successful
   model due to the specificity of industries
    – Most purchases are industry specific
    – Buyers and sellers need customized services
Vertical Public Exchange—Plastics




               www.plasticsnet.com
Horizontal Public Exchange




               www.grainger.com
Niche Public Exchange—Focus on China




                www.alibaba.com
Consortia Exchanges

 ›   Consortia exchanges began to appear to fulfill different tasks
     within specific industries
 ›   In general, they offer the same benefits as public exchanges
     (with fewer participants)
 ›   They also bring about several additional benefits:
      – Increased standardization across the industry (data,
         business processes, etc.)
      – Coordination and championing of industry standards (and
         potential enforcement)
      – Access to important industry information
      – Aggregate and share knowledge of founders
 ›   The challenge is to get competitors to collaborate and share
     information
      – Can also alienate suppliers and may violate competition
         laws
Consortia—Healthcare




               www.ghx.com
Private Exchanges

 ›   Private exchanges have been, by far, the most successful type
     of B2B exchange
      – In effect, private exchanges have become a platform for
         supply chain integration (evolved over time)
 ›   Private exchanges can be viewed as a way to vertically
     integrate in a loosely coupled manner (a more radical redesign
     than the other 2 types)
 ›   The benefits over the other types are clear:
      – Complete control over design and functionality of exchange
      – Control (and protection) of information flows
      – Ability to arrange and manage supply chain
 ›   The challenges are the additional expenses and the inevitable
     supplier consolidation process
Private Exchange




                   www.boeing.com
Modularity and Architectural Knowledge

 › Exchanges can also be described in terms of
   modularity and architectural knowledge
     – This will be even more relevant next week when
       we discuss supply chains
 › Modularity describes how components of a system
   are coupled together
     – Modularity provides firms with an alternate way to
       coordinate activities
 › Architectural knowledge is knowledge about the
   linkages between components
     – It describes how components relate to each other
Modularity and Benefits

Elements               Public             Consortia          Private


Modularity                Low               Medium             High



Standardization           Low               Medium             High



Competitive               No                   No               Yes

advantage
Main benefit      Improved transaction   Standardization   Enable modular
                       efficiency        across industry    supply chain

Competitive              None                 Low               Low
Risks


                  Adapted from Richard and Devinney
The Bottom Line

 ›   Large organizations often use a combination of all three (e.g., Baxter
     Healthcare)
      – Baxter e-services (dozens of e-commerce sites for ordering
         products)
      – GHX (consortia)
      – 3rd party indirect procurement exchanges (public)
 ›   The use of public exchanges tends to be more opportunistic
      – Mostly indirect procurement and low cost items
 ›   Private and consortia exchanges are more strategic
      – Require much larger investment and management oversight
      – Relationships with participants are much closer (and deeper)
      – Focus on collaboration as well as buying and selling
Beyond Transactions

 › Simply bringing buyers and sellers together is not sufficient
   for the survival of public and consortia exchanges
 › Exchanges need to move beyond transactions and offer
   greater collaboration between businesses
 › Need to focus on higher value-added services that B2B e-
   commerce can offer
    –   Support and expert advice during the purchasing process
    –   Accurate delivery dates
    –   Integrated orders from multiple manufacturers
    –   Real-time shipping status
    –   Real-time product availability before purchase
    –   Deep collaboration
 › All this requires more integration
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