BUSINESS TO BUSINESS ECOMMERCE

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BUSINESS TO BUSINESS E-COMMERCE

• Miklos A. Vasarhelyi

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Dynamic Commerce Basics
Evolving Business Models
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EC Waves

• The first wave of e-commerce generally focused on
  replicating traditional business models onto the
  Internet using static pricing schemes.
• The second wave of e-commerce is driven by
  dynamic commerce applications that use the
  Internets intrinsic capacity for continuous
  activity to create new types of fluid,
  market-driven environments

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STATISTICS
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Forresters Report

• By 2003, business-to-business e-commerce will
  draw 90 of the projected 1.4 trillion in total
  internet-based business by 2003
• 10 to 20 times the projected retail market
• Internet will have its biggest long-term impact
  on business to business e-commerce
• new breed of small, private companies-
  business-to-business infomediaries, are blazing
  the trail

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Top 10 B2B Companies (1)

• Intel - Sold about 12 billion in chips and
  processors on the Web last year
• Cisco Systems - A parts list only an IS director
  could love. But Cisco has money to burn
• Dell Computer - In the business of bring
  technology to your business

• 3Com - expects 80 of its business to be
  conducted over the Net by years end
• IBM - No one ever got fired for buying IBM
  software and hardware over the internet
• Gateway 2000 - A lot of small businesses are run
  from American homes

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Top 10 B2B Companies (2)

• Boise Cascade Office Products - E-commerce
  pioneer and office-products supplier to the
  Fortune 500
• W. W. Grainer - Seventy-year old distributor of
  corporate maintenance and operating supplies

• Sabre Group - The original online reservation
  clearinghouse is a backbone for many travel sites
• Office Depot - Americas largest office-products
  supplier has a location near you -- the Web

(These companies bring in much more money than
consumer focused e-tailers)
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Companies Making Dents

• New B2B Companies expected to make it within five
  years
• Chemdex (1997) - Life-science chemicals market
• Instill Corp. (1993) - restaurant supplies
• Metal Site (1998) - online exchange for selling
  surplus inventory steel and other metal products
• National Transportation Exchange (1996) -
  Net-based exchange for empty truck space
• Neoforma (1996) - Medical equipment and supplies

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Dents (2)

• SciQuest.com (mediates in the laboratory and
  scientific equipment marketplace)
• PlasticNet.com (plastic manufacturers and plastic
  processors)
• e-Steel (buyers and sellers of steel)
• Ultraprise (between mortgage originators and
  mortgage buyers - secondary market)

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A COMPARISON OF TRADITONAL AND CONTEMPORARY
B-TO-B ELECTRONIC COMMERCE
A COMPARISON OF TRADITONAL AND CONTEMPORARY
B-TO-B ELECTRONIC COMMERCE
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Traditional E-Commerce (1)

• Buyer and supplier organizations required to
  implement and maintain expensive software
  applications
• Adhere to restrictive standards for data
  presentation and transmission
• Pay continuous transaction and network usage fees

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Traditional E-Commerce (2)

• Results - 1. E-commerce limited to largest
  organizations
• 2. Establishment of closed and incomplete
  trading communities
• 3. Most organizations maintain inefficient,
  error-prone, paper-based business processes

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B2B E-Commerce on the Internet (1)

• Reduction in the technology and cost barriers
  traditionally associated with B-2-B e-commerce
  (IBM expects that selling over the web will
  reduce its costs by 340 million this year)
• Delivers a low-cost method for electronically
  accessing, distributing and presenting data
• based on open communication protocols and common
  data standards

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B2B E-Commerce on the Internet (2)

• Internet connects all businesses to each other,
  regardless of location, or position in the supply
  chain
• ability to bargain directly with a range of
  suppliers
• poses a threat to traditional intermediaries like
  wholesalers and brokers
• Companies can reach beyond their size on the net

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B2B E-Commerce on the Internet (3)

• Result 1. New, improved and automated business
  processes that can deliver significant benefits
  to buyer and supplier organizations, regardless
  of size or technological sophistication

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B-TO-B E-COMMERCE
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Why B2B E-Commerce

• Business to Consumer e-commerce has been largely
  disappointing (with some notable exceptions like
  Amazon.com)
• B2B e-commerce is not new
• Value Added Networks (VANs) were used before the
  Net where mainframes and minis were connected via
  direct dial-up or proprietary third-party
• The real money to be made on the web is in
  selling to other businesses

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Business to Business E-Commerce

• Sales stem from long standing trend of large
  companies outsourcing to small ones
• The small companies then use technology to
  increase their efficiency and reach beyond their
  size
• a vibrant market for computer products and other
  office necessities on the Internet
• The most successful companies have back-office
  technology necessary to automate the entire
  chain, from acquisition to fulfillment

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Successful B2B E-Commerce (1)

• Providing Information
• McKesson shifts from drug distribution to
  information provider for the health-care
  industry, exploiting its massive database for
  information on sales and units for pharmacies

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Successful B2B E-Commerce (2)

• Supplying customized websites/extranet services
• Federal Express is leveraging its existing
  infrastructure for rapid package delivery to
  provide web-based complete order fulfillment
  services to businesses for Dell, corporate
  customers log paperless purchase orders or check
  in with help desks whose services and support
  options are tailored to the customers systems

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Successful B2B E-Commerce (3)

• Moving to an Internet Platform
• Wells Fargo and Bank of America are investing in
  moving EDI functions for business-to-business
  transactions to the lower cost internet platform

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Conceptual
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B2B Industry Models
Hubs as Marketplaces

• Two primary types HORIZONTAL (functional) and
  VERTICAL
• Horizontal specialize along a specific function
  or process
• Vertical specialize along a specific industry or
  market

Horizontal
Auction
Barter
Catalogues
Exchanges
Vertical
Vertical
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Lets get vertical

• B2B math
• B2C benefits to an individual buyer are similar
  with 100 or 100K buyers
• B2B hub creates value by reducing search costs,
  information transfer costs,standardizing systems,
  improving matching. Value increases with the
  square number of participants in the hub.

from Business 2.0 Sept. 99 Sawhney Kaplan
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B2B Hubs

• requires extensive industry expertise
• customer acquisition requires expensive
  procurement of buyers and sellers
• supplier catalogs must be loaded
• business processes must be understood and
  integrated
• these obstacles also increase the barriers to
  entry from hub competitors

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Types of Hubs

• Vertical hubs
• serve a market or industry focus
• Altra energy (energy), Band X (telecom.), Cattle
  Offering Worldwide (beef and dairy), e-Steel,
  Floraplex (florist), IMX Exchange
  (mortgages),PaperExchange (paper),
  PlasticsNet.com (plastics), Ultraprise (secondary
  mortgage exchange)

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Vertical Business Models
Vertical Net (NASDAQ vert)

• VerticalNet is the premier owner/operator of
  B2B-communities, providing a variety of services
  including editorial content, an online
  marketplace, and a career center.
• VerticalNet, which originated in 1995 with
  WaterOnline, paves new sales avenues and creating
  communities for 41 unglamorous industries
• VerticalNet derives revenues as follows
• Rent from Virtual Storefronts
  65 (6000/year/storefront)
• Sponsorships 25
• Transaction Commissions 10 (avg. transaction
  of 25,000)
• Industry Portal Requirements
• Minimum of 3,000 companies, with 40,000 buyers
  to ensure fragmented market
• Minimum of 10B in domestic sales, with 10M
  trade publication ad budget

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Vertical Business Models
Sample Communities
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Types (2)

• Functional hubs
• provide the same function or automate the same
  business process across different industries
• iMark.com (buy sell used capital equipment),
  Employease (employee benefits administration),
• Celarix (global logistics monitoring and
  tracking),
• BidCom (project management), AdAuction (media
  buying), YOUtilities (energy management)

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Horizontal Business Models
Moai.com (privately held)

• Moai provides LiveExchange technology and
  services for customized online auctions and
  exchanges (public/private) for B2B, B2C or C2C.

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Horizontal Business Models
MRO.com (NASDAQ psdi)

• Links an online community of suppliers and buyers
  to a group of Internet desktop requisition and
  online procurement software products.
• Transaction fee-based system that reduces
  purchasing and inventory costs.

Maintenance Parts, materials and services
required for planned maintenance of facilities
or equipment
Repair Parts, materials and services required
for unplanned or emergency repair of equipment
Operating Other indirect materials used to
operate a business
NON-TIME CRITICAL
TIME CRITICAL
NON-TIME CRITICAL
Examples Machinery Parts / Paints Valves /
Switches Cleaning Supplies / Etc..
Examples Machinery Parts / Seals Gaskets /
Bearings Fasteners / Etc..
Examples Office Supplies/ Furniture Computers /
Software Machines/ Forms / Etc..
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Horizontal Business Models
Exchange Model

• Creates value by temporal matching of supply and
  demand and
• Require a real-time, bid-ask matching process,
  marketwide price determination, and a settlement
  and clearing mechanism.
• Best Industries/Settings
• Near-commodity items with several attributes,
  but are easy to specify.
• Significant value in markets where demand and
  prices are volatile.
• Allow businesses to manage excess supply and
  peak-load demand.
• Examples
• BAND-X telecommunications
• e-Steel steel
• Altra energy
• Tradex.com end-to-end commerce platform provider

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Horizontal Business Models
BAND-X.com (privately held)

• Launched in 1997 as the first independent virtual
  market for international wholesale telecom
  capacity.
• BAND-X provides a portal for buyers and sellers
  of bandwidth and related wholesale services to
  anonymously trade.
• BAND-X act as a clearing market and perform
  billing, settlement, arbitration and quality
  monitoring (blacklist).

Traded Goods
Other Services
Switched Minutes
Circuits
Dig Co-Location
Recruitment
Facilities Co-Location
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Key design and execution issues

• Market-making mechanisms
• fixed price mechanism using a catalog model
• for fragmented buyers and sellers who transact
  frequently for relatively small ticket items
• prequalified suppliers and pre-defined business
  rules
• small price fluctuations
• Chemdex, SciQuest.com, MRO.com

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Design (2)

• Auction models
• one-of-a-kind, non-standard, or perishable
  products or services
• capital equipment, used products, returned
  products, hard-to-find products
• different perceptions of the value of the product
• iMark.com (used capital equipment)
• Adaution.com

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Design (3)

• Exchange models
• temporal matching of supply and demand
• near commodity items that are easy to specify
• manage excess supply and peak-load demand
• paperExchange
• e-Steel
• Altra

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Horizontal Business Models
Barter Model

• Creates value by matching two parties that
  possess reciprocal assets within an asset class
  or across asset classes.
• Enables buying at the variable cost of
  producing additional units
• Products - Manufacturing Capacity -
  Services-for-Services
• - High Transportation Cost Assets (such as
  paper/steel)
• Examples
• Ubarter.com various goods and services

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Horizontal Business Models
Ubarter.com (NYSE ubtr)

• Members purchase and sell goods or services with
  Ubarter dollars.
• Ubarter dollars can only be spent between Ubarter
  members.
• Ubarter charges a 5 transaction fee.
• Claims to have 35,000 clients, each conducting 50
  transactions/year.
• Revenues for 1Q 2000 (ended June) were 909,000,
  up 612.
• Has no direct competitorsyet.

5 Main Ubarter Areas
Business Items Office Furniture Staff
Training Equipment Rental Printing
Advertising TV Radio Newspaper/Mag Public
Relations Direct Mail
Personal Golf Reservations Jewelry
Gifts Restaurants Home Renovation
Employee Health Services Staff Incentives Car
Service Fitness Clubs
Travel/Entertain Restaurants Resorts/Hotels Theatr
e Tickets Sporting Events
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Technology providers

• Catalog (Ariba, Commerce One, IBM)
• Auction (Moai Technologies, Dynamic Trade,
  OpenSite Technology)
• Exchange (Tradex Technologies)

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Strategic Issues

• Chicken-and-egg dilemma
• Timing market entry
• Managing channel conflict
• Choosing software platform
• Co-siting
• Expanding the scope of the offering

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The Cons of Business to Business E-Commerce
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Profitability

• Data presented in the Online Marketing Practices
  for Premium Specialty Goods study show that
• Profitable Premium Specialty Goods...52
• Profitable B-to-B web sites..........35

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Reasons for Limited Profitability of B-to-B
E-Commerce Web sites

• Some B2B web sites maintain information-only web
  sites, and so lag behind the rest of the Net in
  terms of profitability
• Unlike B-to-C web sites, B-to-B site
  profitability is somewhat subordinated as a
  company goal

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Other Cons of B2B Web sites

• Slower to implement e-commerce
• due to legacy integration issues
• Invest heavily in web site development
• in anticipation of creating client confidence by
  providing secure and efficient transactions for
  clients
• their web presence is therefore, seen as a
  crucial element in their marketing mix
• 1 in 3 B-to-B sites will be in the black within
  two years

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Challenges Faced by Web Managers

• Web site business competition is harsh
• Technology for delivering professional web sites
  advances rapidly
• site redesign and upgrade cycles are measured in
  months rather than years as sites ride up in the
  learning curve
• Competition for online marketers attentions is
  equally stiff
• hardware, software, prepackaged suites, outside
  virtual services and consulting vie to offer web
  sites a competitive edge

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Conclusions
Widely-Held B2B Predictions

• Hubs will have winner-take-all characteristics
  Strong returns-to-scale
  will create even more advantages for the 1st hub
  to achieve scale and liquidity than in the
  consumer arena.
• Vertical hubs will find it hard to diversify
  beyond their verticals Unless closely related
  domains can leverage these assets, they will find
  it difficult to diversify into other vertical
  markets, due to domain-specific relationships and
  expertise.
• Vertical hubs will form alliances with Horizontal
  hubs Verticals possess domain
  expertise but lack functional expertise, while
  functional hubs possess functional expertise, but
  lack domain expertise.
• Software vendors will climb out of their silos
  MAs among the
  currently types software vendors will increase.
• Transaction Software Vendors (Ariba)
• Auction Software Vendors (Moai / OpenSite)
• Exchange Platform Vendors (Tradex)

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Conclusions
Widely-Held B2B Predictions

• Exchange models will evolve to include
  derivatives Current
  limitation to spot markets will change as
  participants become more sophisticated and
  software platforms improve in functionality, hubs
  will begin to offer derivative products like
  forward contracts and options on commodities and
  capacity.
• All except the biggest firms will give up on
  hosting hubs 1st wave of B2B
  software focused on catalogs, auctions, and
  exchanges hosted by individual firms. This
  firm-centric model limits liquidity.
• New "metahubs" may emerge w/ shared
  infrastructure/ services Emergence of new market
  hubs with shared back-ends and common functional
  hubs servicing the different "tenant" vertical
  hubs.
• The power of conventional commodity exchanges
  will erode. Conventional commodity exchanges will
  find it difficult to compete with the powerful
  integration of context and exchange
  functionalities that hubs will provide. As a
  result, hubs will gradually drain liquidity from
  conventional commodity exchanges.