ECommerce Market Mechanisms

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E-Commerce Market Mechanisms
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Learning Objectives

• Define e-marketplaces and list their components
• List the major types of electronic markets and
  describe their features
• Define supply chains and value chains and
  understand their roles
• Describe the role of intermediaries in EC
• Discuss competition, quality, and liquidity
  issues in e-marketplaces
• Describe electronic catalogs, shopping carts, and
  search engines

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Learning Objectives (cont.)

• Describe the various types of auctions and list
  their characteristics
• Discuss the benefits, limitations, and impacts of
  auctions
• Describe bartering and negotiating online
• Describe the impact of e-marketplaces on
  organizations
• Define m-commerce and explain its role as a
  market mechanism

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Electronic Marketplaces

• 3 main functions of markets
• Matching buyers and sellers
• Facilitating the exchange of information, goods,
  services, and payments associated with market
  transactions
• Providing an institutional infrastructure

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Marketspace Components

• Marketspacea marketplace in which sellers and
  buyers exchange goods and services for money (or
  for other goods and services), but do so
  electronically
• Customers Sellers
• Goods (physical or digital) Infrastructure
• Front-end Back-end
• Intermediaries/business partners
• Support services

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Marketspace Components (cont.)

• Customers
• Web surfers looking for
• Bargains
• customized items
• Collectors items
• entertainment etc.
• Organizations account for over 85 percent of EC
  activities

• Sellers
• Hundreds of thousands of storefronts are on the
  Web
• Advertising and offering millions of Web sites
• Sellers can sell
• Direct from their Web site
• E-marketplaces

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Marketspace Components (cont.)

• Products
• Physical products
• Digital productsgoods that can be transformed to
  digital format and delivered over the Internet

• Infrastructure
• Hardware
• Software
• Networks

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Marketspace Components (cont.)

• Front-end business processes include
• Sellers portal
• Electronic catalogs
• shopping cart
• Search engine
• Payment gateway

• Back-end activities are related to
• Order aggregation and fulfillment
• Inventory management
• Purchasing from suppliers
• Payment processing
• Packaging and delivery

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Marketspace Components (cont.)

• Intermediarya third party that operates between
  sellers and buyers
• Other business partnerscollaborate on the
  Internet, mostly along the supply chain
• Support services such as
• Certification and trust services
• Knowledge providers

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Types of Electronic Markets

• Electronic storefrontsa single companys Web
  site where products and services are sold
• Mechanisms for conducting sales
• Electronic catalogs Payment gateway
• Search engine Shipment court
• Customer services Electronic cart
• E-auction facilities
• Electronic malls (e-malls)an online shopping
  center where many stores are located

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Types of Electronic Markets (cont.)

• Types of stores and malls

• General stores/mallslarge marketspaces that sell
  all types of products
• Public portals
• Specialized stores/mallssell only one or a few
  types of products

• Regional vs. global stores
• Pure online organizations vs. click-and-mortar
  stores

• E-marketplacesonline market, usually B2B, in
  which buyers and sellers negotiate the three
  types of e-marketplaces are private , public ,
  consortia

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E-Marketplaces

• Private e-marketplacesonline markets owned by a
  single company
• Sell-sidecompany sells either standard or
  customized products to qualified companies
• Buy-side marketplacescompany makes purchases
  from invited suppliers
• Public e-marketplacesB2B markets, usually owned
  and/or managed by an independent third party,
  that include many sellers and many buyers
  (exchanges)

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Consortia Information Portals

• Consortiae-marketplaces that deal with suppliers
  and buyers in a single industry
• Vertical consortia are confined to one industry
• Horizontal allow different industries trade there
• Information portala personalized, single point
  of access through a Web browser to business
  information inside (and marginally from outside)
  an organization
• Publishing portals Commercial portals
• Personal portals Corporate portals
• Mobile portals

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Supply Chains

• Supply chainthe flow of materials, information,
  money, and services from raw material suppliers
  through factories and warehouses to the end
  customers
• Includes organizations and processes that create
  and deliver the following to the end customers
• Products
• Information
• Services

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A Simple Supply Chain
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Supply Chain Components

• Upstream supply chainincludes the activities of
  suppliers (manufacturers and/or assemblers) and
  their suppliers
• Internal supply chainincludes all in-house
  processes used in transforming the inputs
  received from the suppliers into the
  organizations outputs
• Downstream supply chainincludes all the
  activities involved in delivering the product to
  the final customers

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Types of Supply Chains

• Integrated make-to-stock
• Continuous replenishment
• Build-to-ordermodel in which a manufacturer
  begins assembly of the customers order almost
  immediately upon receipt of the order
• Channel assemblymodel in which product is
  assembled as it moves through the distribution
  channel

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Supply Chains Integrated Build-to-Order
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Value Chain Value System

• Value chainthe series of activities a company
  performs to achieve its goal(s) at various stages
  of the production process each activity adds
  value to the companys product or service,
  contributes to profit, and enhances competitive
  position in the market
• Value systema set of value chains in an entire
  industry, including the value chains of tiers of
  suppliers, distribution channels, and customers

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Supply Chain Value Chain

• Value chain and the supply chain concepts are
  interrelated
• Value chain shows the activities performed by an
  organization and the values added by each
• The supply chain shows flows of materials, money,
  and information that support the execution of
  these activities

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Supply Chain Value Chain (cont.)

• EC increases the value added by
• Introducing new business models
• Automating business processes
• EC smoothes the supply chain by
• Reducing problems in the flows of material,
  money, and information
• EC facilitates the restructuring of business
  activities and supply chains

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Intermediation in E-Commerce

• Intermediaries provide value-added activities and
  services to buyers and sellers wholesalers,
  retailers, infomediaries
• Roles of intermediaries
• Search costsdatabases on customer preferences
• Lack of privacyanonymity of sellers and buyers
• Incomplete informationgather product information
• Contract riskprotect sellers against non-payment
• Pricing inefficienciesinduce appropriate trades

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E-Distributors on B2B

• E-distributoran e-commerce intermediary that
  connects manufacturers (suppliers) with buyers by
  aggregating the catalogs of many suppliers in one
  placethe intermediarys Web site
• E-distributors also provide support services
• Payments
• Deliveries
• Escrow services
• Aggregate buyers and or sellers orders

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Disintermediation Reintermediation

• Disintermediationelimination of intermediaries
  between sellers and buyers
• Reintermediationestablishment of new
  intermediary roles for traditional intermediaries
  that were disintermediated

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Syndication as an EC Mechanism

• Syndicationthe sale of the same good (e.g.,
  digital content) to many customers, who then
  integrate it with other offerings and resell it
  or give it away free

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Competition in the Internet Ecosystem

• Competition in the Internet ecosystem (business
  model of the online economy)
• Inclusive with low barriers to entry
• Self-organizing
• Old rules may no longer apply
• Competition is tense
• Lower buyers search cost
• Speedy comparisons
• Differentiation and personalization

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Competition in the Internet Ecosystem (cont.)

• Differentiationproviding a product or service
  that is unique
• Personalizationthe ability to tailor a product,
  service, or Web content to specific user
  preferences
• Lower prices

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Competition in the Internet Ecosystem (cont.)

• Customer service is an extremely important
  competitive factor
• Some competitive factors are less important as a
  result of EC
• Size of company is no longer significant
• Geographical location is insignificant
• Language barriers are being removed
• Digital products do not have normal wear and tear

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Competition in the Internet Ecosystem (cont.)

• EC supports efficient markets and could result in
  almost perfect competition with these
  characteristics
• Many buyers and sellers must be able to enter the
  market at no entry cost
• Large buyers or sellers are not able to
  individually influence the market
• The products must be homogeneous
• Buyers and sellers must have comprehensive
  information about the products and about the
  market participants demands, supplies, and
  conditions

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Porters Competitive Analysis

• Porters competitive forces model applied to an
  industry views 5 major forces of competition that
  determine the industrys structural
  attractiveness
• These forces, in combination, determine how the
  economic value created in an industry is divided
  among the players in the industry
• Such an industry analysis helps companies develop
  their competitive strategy

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Porters Competitive Forces Model
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Liquidity

• Liquiditythe need for a critical mass of buyers
  and sellers
• The fixed cost of deploying EC can be very high
• Without a large number of buyers, sellers will
  not make money
• Early liquidityachieving a critical mass of
  buyers and sellers as fast as possible, before
  the market-makers cash disappears

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Quality Uncertainty Assurance

• Quality uncertaintythe uncertainty of online
  buyers about the quality of products that they
  have never seen, especially from an unknown
  vendor
• Provide free samples
• Return if not satisfied
• Microproducta small digital product costing a
  few cents
• Insurance, escrow, and other services

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E-Market Success Factors

• Contributors to e-market success

• Product characteristics
• Type
• Price
• Availability of standards and product information
• Industry characteristics
• Brokers currently necessary
• Intelligent systems may replace brokers

• Seller characteristics
• Consumers find sellers with the lowest prices
• Low-volume, higher-profit-margin transactions
• Consumer characteristics
• Impulse buyers
• Patient buyers
• Analytical buyers

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Electronic Catalogs

• Electronic catalogsthe presentation of product
  information in an electronic form the backbone
  of most e-selling sites
• Evolution of electronic catalogs
• Merchantsadvertise and promote
• Customerssource of information and price
  comparisons
• Consist of product database, directory and search
  capability and presentation function
• Replication of text that appears in paper
  catalogs
• More dynamic, customized, and integrated

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Classifications ofElectronic Catalogs

• Dynamics of information presentationstatic or
  dynamic
• Degree of customizationready-made or customized
• Electronic catalogs allow integration of
• Order taking and fulfillment
• Electronic payment
• Intranet workflow
• Inventory and accounting system
• Suppliers extranet
• Relationship to paper catalogs

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Customized Catalogs

• Assembled specifically for
• A company
• An individual shopper
• Customization systems can
• Create branded, value-added capabilities
• Allows user to compose order
• May include individualized prices, products, and
  display formats
• Automatically identify the characteristics of
  customers based on the transaction records

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Search Engines

• Search enginea computer program that can access
  a database of Internet resources, search for
  specific information or keywords, and report the
  results
• Software (intelligent) agentsoftware that can
  perform routine tasks that require intelligence

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Search Engines, Intelligent Agents Shopping
Carts

• E-commerce users use both search engines and
  intelligent agents
• Search engines find products or services
• Software agents conduct other tasks (comparisons)
• Electronic shopping cartan order-processing
  technology that allows customers to accumulate
  items they wish to buy while they continue to shop

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Auctions

• Auctiona market mechanism by which a seller
  places an offer to sell a product and buyers make
  bids sequentially and competitively until a
  final price is reached
• Auctions deal with products and services for
  which conventional marketing channels are
  ineffective or inefficient

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Limitations of Traditional Auctions

• Traditional auctions are generally a rapid
  process
• It may be difficult for sellers to move goods to
  the auction site
• Commissions are fairly high

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Electronic Auctions

• Electronic auctions (e-auctions)auctions
  conducted online
• Host sites on the Internet serve as brokers
  offering
• Services for sellers to post their goods for sale
• Allowing buyers to bid on those items
• Many sites have certain etiquette rules that must
  be adhered to in order to conduct fair business

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Electronic Auctions (cont.)

• Major online auctions offer
• Consumer products
• Electronic parts
• Artwork
• Vacation packages
• Airline tickets
• Collectibles
• Excess supplies and inventories being auctioned
  off by B2B marketers

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Dynamic Pricing

• Dynamic pricingprices that change based on
  supply and demand relationships at any given time
• The four major categories of dynamic pricing are
  based on the number of buyers and sellers
  involved
• One buyer, one seller
• One seller, many potential buyers
• One buyer, many potential sellers
• Many sellers, many buyers

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Types of Dynamic Pricing
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Dynamic Pricing (cont.)

• One buyer, one seller uses
• Negotiation
• Bargaining
• Bartering
• Price will be determined by
• Each partys bargaining power
• Supply and demand in the items market
• Possibly business environment factors

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Dynamic Pricing (cont.)

• One seller, many potential buyers
• Forward auctionan auction in which a seller
  entertains bids from buyers
• English auctionan auction in buyers bid on an
  item in sequence and the price increases with
  time
• Yankee auctionauction of multiple identical
  items in which bidders can bid for any number of
  the items offered, and the highest bid wins

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Dynamic Pricing (cont.)

• Dutch auctionauction of multiple identical
  items, with prices starting at a very high level
  and declining as the auction time passes
• Free-fall (declining price) auctiona variation
  of the Dutch auction in which only one item is
  auctioned at a time the price starts at a very
  high level and declines at fixed time intervals,
  the winning bid is the lowest one when the time
  expires

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English Auction, Ascending Price
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Dynamic Pricing (cont.)

• One buyer, many potential sellers
• Reverse auction (bidding, or tendering
  system)auction in which the buyer places an item
  for bid (tender) on a request for quote (RFQ)
  system, potential suppliers bid on the job, with
  price reducing sequentially, and the lowest bid
  wins primarily a B2B or G2B mechanism

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The Reverse Auction Process
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Dynamic Pricing (cont.)

• One buyer, many potential sellers (cont.)
• Name-your-own-price model
• Consumer-to-business (C2B) model
• Many sellers, many buyers
• Double Auctionbuyers and their bidding prices
  and sellers and their asking prices are matched,
  considering the quantities on both sides

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Limitations of Electronic Auctions

• Possibility of frauddefective goods or receive
  goods/services without paying
• Limited participationinvitation only or Open to
  dealers only
• Lack of securityC2C auctions sometimes not done
  in an unencrypted environment
• Limited softwareonly a few completeor
  off-the-shelf market-enabling solutions

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Impacts of Auctions

• Auctions as a coordination mechanism
• Auctions as a social mechanism to determine a
  price
• Auctions as a highly visible distribution
  mechanism
• Auctions as a component in e-commerce

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Bartering Online

• Barteringan exchange of goods and services
• Bartering exchanges
• Give your offer to intermediary
• Intermediary asses value of your product or
  service inpoints
• Use points to buy what you need
• Bartering sites must be financially secure
• Alternative to bartering is to auction surplus
  and then use the money collected to buy items
  needed

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Bartering Online (cont.)

• E-barteringbartering conducted online, usually
  by a bartering exchange
• Bartering exchangea marketplace in which an
  intermediary arranges barter transactions

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Online Negotiating

• Online negotiationelectronic negotiation,
  usually done by software (intelligent) agents
  that perform searches and comparisons improves
  bundling and customization of products and
  services
• Dynamic prices can be determined by negotiation
• Negotiated prices result from interactions and
  bargaining among sellers and buyers
• Expensive items like cars and real estate
• Deal with nonpricing terms like payment method
  and credit

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Online Negotiating (cont.)

• Three factors that facilitate negotiated prices
• Intelligent agents that perform searches and
  comparisons
• Computer technology that facilitates negotiation
  process
• Products and services that are bundled and
  customized

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Mobile Commerce

• Mobile computing permits real-time access to
  information, applications, and tools that, until
  recently, were accessible only from a desktop
  computer
• Mobile commerce (m-commerce)
• e-commerce conducted via wireless devices
• M-businessthe broadest definition of
• m-commerce, in which e-business is conducted in
  a wireless environment

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The Promise of M-Commerce

• Mobility significantly changes the manner in
  which people and customers
• Interact
• Communicate
• Collaborate

• Mobile applications are expected to change the
  way we
• Live
• Play
• Do business

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The Promise of M-Commerce (cont.)

• The PC-based Internet culture may change to one
  based on mobile devices
• M-commerce creates new business models for EC,
  notably location-based applications
• Many large corporations with huge marketing
  presence are transforming their businesses to
  include m-commerce-based products and services
• Microsoft ATT
• Intel AOL-Time-Warner
• Sony

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I-Mode Successful Mobile Portal
An example of the spread of m-commerce is
DoCoMos i-Mode some applications of I-Mode are

• Shopping guides
• Maps and transportation
• Ticketing
• News and reports
• Personalized movie service

• Entertainment
• Dining and reservations
• Additional services
• Banking
• Stock trading
• Telephone directory searches
• Dictionary services
• Horoscopes

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Impacts of E-Markets on Business Processes
Organizations
Impacts of e-markets on B2C direct marketing

• Product promotion
• New sales channel
• Direct savings
• Reduced cycle time
• Customer service

• Brand or corporate image
• Customization
• Advertising
• Ordering systems
• Market operations

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Analysis-of-Impacts Framework
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Transforming Organizations

• Technology and organizational learning
• To survive, companies will have to learn and
  adapt quickly to the new technologies
• Corporate change must be planned and managed
• New technologies will require new organizational
  structures and approaches

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Transforming Organizations (cont.)

• The changing nature of work
• Driven by increased competition in the global
  marketplace, firms are Reducing the number of
  employees and Outsourcing whatever work they can
  to countries where wages are significantly less
• The upheaval brought on by these changes creates
  new opportunities and new risks forces us to
  think new ways of about jobs, careers, and
  salaries

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Transforming Organizations (cont.)

• Digital-Age workers will have to be very
  flexibletruly secure jobs will be few, many will
  work from home
• Digital-Age companies will have to prize its core
  of essential workers as its most valuable
  assetempowering them and providing them with
  means to expand their knowledge and skill base

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Redefining Organizations

• New and improved product capabilities
• E-markets allow for new products to be created
  and/or for existing products to be customized in
  innovative ways
• Customer profiles and data on customer
  preferencessource of information for improving
  products or designing new ones
• Mass customization enables manufacturers to
  create specific products for each customer, based
  on the customers exact needs

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Redefining Organizations (cont.)

• New business models
• E-markets affect individual companies, products,
  entire industries
• Improving the supply chain
• Impacts on manufacturing
• Manufacturing systems changing from mass
  production lines to demand-driven, just-in-time
  manufacturing
• Virtual manufacturing enables global
  manufacturing plants to run as though they were
  one in location

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Changes in the Supply Chain
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Changes in the Supply Chain
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Redefining Organizations (cont.)

• Impacts on Manufacturing (cont.)
• Build-to-Orderthe biggest change in
  manufacturing will be the move to build-to-order
  systems
• Manufacturing or assembly will start only after
  an order is received
• Will change not only the production planning and
  control, but also the entire supply chain

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Redefining Organizations (cont.)

• Impacts on finance and accounting
• E-markets require special finance and accounting
  systemsmost are electronic payment systems
  complicated by legal issues and international
  standards
• Executing an electronic order triggers
  back-office transactions
• These activities must be efficient, synchronized,
  and fast so the electronic trade will not be
  slowed down

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Ciscos Virtual Close

• Cisco Systems supplies vast networks that
  connect computers to the Internet
• Virtual Close was developed to allow companies to
  close its accounting records (its books) more
  quickly
• Cisco is implementing such a system for itself
  for closing quarterly accounts
• Used to take up to 10 days within 4 years it
  took 2 dayssignificantly cut its cost
• By 2002 or 2003 Cisco hopes to close the books
  with 1 hours notice, on any day in the quarter

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Ciscos Virtual Close (cont.)

• Advantages of Virtual Close
• Companies can become proactive, spotting problems
  at any time
• New opportunities can be detected early
• Enables quick drill down analysis, which
  locates the causes of either poor or excellent
  performance
• Brings huge productivity gains related to
  corporate financial reporting

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Redefining Organizations (cont.)

• Impact on human resource management and training
• EC is changing how people are recruited,
  evaluated, promoted, and developed
• EC also is changing the way training and
  education are offered to employees
• Online distance learning and virtual courses are
  exploding
• Companies are cutting training costs by 50
  percent or more

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Redefining Organizations (cont.)

• New e-learning systems offer two-way video,
  on-the-fly interaction, application sharing
• E- learning may be their ticket to corporate
  survival as changing environments, new
  technologies, and continuously changing
  procedures make it necessary for employees to be
  trained and retrained constantly

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Managerial Issues

• How do we compete in the digital economy?
• What about intermediaries?
• What organizational changes will be needed?
• Should we auction?
• What should be auctioned?
• Should we have our own auction site or use a
  third-party site?
• Should we barter?
• What m-commerce opportunities are available?

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Summary

• E-marketplaces and their components
• The major types of e-markets
• Supply chains and value chains
• The role of intermediation
• Competition, quality, and liquidity in
• e-markets
• Electronic catalogs, search engines, and shopping
  carts
• Types of auctions and their characteristics