B2B Issues in Web-Based Marketplaces

1. B2B Issues in Web-Based Marketplaces

2. Myopic View of B2B Competition • Companies compete with each other for corporate clients • Zero-sum game with competing companies • Only a partial view of the complete picture Supplier A Supplier B Corporate Client

3. Supply Chain View of Competition Supplier A Supplier B • Entire chains compete with each other for final customer • Zero-sum game with competing chains Corporate Clients Corporate Clients Final Customers

4. Ways to manage a supply chain • Bend the rest of the supply chain to your will (e.g., Wal*Mart) • Make the final customer want items that contain your product (e.g., Intel) • Make your supply chain more efficient

5. Supply Chain Efficiency – an MIS objective • Real-time forecasts • Accurate planning • Build to order / Just-in-time • Reduce inventories • Increase in-stock sales • Respond to fast-changing consumer preferences

6. Cisco Systems Ordering • Customer orders through Cisco Connect Online • Every 15 Seconds, Cisco’s Oracle order management system retrieves those orders and books them • Cisco’s system automatically checks for availability and time slots. • Customers can review their order within 90 Minutes. Source: Electronic Business Today, August 1997, p. 32

7. 3Com saves over $100 million per year by automating supply chain purchases and support. Pre-net, each large sale initially required a 3Com vendor to visit a site.

8. Hubs are Important in Supply Chain Management Source: Kaplan, S. and Sawhney, M., “E-Hubs: The New B2B Marketplaces,” Harvard Business Review, May-June 2000, p. 306

9. How B2B and B2C Work Together Collins, P., “E-logistics 2000: Re-thinking the supply chain,” Management Services, Jun 2000; 44 (6) pg. 6-10.

10. Industry Illustrations and Issues: • Computers and PComputers & Peripherals • Procurement Auctions • Innovations in Travel Distribution • Leading Edge Financial Services

11. Computers and Peripherals

12. Buying at cost, or buying by auction … gives potential buyers two ways to work with ONSALE.Com

13. ONSALE.Com emphasizes auctions for goods that are commodities. Their inherent transactability is very high in this medium. • In fact, one expects the electronic brokerage effect to impact this kind of item -- a pure commodity, with undifferentiated features for each instance. • This matches the early prediction of Malone, Yates and Benjamin (1987).

14. 48-hour and 1/2 hour call markets distinguish First Auction from some of the other players in the market. Its “instant auctions” are aimed at introducing transactional immediacy for both buyers and sellers.

16. Procurement Auctions

18. The State of Kentucky takes RFPs and bids for procurement via its purchasing website. It utilizes the First Price Sealed Bid mechanism for its auctions. This kind of approach is increasingly common when the goal is to achieve the benefits of a very large marketplace, with many participants.

19. In addition to using the web as for electronic procurement, the State of Kentucky is also applying a similar approach to “fire sales” of surplus property. This levers efficiency by increasing the potential for liquidity.

21. A first price sealed bid auction mechanism is used by GE TPN.

22. GE TPN Microstructure • Buyer uses the TPN Post Integrated Application Suite to send RFQ • States specs of supplies and participating factories for the RFQ • Bid packages sent to authorized suppliers by email, fax or EDI • Suppliers have 7 days to prepare bid • Winning bid awarded by Internet same day

23. Similar Developments Are Happening All Over • GE is not alone in its efforts to transform its “marketspace” via the Internet • Other entrepreneurs are similarly active • They recognize that electronic markets on the Internet can provide: • market immediacy, broad-based liquidity • mechanism to move inventory, exploit commodity product characteristics • innovative microstructure design

24. Search Costs Play a Role, Too In B2C commerce, search costs are somewhat reduced. In B2B commerce, this effect is increased. No longer do you need to coerce quotes or find the right supplier at the right time.

25. Does the Theory Match Reality? • Malone, Yates and Benjamin (1987) predicted that much of this would happen prior to the emergence of the Internet • Their focus: identifying and predicting when it is economic to organize to deliver goods via a market vs. a corporate hierarchy • Key insights: “asset specificity,” “electronic brokerage effect” in presence of IT

26. Ethical Use of a Bid Site • “Shop then drop” has become common practice: • Find a better price using a reverse auction site • Use this price to reduce the costs of your own supplies from previous suppliers • Just what is ethical? Do we even belong asking that question?

27. Leading Edge Financial Services

28. Wit Capital & Optimark

29. WitTrade, Spring Street Brewery A savvy entrepreneur made use of the web to disintermediate investment bankers -- by running an electronic initial public offering (EIPO) market.

30. Market Microstructure Matters • Recognized appropriateness of electronic market microstructures for E-IPOs • Possible to do this via the web in “call market” form • Limit the time when the effort to raise capital will conclude

31. First American E-IPO

32. This is Wit Capital today, the highly successful follow up company portrayed in the book, WallStreet.Com.

37. Optimark • Optimark is promoting “3D-Trading”: • Price • Quantity • Utility

39. The OPTIMARK Insight Allows traders to list P/Q combinations in terms of their “willingness to trade”, a new utility dimension

40. The U.S. Patent • OPTIMARK Technologies holds a U.S. patent, #5,689,652 (11/18/97), for the electronic market microstructure it has created • Dr. Terry Rickard, a computer scientist, supplied the computational expertise to architect a computing solution

41. Where Other Markets Fail • Most markets only permit an interested buyer or seller to present prices to the market for single /discrete price/ quantity (P/Q) combinations • But institutional traders have a “utility curve” that relates different P/Q

42. Enter “3D” Trading • Price, quantity and utility -- P/Q/U listing -- attracts traders who would not otherwise come into the marketplace • They would be unable to express their preferences

45. OPTIMARK’s Broader Application in E-Markets • Not just equities, but many kinds of traded securities • Not just financial instruments: • -- diamonds • -- golf tee times • -- airline seats, computers • -- hotel rooms • -- electricity

46. Key Insights • Internet-based markets illustrate: • tremendous new opportunities for innovation • disintermediation of traditional players • a more “friction-free” transaction mechanism • Internet market design should be based on theory that has supported the design of effective financial markets over the years • Market microstructure choices are crucial

47. The Future: A Battleground for Electronic Market Standards • How will e-markets be architected? • Who will oversee them? • To what extent will they balance the concerns of buyers and sellers? • How will the marketplace deal with the inevitable fraud and malfeasance? • How will market standards be achieved?