b2b basics and exchanges

1. B2B Basics and Exchanges

2. 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

3. 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.)

4. 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)

5. B2C versus B2B B2B High value business critical transactions Multiple constituents Complex transactions Payment by P.O. Strong customer relationship/ integration High switching costs and customer retention Fulfillment critical Huge network effects B2C Low value, high volume transactions 2 constituents Simple transactions Payment by credit card Limited customer relationship/ integration Low switching costs and customer retention Fulfillment important, but not critical Small to medium network effects

6. 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

7. 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

8. 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)

9. 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

10. 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

11. 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

12. 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

13. 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)

14. 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

15. 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

16. 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)

17. 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

18. B2B Exchanges�Characteristics

19. 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!

20. 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

21. Vertical Public Exchange�Plastics

22. Horizontal Public Exchange

23. Niche Public Exchange�Focus on China

24. 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

25. Consortia�Healthcare

26. 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

27. Private Exchange

28. 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

29. Modularity and Benefits

30. 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

31. 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

32. Next: Covisint