B2B Issues in WebBased Marketplaces

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B2B Issues in Web-Based Marketplaces

• IDSc6442

Note This presentation is based heavily on a
presentation prepared by Robert J. Kauffman for
the Carlson Stars on the Road Program, and then
modified for presentation at an MIS Research
Center and elsewhere around the U.S.
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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
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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


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Ways to manage a supply chain

• Bend the rest of the supply chain to your will
  (e.g., WalMart)
• Make the final customer want items that contain
  your product (e.g., Intel)
• Make your supply chain more efficient

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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

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Cisco Systems Ordering

• Customer orders through Cisco Connect Online
• Every 15 Seconds, Ciscos Oracle order management
  system retrieves those orders and books them
• Ciscos system automatically checks for
  availability and time slots.
• Customers can review their order within 90
  Minutes.

Source Electronic Business Today, August 1997,
p. 32
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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.
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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
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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.
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Industry Illustrations and Issues

• Computers and PComputers Peripherals
• Procurement Auctions
• Innovations in Travel Distribution
• Leading Edge Financial Services

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Computers and Peripherals
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Buying at cost, or buying by auction gives
potential buyers two ways to work with ONSALE.Com
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• 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).

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

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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

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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.

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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

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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?

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Leading Edge Financial Services
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Wit Capital Optimark
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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.
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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

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First American E-IPO
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This is Wit Capital today, the highly successful
follow up company portrayed in the book,
WallStreet.Com.
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Optimark

• Optimark is promoting 3D-Trading
• Price
• Quantity
• Utility

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The OPTIMARK Insight

• Allows traders to list P/Q combinations in
  terms of their willingness to trade, a new
  utility dimension

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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

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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

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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

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OPTIMARKs 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

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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

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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?