A Question of Value

1
A Question of Value

• Mod IV, 2004
• Professor David Dilts

2
The Fundamental Theory Issue

• As interaction costs decrease,
• - the value of bundling the firm decreases,
• - which increases the value of outsourcing
• - and forces a redefinition of the business.
• Transaction Cost The resources expended in the
  formal exchange of goods and services between
  organizations or customers
• Interaction Cost Transaction costs costs for
  exchanging ideas information
• Resources time, money, effort, people

3
Conventional Thinking About Internet Effective
Markets
Source Grover, Varun and Pradipkumar Ramanlal,
(1999) Six Myths of Information and Markets,
MIS Quarterly, 23(4) 465-495.d

• Internet reduces transaction cost
• Namely searching, seeking, shopping, negotiating
• Internet reduces perceived complexity of products
• i.e., more and easier to interpret information is
  available
• Internet reduces asset specificity
• Allows products to be quickly easily adapted
• Internet increase free flow of information
• E.g., cyberspace marketplaces

4
Some other not-so-general tenets

• Unit IT costs will decrease but not at the same
  rate for buyers sellers
• IT capitalization is asymmetrical among buyers
  suppliers
• E.g., bigger firms can capitalize more
• An effective market is not to every players
  enlightened self-interest
• Information can be used to clarify and distort
  perceptions
• Information is valued differently by different
  buyers sellers
• Market structure is an evolving, not a a priori
  state

5
Is There A Best Way To Achieve Value?

• No, value depends upon
• What the buyers value
• And who is the buyer anyway?
• What seller sells (or does not sell)
• Pain Points
• The Value of Being First
• Micro and Macro Perspectives
• Buyers Sellers
• Market Disciplines

6
Value Creation in B2CAmit Zott, 2001
New transaction structures New content New
participants, Etc.
Novelty

• Search Costs
• Selection Range
• Information Symmetry
• Simplicity
• Speed
• Scale
• Etc.

Value

• Switching Costs
• Loyalty programs
• Dominate design
• Trust
• Customization
• Positive Network Externalities
• Direct
• Indirect

Efficiency
Lock-in
Complementarities
Between products Services (i.e., vertical
or horizontal Between on-line off-line
assets Between technologies Between activities
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But what creates Value in B2B?

• First, look at the characteristics of B2B v. B2C
• Next, identify the type of organizations,
• Then, identify the pain points how to cure them
• Next, look at the value to each party
• Remembering Critical mass First mover
  disadvantages

8
Characteristics of Business-to-Business Markets

• Buyers Influencers
• Fewer but larger buyers
• Professional purchasing
• Multiple Buying Influences (Kotler)
• Initiator - User - Technical Expert
• Influencer - Approver - Buyer/
  Purchasing Agent
• Gatekeeper
• Relationship building, not sales
• May require a long negotiation period
• In e-Procurement the need to qualify bidder
• In Supply Chain Management the need to
  understand the characteristics of the supplier

9
Characteristics of B2B Markets (continued)

• Direct purchasing from the manufacturer
• Reciprocity
• Ill buy yours, if youll buy mine
• Geographic Concentration
• Examples Seattle, Nashville, Route 128
• Requirements for after-sale service
• Installation, maintenance, supply inventory
• This may be of more value than the initial sale
  (King Gillette Strategy)

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Characteristics of B2B Markets (continued)

• Inelastic Demand
• Less-price sensitive than consumers, on one hand
  but
• Will only buy from the lowest bidder on the other
• Typically, B2B is less of an impulse decision
  than with consumer purchasing
• Fluctuating Demand
• More volatility than consumer demand (remember
  the beer game)
• Derived Demand
• Demand is driven both from the ultimate consumer
  and from the business intermediary.

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Market Disciplines
Source Hagel III, John and Marc Singer (1999),
Unbundling the Corporation, HBR, 77(2) 133-141
Source Treacy and Wiersema, (1993) Customer
Intimacy and Other Value Disciplines HBR, 71(1)
84-93.

• Infrastructure/Operationally Excellence
  (economics of scale)
• Lead the industry in terms of price and
  convenience
• Build and manage capabilities for high-volume,
  repetitive operational tasks for the lowest
  possible cost products
• examples Dell Computers, Cisco Systems
• Product / Technology Leadership (-- economics of
  speed)
• Lead or dominate the world in terms of product
  leadership or technology
• Force the clockspeed of the industry
• examples Microsoft, Intel
• Customer Intimacy (--economics of scope)
• Tailor and shape products and services to fit an
  increasingly fine definition of the customer
• Build a long-term relationship
• Never loose a customer
• examples Andersen Consulting, KPMG

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Key Success Factors for Infrastructure
(Operational Excellent) Business

• Management of customer expectations
• Because 'variety kills efficiency', provide a
  limited number of product or
  service options, and manage
  customer expectations accordingly
• Dedication to measurement systems
• Monitor measure everything to ensure rigorous
  quality and cost control, dedicated to monitoring
  and measuring all processes, continually
  searching for ways to reduce cost, and improve
  service and quality
• Efficient management of people
• employees are trained in the most efficient and
  lowest cost way of doing things
• Management of efficient transactions
• JIT delivery, lowest possible cost of transaction
  processing

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Key Success Factors for Product Innovation
(Leadership) Business

• Encouragement of innovation
• Use small ad hoc working groups, an
  'experimentation is good' mind-set, and
  compensation systems that reward success,
• constant product innovation is encouraged
• Risk-oriented management style
• Focus on innovators, which requires a recognition
  that there are risks (as well as rewards)
  inherent in new ventures
• Talented designers are key to current and future
  success but
• Project management is critical to success
  delivery dates and feature-based modules are
  vital
• Recognition of the need to educate and lead the
  market
• Lead products are frequently misunderstood so
  how-to-use and benefits need to be highlighted
  to customers

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Key Success Factors for Customer Relationship
(Intimacy) Business

• Deep customer insight
• Understand what the customer needs now, and in
  the future
• Solve the customers problem, even if it costs
  the firm money
• Serve customers on demand with a full range of
  services
• Use both internal resources and an extensive use
  of external experts
• Use of knowledge management tools critical
• Scan for breakthrough thinking where ever it
  occurs
• Investigate leading-edge practice of firms
• Use environmental scanning for
  leading-edge
  thinking

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Developing Deep Customer Insights
Source Anderson, James and James Narus, (1998)
Business Marketing Understand what customers
value, HBR, 76(6) 53-61

• Understanding what customers value
• Build a customer value model, which are
  data-driven representations of the worth of what
  the supplier is doing or could do for the
  customer
• Expressing Value
• In monetary terms (What are utils anyway?)
• Showing net benefits
• Within some context
• Example Caterpillars Yards-of-dirt-moved

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What Are B2B Examples of Each Kind of Business ?

• Operationally Excellent
• Product Leadership/Innovation
• Customer Relationship/Intimacy

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A Formal Method of Building Value Models
Source Anderson, James and James Narus,(1998)
Business Marketing Understand what customers
value, HBR, 76(6) 53-61

• Initial field assessment
• What is possible what is not
• Select right market segment
• Identify key information needed from customers
• Generate a list of value elements
• Gather field data or use focus groups
• Cross validate with other data
• Understand the variability of results and value
  drains, things that harm value
• Create value-based sales tools

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Why use any B2B Hub?

• Dealing with pain points

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Pain Points, a different way of looking at value

• What hurts in current methods?

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Pain Points, a different way of looking at value

• What hurts in current procurement methods?
• Inefficient business process transactions
• Mainly paper-based systems
• Inefficient trading partner search processes
• Too many search channels
• Qualifying vendors and customers
• Inefficient product information search processes
• Heterogeneous RFQ information in
• Pricing / product details / availability /
  delivery date methods / status information /
  additional services (maintenance, etc.)
• Inefficient supply chains
• Use of brokers as matchmakers
• Multiplier effect of multiple inefficiencies
• Particular problem internationally

21
Value Propositions in B2B

• Buyers value benefits
• Sellers value benefits
• Intermediators value benefits (revenue streams)

22
Buyers Value Benefits
I N T E R M E D I A T O R
Selling Organization
Buying Organization

• Reduced procurement process costs
• Reduced inventory costs
• Reduced rogue purchases
• More choices, bidders better pricing
• Reduced lead times

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Buy-Side Relationship

• What are my critical pain points?
• Cost is important but there may be other benefits
  that are more important.
• Remember Dell Webpages
• What are the down-sides of buying on cost?
• Does the supplier understand the needs of the
  buyer?
• Example GE Medical Devices

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Sellers Value Benefits
I N T E R M E D I A T O R
Selling Organization
Buying Organization

• Reduced cost associated with sales
• corollary new sales opportunities
• Reach to new customers
• Reduce processing costs of order management
• Increased standardization of terms and processing
• Better future need information

25
Sell-Side Supply Chain Issues

• What is the value added by retailers
  distributors?
• Repackager
• Example Alliance Entertainment
• Customizer
• Intra-company postponement
• Example Harley Customizer
• What is the business of the manufacturer?
• Problem do the manufacturers know enough about
  local customers?
• What information should be shared when?

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Intermediators Value Benefits
I N T E R M E D I A T O R
Buying Organization
Selling Organization

• Percent of gross transaction value
• Product listing fees
• Advertising revenue
• Membership fees
• Sponsorships
• Referrals

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Common Characteristics for B2B Success

• Information intensity
• Multiple of buyers and sellers
• Highly fragmented markets
• Market inefficiencies
• High search, comparison, and workflow costs
• Low switching costs between suppliers
• Management domain expertise
• Critical mass
• First mover advantages that outweigh first mover
  disadvantages

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One of the Key Issue for Open Hubs Critical Mass

• In order to be successful, any open B2B hub
  needs a critical mass
• In physics
• the minimum amount of fissionable material
  required to sustain a chain reaction
• In a software product
• a condition such that fixing one bug introduces
  one plus epsilon bugs. When software achieves
  critical mass, it can never be fixed it can only
  be discarded and rewritten.
• In business
• A size at which some fundamental change takes
  place in the operations of a business. For
  example, the business achieves increasing returns
  to scale, with growth beginning to feed itself
  (like an avalanche.)
• The value of a network goes up the the square of
  the number of nodes on the network

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First Mover AdvantagesCreation of Barriers to
Entry
Source Lieberman, Marvin and David Montgomery,
(1988) First-Mover Advantages, Strategic
Management Journal,

• Technology Leadership (setting the future)
• Advantages of the learning curve
• Ability to mold the cost structure of customers
• Success in patent races (preemptive patenting
  Amazon.coms strategy)
• Preemption of scarce resources (capturing the
  resources)
• Controlling input factors
• Controlling geographic and product characteristic
  space
• Preemptive investment in plant and equipment
• Switching costs buyer choice under uncertainty
  (risk reduction)
• Switching costs late entrants must offer
  something extra
• Buyer risk adverse once an acceptable choice
  found
• Positive feedback gains (bigger is better)
• Buyers want to buy from the most popular and
• Creators what to create for the most popular

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First Mover Disadvantages
Source Lieberman, Marvin and David Montgomery,
(1988) First-Mover Advantages, Strategic
Management Journal,

• Free-rider effects
• In RD, in buyer education, and infrastructure
  development
• The Tasters Choice Effect
• Resolution of technological or market uncertainty
• Taking advantage of first-mover mistakes
• Shifts in technology or customer needs
• Speed of change leads no one to be the first
  mover
• Customers expectations (needs) change too
  rapidly
• Focusing on the wrong customers (disruptive
  technologies
• Incumbent inertia
• Inability or unwillingness of incumbents to
  change
• Fords black Model T No one ever got fired
  for buying IBM

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Stickiness

• "Stickiness refers to a companys ability to
  retain users and drive them further into a site"
  (Wired News, 1999)
• "Stickiness The name of the game is to create
  high switching costs so that customers who use
  your portal as their entry to the rest of the Web
  wont bother to stray." (Business 2.0, December
  1998)
• Stickiness a weak surrogate measure for customer
  retention loyalty

Note Internet people love to create new words.
32
Critical Value Ideas

• The value of e-commerce is not common sense
• Understand why customers do/want what they
  do/want
• Do not assume you know what a customers value
  proposition is
• Speed can kill

33
A Final Comment

• Remember to identify the source of value for
• The buyer
• The seller
• And the B2B firm

34
Extra Slides
35
The Fundamental Business Issue

• The only reason youre doing e-business is to
  create greater value for your customers or to
  reach customers to whom you could not deliver
  your products or value to before. Companies must
  consider the value proposition above all else.
• Does it get me to customers I couldnt reach
  because of economic considerations?
• One of the big traps to avoid in e-business is,
  if its not adding value to the customer, if the
  customer does not see an incremental improvement
  every three months from your company, then you
  are probably working on the wrong project.
• John Roth, CEO, Nortel Networks, 2001

36
Who is the customer?

• A GE Information Services Quote
• Our solutions meet application-to-application
  (A2A), business-to-business (B2B) and
  business-to-consumer (B2C) EAI requirements. Our
  solutions connect disparate applications using
  Enterprise Resource Planning (ERP) certification
  adapters, File Transfer Protocol (FTP), and
  conversational Application Program Interface
  (API) as well as offer extensive electronic data
  interchange (EDI) value-added network (VAN)
  connectivity, EDI and extensible markup language
  (XML) standards support and web access
  components.

GE Information Services http//www.geis.com/geisc
om/template.jsp?page10id11
And the value is what???
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One Example Information Technology (IT)
Outsourcing
Source Butler, Steven (2003) IT outsourcing
Gains Momentum, eMarketer, http//www.emarketer.co
m/news/article.php?1002116cnewsltrnleadtad