Electronic Commerce: Three Emerging Strategies (1998)

Electronic commerce is fulfilling its early promise for business-to-business trade. Marketplaces that connect buyers and sellers are up and running in many product categories, and are creating value by making trading more efficient. The experience of early participants suggests that an electronic marketplace can capture savings of 10 to 20 percent on sales and deliver lower prices for buyers.(*) The rewards are split three ways. Sellers can reach more customers, gather better information about them, target them more effectively, and serve them better. The marketplaces also create value for the third-party intermediaries that organize some of them. Intermediaries can earn transaction commissions and fees for value-added services such as information capture and analysis, order and payment processing, the integration of buyers' and sellers' IT systems, and consulting services. The best rewards go to buyers, however. Able to compare products and prices easily, they will compel suppliers to compete more fiercely than ever. The potential value at stake is enormous. Take the US maintenance, repair, and operations (MRO) products business - including items ranging from brooms and light bulbs to simple motors - which is worth $300 billion. If the electronic marketplaces rapidly emerging in the industry came to harness even 10 to 20 percent of these sales, and reaped the same process cost and price savings as the earliest electronic marketplaces - that is, 10 to 20 percent - the industry could see value creation worth $3 to $12 billion. Similarly, in the combined PC and low-end networking products industry, $2.5 to $5 billion is at stake. A battle between buyers, sellers, and intermediaries to capture this value seems inevitable; furthermore, the conditions for winning it are already evident. It is therefore time for businesses to consider how they might participate in electronic marketplaces to create value for themselves and prevent it shifting to competitors. Three models There are three types of marketplace: those controlled by sellers, those controlled by buyers, and those controlled by neutral third parties (EXHIBIT 1). Marketplaces controlled by sellers are usually set up by a single vendor seeking many buyers. Its aim is to create or retain value and market power in any transaction. The corporate Web site set up by Cisco Systems, for example, enables buyers to configure their own routers, check lead times, prices, and order and shipping status, and confer with technical experts. The site generates $3 billion in sales a year - about 40 percent of the company's total. Exhibit 1 Types of electronic marketplace Seller controlled Information-only vendor Web sites Vendor Web sites with online ordering Buyer controlled Web site procurement posting Purchasing agents Purchasing aggregators Nuetral Industry/product-specific search engines Information marts (structured access to vendor and product information) Business malls (multiple vendor store fronts) Auction spaces In addition, by publishing technical documents on line and giving customers access to order information, Cisco saves $270 million annually in printing expenses, order and configuration errors, and telephone-based technical support. Its online market may also increase customer loyalty by speeding up ordering and order status checking. Buyer-controlled marketplaces are set up by or for one or more buyers with the aim of shifting power and value in the marketplace to the buyer's side. Many involve an intermediary, but some particularly strong buyers have developed marketplaces for themselves. Japan Airlines, a big purchaser of in-flight consumable items such as plastic rubbish bags and disposable cups, posts procurement notices on line in order to find the most attractive suppliers. …