One Size Does Not Fit All - The Need for An E-Marteplace Portfolio
The Emerging B2B Landscape
At the beginning of 2000, popular wisdom portrayed independent e-markets as the wave of the future. Between 1998 and 2000 e-markets grew more than 1000%, and analysts estimated that by 2005 they would increase in number by a factor of ten. Equity markets responded by giving publicly-traded e-markets soaring valuations, and analysts predicted that as many as 10,000 e-markets would flourish by 2004. By the second quarter of 2000, a mere three months later, the same analysts began speaking of a "shake-out" that would eliminate all but a few e-markets in each industry. Independent e-market valuations subsequently plummeted (see Figure 1: The Accenture Index - Valuations of 10 Leading B2B Markets) accelerated by the emergence of well financed industry consortium e-markets that promised to drive volume and liquidity.
Figure 1 - The Accenture Index - Valuations of 10 leading B2B markets
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In the U.S., over 60 industry consortium-led e-markets were created in the latter half of 2000. With equity investments on average of $8.5 million per consortium member, and up to $243 million invested in creating a single consortium e-market (Jupiter Research, Industry-Sponsored Marketplaces, October 2000), consortia were able to start quickly, supported with adequate capital and guaranteed volumes from consortium partners. At the same time, major firms like Cisco, Wal-Mart, and Eastman Chemical were moving rapidly to implement private exchanges. In the short period of a year, the marketplace was rationalizing and selecting the business models that would work, and it was killing those that would not. As the e-market space matures, we expect there will be approximately 100 major industry consortia, 500 independent e-markets, and over 2,000 private exchanges. Each of these types will complement each other as larger multi-unit, multi-business firms participate in a portfolio of e-markets to meet their varied needs.
Types of E-Marketplaces
Private Exchanges - One-to-many connection between a company and its trading partners. Private exchanges typically offer a customizable interface, but usually cannot enable deep collaboration. They provide access to the company's qualified supplier base or known customers, but do not enable companies to look beyond the companies they already know.
Consortia e-markets - Some-to-many connection, between the members of an industry consortia and their trading partners. Consortia e-markets may offer as much collaborative capability as private exchanges, but at the expense of standardizing processes across consortia members. Consortia e-markets provide individual members access to each other's trading partners, so there is some increase in access to partners. In addition, consortia e-markets may allow other companies to join the e-market, which provides still wider access.
Independent e-markets - Many-to-many connection between buyers and sellers through an independent intermediary. Independent e-markets have the widest variety of participants, which makes deep collaboration most difficult, but the large number of participants also maximizes access.
Figure 2 - Private Exchanges in the E-Marketplace
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E-Markets: The Benefits
Despite the drop in the value of independent e-markets, why are companies continuing to invest extensively in B2B e-markets, from private exchanges to consortia? Most major companies realize today that these markets are truly transformative and can generate a range of benefits from:
- Increased market supply and demand visibility - enabling more customer choice, potentially better fit of products to buyers, and a larger market for sellers.
- Price benefits from increased competition - auctions and e-markets can be used to increase price competition and lead to dramatically lower procurement costs for buyers.
- Increased operational efficiencies - through improved procurement, order processing and selling processes. Efficiencies can also include faster order cycle times.
- Improved partner and customer segmentation - e-market platforms can be used to transform customer segmentation and provide appropriate levels of services to customers with different value.
- Improved supply chain collaboration - e-market platforms will enable buyers and sellers to work together collaboratively for product design, planning, introduction, marketing campaigns, and programs.
- Synchronized supply chains - where visibility into operating information across the value chain allows companies to drive efficiencies across the entire value chain. These include increased inventory turnover, fast new product introductions, lower work in progress inventories, etc.
However, as the evolution from transparent data access to supply chain synchronization occurs, the capabilities required of the e-market platform increase. Indeed while the extent of capabilities offered by e-markets today are limited, expect future e-markets to provide broader functionality. Yet not all e-markets will have the same functionality and capabilities. We expect a distribution of capabilities across independent, consortia, and private exchanges.
We expect independent e-markets will find niches most favorable to them will be focused on relatively low-risk trading activities, such as purchasing MRO and indirect materials, finding new trading partners to evaluate, or spot trading of commodities. Even so, to build trust between unfamiliar buyers and sellers, we especially expect that the independent e-markets will have to host or outsource various trust-building services from supplier ratings, to credit verification, and escrow services.
As many industry consortia serve a large - and sometimes captive - customer base, they will seek to become the one-stop shopping source. Such a market position suggests industry consortia will develop MRO capabilities that are similar to independent trading e-markets, except that the level of customer service may be lower because of the more significant levels of volume. In some cases, industry consortia will form an alliance with an MRO-focused independent e-market that enables the industry consortium to leverage the established capabilities and relationships of the independent. In addition, industry consortia are likely to develop considerable direct materials procurement and exchange functionality including comparative catalogs, when feasible. Some companies, based on long-held competitive animus, will insist on procuring direct materials through their own private exchanges. If a high number of companies in an industry adopt this position, the direct materials procurement functionality of industry consortium will be relatively limited. Industry consortia will also have the highest level of industry news, expert forums, and standards establishing authority of any e-market type.
Private exchanges will have some of the most sophisticated e-market capabilities, much of which will never be available to most companies. Private exchanges will focus primarily on direct materials procurement and deep collaboration with trading partners. The level of proprietary data, information sharing, and deep collaborative capabilities will be at the highest levels in private exchanges. Private exchanges will be the most likely to have the most sophisticated software applications and deep integration with ERP systems of trading partners. Based on their direct materials focus, private exchanges are unlikely to focus on MRO capability, the provision of industry news, industry data, or expert forums. These exchanges will however be the most common e-market type utilized by nearly every major firm with strategic trading partners, where high levels of collaboration, specialized applications, and data privacy are required.
The Portfolio Imperative
Most companies will correctly conclude that there is no single e-market that will fulfill their needs. In response, the smart path now will be to adopt a portfolio approach where companies will participate in select e-markets that have market dominance or unique capabilities that serve a specific need. Participating in a portfolio of e-markets also creates a wider range of trading options and allows companies to address their varied privacy and information needs. When companies do not want to share key processes, information, or capabilities with competitors they are likely to implement private exchanges. Consider Dow Chemical (see Dow sidebar). It operates and participates in a multiplicity of channel relationships including a mix of independent, consortia, and private exchanges.
Figure 3 - Private Exchanges in the E-Marketplace
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Some e-markets in the portfolio help Dow gain selected efficiencies in MRO and other indirect materials, while other e-markets will allow the company to evolve capabilities and provide "real options" on benefits from synchronized supply chains. We expect that, like Dow, most companies will evolve a portfolio strategy to e-market participation.
Having a portfolio approach to participating in e-markets is smart for a number of different reasons. For example, buyers of commodities can use the independent and consortia markets to get the lowest prices and get the greatest visibity into industry supply and demand. Sellers of commodities in contrast will participate in a range of e-markets from private exchanges to independent e-markets based on the expected value of each of these channels. Thus we expect most large firms to participate with different levels of commitment in different types of e-markets based on the products, the supplier or buyer industry structures, and value of the channel. Participating in independent and consortia e-markets also provide a benchmark for private exchange effectiveness. Select participation in e-markets also builds "real options" on future benefit streams as different e-markets specialize and evolve their capabilities.
Companies are confronted with a variety of participation options. Their participation decisions should be made with a focus on channel conflict, integration complexity, channel power (based on product uniqueness and capability leadership), and availability of e-markets in the industry. Market leaders have more viable options available than market laggards. Many market leaders will choose to use private exchanges to protect their market position by keeping transactions private, driving deep collaborative capabilities with trading partners, and enabling proprietary capabilities. Companies that are not in a position of strength will often be compelled by more powerful trading partners to participate in industry consortia. Many of these companies will also participate in independent e-markets to broaden their visibility to suppliers and to create additional access to markets for their products.
Conclusions
B2B electronic marketplaces are transitioning from infancy toward becoming an integral part of company supply chains. Independent consortia, and private exchanges will specialize and provide different types and levels of functionality and service to buyers and sellers. Smart participants will adopt a portfolio strategy to to realize value at speed from independent and consortia e-markets and build private exchanges to strategic benefits from better collaboration with partners. A portfolio strategy will best enable companies to realize the benefits from future supply chain synchronization.
