Emerging Market Mechanisms in Business-to-Business E Commerce: A framework*

B Mahadevan

Indian Institute of Management Bangalore Bannerghatta Road,

Bangalore 560 076, INDIA. e-mail: mahadev@iimb.ernet.in

International Conference on

Advances in Infrastructure for e-Business, eEducation, e-Science, and e-Medicine

on the Internet (SSGRR 2002s),

Rome, ITALY

July 29 - August 4, 2002

* Word Count – 6005.

1

Emerging Market Mechanisms in Business-to-Business E Commerce: A framework

Abstract

Several researchers have predicted a significant growth trajectory for Business-

to-Business (B2B) applications of E Commerce. Over the last five years, a

variety of market mechanisms have emerged to address various issues pertaining

to B2B E Commerce. However, there is a general lack of understanding among

the researchers and practitioners on two key issues: What are the key

characteristics of these market mechanisms? What factors drive the choice of one

market mechanism over the other? Our current research addresses these questions

through a study of 13 different market mechanisms in operation today.

The study shows that B2B market mechanisms have the potential to enable

organizations overcome the limitations of traditional markets such as poor market

liquidity, high transaction costs and low operational velocity. The study reveals

that while several market mechanisms promote competitive market behaviour

among the participants, some others facilitate newer collaborative mechanisms.

Four factors significantly drive the choice of an appropriate market mechanism

for an organization. These include asset specificity, degree of fragmentation,

complexity of product description and complexity of value assessment. We have

developed a framework using these factors that unambiguously positions these

market mechanisms. The framework will help organizations devise appropriate

strategies to exploit B2B market mechanisms.

2

I. INTRODUCTION

The growth of electronic markets has dwarfed the historical growth patterns of other

sectors of the industry. Kshetri and Dholakia [1] presented Business-to-Business

(B2B) market projections by several consulting firms. According to them, worldwide

B2B market is estimated to grow from US $ 919 Billions in 2001 to about US $ 6

Trillions by the end of 2004. Over years, several market mechanisms have sprung in

electronic market space to tap new value creation opportunities. For instance, Free

Markets introduced the idea of conducting reverse auctions using the electronic media

during 1995. GEIS pioneered the concept of Trading Partner Network (TPN) in the

mid 1990’s. Similarly, the big three auto players created in February 2000

COVISINT, a consortia-based market structure. Other examples include catalogue

aggregation by Sciquest and virtual community building by Vertical Net. Many others

such as Oracle, i2, SAP and Ariba developed a variety of supply chain collaboration

tools.

Researchers, and Consultants have coined alternative classification schemes to

describe B2B market mechanisms. Mahadevan [2] generically divided the electronic

market space into three: Portals, Market makers and Product/Service providers and

suggested that B2B applications will be increasingly concentrated in market making.

Barrat and Rosdahl [3] presented a brief overview of alternative taxonomies to

classify B2B markets. Blodget and McCabe [4] classified B2B markets as either

vertical or horizontal. While vertical markets are industry specific, horizontal markets

are based on specific functions. Kaplan and Sawhney [5] proposed a 2x2

classification of B2B markets on the basis of “how” and “what” of the procurement

process. This classification scheme can be applied to traditional markets also. There

3

have also been attempts in the past to classify a sub-section of B2B markets. For

instance, Philips and Meeker [6] identified four types of B2B exchanges viz., Buyer

managed, Supplier managed, distributors and content aggregators. Le [7] identified

three market structures in B2B: Third party independent exchanges (3PXs), Industry

Sponsored Market places (ISMs) and Private Trading Networks (PTNs) and

concluded that leaders in B2B markets will have to eventually provide value through

aggregation and collaboration.

Despite several attempts in the past to classify B2B market structures, they are

inadequate for several reasons. First is the significant change in the character B2B

sites. Tomak and Xia [8] reported that B2B models are witnessing a move towards

newer market structures such as privately owned and consortia. Moreover, initially a

large number of them operated in pure market structures. However, currently several

B2B sites provide in one virtual place multiple market structures such as an exchange,

an online community, software for hosting a private market place, facility to conduct

forward and reverse auctions, and a catalogue. A case in point is

www.chemconnect.com, which offers auctions, commodity exchanges, online

community resources and collaboration with trading partners (see Figure 1 for a

screen shot). Similarly, Free Markets started by conducting reverse auctions.

Currently, they also conduct forward auctions (asset auctions), and sell site licenses

for their bidding software. Consequently, there is a greater need for an organization to

know how to benefit from a B2B market place offering multiple market mechanisms.

Moreover, no efforts have been made to systematically enumerate alternative market

structures in operation today. Earlier studies have addressed only a sub-set of market

structures. Finally, there is no robust taxonomy available to classify the market

4

structures. Since most of the earlier studies chose to address only a partial set of

market structures, the classification scheme adopted was also limited.

For the most part, earlier studies on alternative market structures and the benefits that

they offer to organizations have resulted in an “either or approach” when it comes to

recommending appropriate market structures for organizations. We, on the other

hand, would like to provide an alternative perspective to this issue. We focus on how

organizations could benefit from all the available market structures. We shift the

discussion to “when” alternative market structures are appropriate. This paper

addresses these issues and proposes a new framework for understanding the emerging

market mechanisms in B2B.

We begin the paper with a brief description of thirteen alternative B2B market

structures available today. We follow it up with a discussion on the specific areas in

which electronic B2B markets provide value over traditional market structures. We

also identify key factors that will differentiate the market structures on the basis of our

understanding of the role of electronic markets. We use the key factors to propose a

framework to classify the thirteen market structures. We finally end the paper with

some managerial insights and implications of the proposed framework.

II. ELECTRONIC MARKETS FOR B2B

There are several types of markets structures operating in the B2B electronic market

domain. However, we have identified 13 dominant structures based on our study of

about 200 B2B market sites in operation today. The selection of B2B market sites for

this study was primarily on the basis of Forbes.com’s 2001 listing of Best of Web –

B2B sites [9]. Table 1 has the list of B2B market structures and some representative

5

examples for each of them. Popular among the list includes auction sites, catalogue

aggregators and exchanges. However there are others that are least understood. These

include extranets, trading partner networks and buyer and supplier centric market

structures and consortia market places.

One set of market structures includes Extranets, TPN and web EDI. These are enabled

when computers cutting across organizational boundaries are connected to a single

network for the purpose of sharing vital data of interest to the network members. An

Extranet uses Internet protocols and public telecommunication system to securely

share part of a business’s information or operations with suppliers, vendors, partners,

customers, or other businesses. However, two narrower applications of Extranets are

TPN and web EDI. These market structures increase the collaboration capability of

the network members and help in speeding up business processes. They also help

eliminate duplication of resources, cut costs and improve responsiveness of the supply

chain.

In the second set of market structures, one or a small group of either the buyers or the

sellers will initiate the market place, host and monitor, enroll market participants and

moderate the market behavior if required. In a buyer centric marketplace, buyers take

the initiative to host the market and appropriate greater benefits than other market

participants and so the suppliers in a supplier centric market. Two well-known

variations of seller and buyer centric market structures are forward and reverse

auction sites respectively. Alternatively, a few buyers belonging to a sector of an

industry or a few suppliers of products to get together and create a consortium market

place. Examples include www.covisint.com (auto), www.transora.com (consumer

packaging industry), and www.globalnetexchange.com (retail industry).

6

The third set of market structures includes Neutral Auctions, Exchanges, Catalogue

Aggregators, On-line community and Click & Mortar. We define a neutral auction as

one in which several forward and reverse auctions are hosted simultaneously. Bidders

understand that there are substitutable products available for the item that they may be

bidding for in one such auction. For instance, when a second hand capital goods or

surplus inventory is put on sale in a site, the items are not unique to give any

significant advantage to the seller. Neutral auctions have contextual relevance only in

electronic markets. In traditional markets, it is practically not possible to know the

existence of such substitutable auctions hosted at other places and participate in those

auctions due to high search costs. In some sense, we introduce a new market structure

through our definition of neutral auctions. However, it is consistent with the

observation made by Bakos [10] that when search costs come down, new markets

(those infeasible in an era of high search costs) are invariably created.

Unlike an auction, exchanges promote many-to-many relationship. In our definition,

any market structure where both buyers and suppliers negotiate prices, usually with a

bid and ask system, and where prices move both up and down would be classified as

an exchange. Typical examples of exchanges include trading in commodity markets

such as metals, crude, bandwidth in telecommunication networks and energy.

Catalogue aggregators standardize information coming from diverse sources to enable

comparisons of similar products. Catalogue aggregator acts as a neutral intermediary

and may also provide additional services to buyers such as comparison across

multiple vendors, trust, logistics, and payment mechanism.

It is also possible to virtually host a community or special interest group belonging to

one sector of the industry. For instance, a group of neurosurgeons could be organized

7

into an online community. As the community grows in size and reaches a threshold a

virtual market place can be organized. A large online community attracts the attention

of several suppliers of products and services pertaining to the group. Several firms

operating in that sector could target their marketing. Several reputed players operating

in traditional B2B markets have established their presence in the electronic market

domain also. The market in such cases is more appropriately defined as click &

mortar.

Our definition of the 13 market structures fall under three distinctive categories:

collaborative mechanisms, quasi-market mechanisms and neutral market mechanisms.

Collaborative mechanisms consist of market structures that fundamentally enable the

market participants to engage in a variety of collaborative exercises. The first set of

three market structures belong to this category. The second category consists of a set

of market structures that have an inherent bias towards one of the market participant

viz., the buyer or the supplier. The bias arises on account of several factors including

the rules governing the market place, the ownership and the market participant

initiating it. The second set of five market structures that we have introduced belong

to this category. The last five market structures are characterized by neutrality in the

market.

Irrespective of the type of the market structure each one of them respects several

governing principles behind the functioning of electronic markets. For instance,

catalogue aggregators significantly bring down product search costs and improve

transactional efficiency. Auction sites increase the reach of the market and make the

price discovery process very efficient. However, each market structure has specific

relevance to organizations.

8

III. NEW VALUE PROPOSITIONS IN B2B ELECTRONIC MARKETS

Our study of B2B sites suggests that electronic B2B markets provide several

promising benefits to organizations. Due to certain characteristics of electronic

markets, it is possible to overcome some limitations of traditional markets. We

particularly identify and discuss three generic features of electronic markets and show

how they provide new value propositions.

A. Increased reach Electronic markets play the fundamental role of connecting buyers and sellers situated

geographically far away through a virtual market place thereby significantly

increasing the reach. The in creased reach provided by electronic markets offers

several value propositions. Often, buyers perceive value arising out of reduced

product search cost and transaction costs. Similarly suppliers perceive value arising

out of reduction in customer search costs, cost of product promotion, business

transaction costs and lead time for business transactions. These benefits are likely to

be substantial in B2B markets. For instance, it was reported that car dealers spend on

an average about $ 25 to close business with a buyer referred by autobytel.com as

opposed to several hundreds of dollars in the brick and mortar operation [11]. There

was virtually zero customer search cost in such referrals.

Furthermore, the extensive reach attainable through electronic markets enables

suppliers to compete on a level playing field for business with global customers,

which may previously have been unattainable. For instance, nearly 19,000 suppliers

from 70 countries have competed in the last five years for about $30 billion worth of

business that was bid through FreeMarkets.com [12]. Similarly, Newview

technologies connected about 200 steel mills, 1700 stockists, converters and

9

fabricators, 250 end users and about 400 international trading companies through its

online exchange, e-STEEL [13].

B. Reduced Transaction Costs

Transaction costs include costs of negotiating, drafting and safeguarding an

agreement between trading partners as well as haggling, set-up and running costs

associated with the governance structures and bonding costs to effect secure

commitments [14]. Every organization operating in B2B markets incurs transaction

costs in several forms including the cost of discovering products and prices, the cost

of negotiating and concluding contracts and the costs of monitoring and safeguarding

the agreements entered into through the contracts. These costs are far in excess in the

case of paper based and semi-automated transaction processing environments. For

instance, The National Association of Purchasing Managers, USA estimated that the

average manual purchase order costs a company $79 to process, $38 of which is

related to internal processing [4]. In such traditional markets, organizations also incur

heavy costs in tightly integrating with their supply chain partners.

On the contrary, electronic markets typically reduce customers’ cost of obtaining

information about prices and product offerings [15]. They also can directly reduce

market transaction costs by providing cost effective means to access market

information and process transactions [16]. Furthermore, the suppliers’ cost of

communicating information about their prices and product offerings to additional

customers is negligible. For instance, a registered member of Alibaba.com gains

access to a vast database of over 296,000 trade leads of about 33,000 companies

pertaining to about 65,000 products worldwide as soon as she logs into its homepage.

When the search costs come down, buyers benefit from lower prices and better

10

allocation of their resources. Moreover, it opens up new markets that were infeasible

due to high search costs in traditional markets [10].

Furthermore, an organization could seamlessly integrate with its supply chain partners

and exchange complex technical drawings, sensitive business documents, voluminous

transaction data and even cash in real time. Approvals for purchases and other

complex business processes can be efficiently managed using innovative software

addressing workflow and business process management issues. Better demand

management will allow coordinated production planning and control among the

supply chain partners. Moreover, unwanted inventory will not be shipped across the

supply chain. All these lead to significant cost savings and rationalization of resources

and manpower.

In several sectors of the Industry, market participants have experienced these effects

leading to reduction in transaction costs by orders of magnitude. American Air

Transport Association estimated that while it costs $8 for a travel agent to book an air

ticket using computerized reservation system it may cost $6 for the travel agent to

book the ticket online and only $1 for the customer to book directly with the airline

[17].

C. Deep-customization capabilities

Evans and Wurster [18] concluded that electronic markets have enabled organizations

to overcome the trade-off between “richness” and “reach” that is characteristic of

traditional markets. They defined richness as the amount information that can be

shared between two parties, the level of customization and the degree of interactivity

and reach by the number of people reached. Consequently, electronic markets

11

permitted several capabilities to customize the transactions to specific parties. Some

of the prominent features include the following:

?? Pre-configure the virtual ambience in which the market participants will deal

with the organization. This involves pre-specifying the items procured,

preferred suppliers, documentation required for procurement and shipping

addresses. It also includes building preferred procurement lists from

dynamically updated electronic catalogues.

?? Allow an organization to build a product from an assortment of basic

components available in modules to suit its requirements. Such a feature

provides a wide product variety and throws open exciting opportunities for the

organization to procure minimum quantities of several variations. For

instance, a visiting customer desiring to buy a Dell Inspiron 8100 G1200VT

notebook from http://www.dell. co.in can configure her own system from

2,080,899,072 alternatives available for various system components such as

base system, OS, Optical drives (fixed, removable), carry case, battery, Zip

drive, video card, mouse, key board, and hardware maintenance (This has

been computed based on the information available at their site as of February

15, 2002).

?? Enable business customers to interact with the organization through a highly

customized environment for all pre- and post-order transactions and after sales

support. For instance, from the time an order is placed with an organization,

the buying organization can track the status of the order in real time through a

customized virtual environment. As information about the entire value chain

related to the transaction is available to the buying organization, it will be able

to rationalize its investments in inventories, make accurate production plans

12

and commit firmly to its downstream customers. Further, several resources

pertaining to after sales support will be at the disposal of the buying

organization through the customized interaction. These features help an

organization to convert its interactions with business customers from a pure

“transactional” to a higher “relational” form. It also allows organizations to

build virtual communities.

D. Value creation opportunities in electronic B2B markets

The three features of electronic markets clearly point to new value creation

opportunities that these markets provide to organizations. Dramatically increased

reach provided by electronic markets ensures high market liquidity. It also cuts

information search cost. Since information search costs form a predominant part of

the transaction cost in B2B markets, the transaction cost comes down and

transactional efficiency improves. Reduction in search costs also has a significant

impact on price. Buyers in B2B electronic markets fetch better prices for the items

that they buy, leading to lower input costs. Moreover, reduction in transaction costs

translates into new cost red uction opportunities. Finally, improved transactional

efficiency leads to improved operational velocity on account of reduced lead-time.

Figure 2 illustrates these benefits accruing to organizations.

IV. FACTORS DRIVING CHOICE OF THE MARKET STRUCTURES

The existence of such a large variety of market structures raises several questions in

the minds of practitioners. Are these market structures mutually exclusive? Is there a

better way of classifying these market structures? Are these market structures related

to different sectors of the industry in any manner? What sub-set of these are useful to

an organization? What factors drive the choice of one market structure over the other?

13

In order to gain a better understanding of these issues we introduce some factors that

critically influence the classification of these markets.

A. Degree of fragmentation

Clearly, the inherent ability of electronic markets to increase reach suggests that

“degree of fragmentation” will help in differentiating alternative market structures.

Markets with high degree of fragmentation may be immensely benefited from the

increased reach provided by electronic markets.

We define degree of fragmentation with two key attributes of the market. The first is

the number of players. A market, with large number of buyers (sellers), will be

considered to have a high degree of fragmentation of buyers (sellers) and vice versa.

The second attribute is the geographical spread. Given the same number of buyers and

sellers in two sectors of an industry, a sector with a relatively high geographical

spread will indicate a greater degree of fragmentation. The key motivation behind this

definition of degree of fragmentation is the degree of control or influence the buyers

or the suppliers can exert on the market place.

Fragmentation may exist either in the buyer side or in the seller side or in both. There

are a host of situations in which there is a large fragmentation of both the buyers and

the sellers. These primarily include B2B horizontal such as transportation industry,

packaging, and Maintenance, Repair and Office (MRO). Other sectors such as

healthcare, travel & tourism, and consumer goods, are also often highly fragmented

on both sides. However, there can be situations in which there is very little

fragmentation in both the buyer and the supplier side. Accordingly, we identify four

sub-classifications of fragmentation of market participants (see table 2 for details).

14

The degree of fragmentation points to a few behavioral patterns in the market. This is

illustrated in figure 3. As the degree of fragmentation is high on both the supplier and

the buyer side the market tends to be open and competitive. On the other hand, as we

move towards lesser fragmentation in either the buyer or the supplier side there is an

opportunity for control-oriented mechanism to characterize the market. However, as

the degree of fragmentation is very low, organizations tend to greatly benefit from

collaborative practices as opposed to control.

B. Asset Specificity

Transaction cost economics literature has clearly established the relationship between

asset specificity and governance structure. As asset specificity increases transaction

costs also increase if the governance structure is inappropriate and vice versa [19].

Furthermore, Malone et al. [20] argued that electronic markets reduce the costs of

coordination and communication leading to changes in governance structures and

asset specificity. Tomak and Xia [8] also suggested that asset specificity is an

important attribute to differentiate market structures. Asset specificity is, therefore,

another factor useful in classifying B2B market structures.

Asset specificity is a function of the costs of setting up a relationship between two

market participants in order to manage business transactions cost effectively. The

costs arise on account of specific resources (assets) that the two market participants

have to deploy apriori in order to transac t business. These investments could be in

dedicated machine tools, dies, tools and fixtures, information system and data format

to exchange information and investment in people of special skills. Clearly, all these

investments are specific to the relationship between the two market participants are

irreversible. For instance, in the case of an aerospace manufacturer, the asset

15

specificity will be very high in the case of procurement of engines from a supplier. On

the other hand, the aerospace manufacturer needs no relationship specific investments

to procure office stationary.

This has important implications to the behavior of the market participants. When the

asset specificity is high, the market participants will be better of by engaging in

collaborative practices and superior coordination mechanisms. On the other hand,

when the asset specificity is very low, competitive market practices and relationships

based on price will benefit both the buyers and the suppliers. In the medium asset

specific situations, quasi-market mechanisms that blend both collaboration and

competition will be a viable alternative for the market participants.

Figure 4 shows the classification of the market structures on the basis of degree of

fragmentation and asset specificity. Asset specificity and degree of fragmentation

have a relationship especially in the extreme cases. When asset specificity is very low,

the market is likely to be highly fragmented and vice versa. Hence the two diagonal

grid locations in the figure are not relevant. Our classification of the thirteen market

structures falls into this two dimensional framework. However, several neutral market

structures are grouped together into two grid positions in figure 4. Organizations

would require more clarity on when to use these neutral markets. In order to provide

this discrimination, we introduce two more factors.

V. CLASSIFICATION OF NEUTRAL MARKETS

Neutral markets suffer from poor market liquidity on account of several factors.

Prominent among them is the high degree of fragmentation on both the buyer as well

as the supplier side. Electronic markets fundamentally address the problems arising

16

out of fragmentation by providing spectacular reach to the market participants.

However, there are other factors that have significantly distinguished alternative

neutral market structures. We introduce two factors; complexity of product

description and complexity of value assessment and use them to classify the neutral

market structures.

A. Complexity of Product Description

Complexity of product description relates to the amount of information a buyer needs

to understand the functional and technical specifications of the product/service [20].

For instance, an automobile is highly complex in description. Similarly, airline ticket

is another example of product description complexity. There are numerous

alternatives for routing and several conditions are attached to each category of fare

structure. Electronic components, bearings and valves and many catalogue items

could also introduce medium to high complexity on account of large variety in their

offerings and detailed technical and commercial specifications pertaining to each

variety. Communicating numerous specifications that differentiate one variation from

the other, communicating price changes to clients, managing stock keeping units, and

improving stock visibility are issues that contribute to complex product

characteristics. Further, such a large menu of offerings induces additional costs

related to maintaining price lists and repeated communication of changes in price lists

usually known as menu costs [21].

Electronic markets add substantial value in situations involving complex product

characteristics. The deep customization capabilities characteristic of electronic

markets and their ability to efficiently communicate and manipulate data from several

sources tend to reduce the product description complexity as well as menu costs.

17

Malone et al. [20] argued that computer based information technologies can handle

and communicate complex, multi-dimensional product descriptions much more

efficiently than can traditional modes of communication. These new capabilities allow

organizations to efficiently manage catalogues and promote active relationships

through online communities.

B. Complexity of value assessment

Complexity of value assessment refers to the amount of information needed to

estimate accurately the worth of an item and use the information to either arrive at a

price or select items offered at a price. It is easy to assess the value of a new item than

to assess the value of second hand and surplus items, and very unique products and

services. Furthermore, products with no complexity in product description can pose

complexity in value assessment as in the case of commodities. The complexity arises

on account of several factors. First, the price setting mechanism could be dynamic

through a set of bids and offers. The benefits of operating in such markets are directly

a function of the size of the market participants. Second is the amount of information

and pre-assessment required before making a choice as in the case of auctions.

Finally, the complexity of value assessment is also due to info rmation asymmetry

problems. Electronic markets substantially eliminate information asymmetry

problems and help reduce the complexity of value assessment.

It is therefore possible to classify neutral markets on the basis of the complexity of

product description and the complexity of value assessment. Figure 5 shows the

classification of the neutral markets on this basis. Catalogue aggregation seeks to

address the problems arising out of complexity in product description. On the other

hand, exchanges address the requirement of a standard product having value

18

assessment problems arising out of dynamic price setting. Exchanges bring together a

vast set of buyers and sellers and facilitate the trade. Auction sites address the

problems of medium complexity in product description as well as value assessment.

By bringing together a community of bidders and auctioneers and enabling electronic

communications among them, they improve the market liquidity.

VI. MANAGERIAL IMPLICATIONS

Every organization will find itself in all the four categories of degree of fragmentation

depending on the nature of the product or service that it is either procuring or

supplying. For instance, Boeing will find itself in “low buyer fragmented - low

supplier fragmented” situation when it comes to procuring engines. On the other hand,

when it procures maintenance consumables or office stationary, it may be in “high

buyer fragmented - high supplier fragmented” situation.

Consequently, the notion that every organization will find only one or two variations

of the B2B electronic market useful is not sound. On the other hand, organizations

will have to strategically draw a blue print on how they will derive value by

exploiting all these market structures. In some situations, they may have to tap several

benefits from accessing neutral markets. Simultaneously, there will be value in

developing collaborative mechanisms for a class of products (suppliers and

distributors).

Online communities will play an important role in improving the market liquidity in

situations involving very complex product description and value assessment

characteristics. How does a cardiologist highly specialized in a particular technology

of treating heart ailments through surgery identify cutting edge developments in the

19

field including new technology pertaining to diagnostics, medication, and surgery and

bring it into practice? How do thousands of software developers developing numerous

business applications for organizations world -wide using a set of developer tools get

to solve the problems that they face in coding and debugging their software?

In a traditional market, they suffered on account of complex product characteristics

and value assessment problems and found it almost impossible to network with other

experts in their field. The crucial role online communities play is to provide a

distinctive focus [22], and bring together all resources pertaining to the field. Such a

market structure will improve market liquidity and will effectively address the

problems arising out of complexity of product characteristics.

There are several situations that warrant a combination of click & mortar strategies.

The framework suggests that these include situations in which the product

characteristics are fairly complex and difficult to assess the value. Several industrial

marketing issues govern procurement of capital equipments and services for MRO

situations. Typically, in a traditional market, several intermediary channels work with

the suppliers of equipment and services and the buyers and improve the liquidity.

However, electronic communication and electronic brokerage effects will help

organizations devise novel click & mortar strategies. Electronic markets will

eventually cause dis-intermediation of these channel partners by careful deployment

of click & mortar strategies.

Restructuring the logistics and supply chain network of an organization will become

inevitable. Some suppliers with whom an organization developed close relationships

will be asked to participate in more competitive mechanisms such as reverse auctions.

Still others may be replaced with more competitive sourcing decisions involving

20

neutral electronic markets. Electronic markets may also cause dis -intermediation of

some traditional channels. For instance, neutral auction sites may replace channels for

disposal of second hand capital goods, and surplus inventory. New opportunities will

emerge in recasting the distribution network in several industries. Resellers may be

eliminated and the role of distributors and other channel partners will be redefined.

VII. CONCLUSIONS

Electronic markets fall under three distinctive categories: collaborative mechanism,

quasi-market mechanism and pure market mechanism and provide several value

creating opportunities. Through increased reach, deep customization capabilities and

reduced transaction costs electronic markets enable market participants overcome

some of the limitations of traditional B2B markets. Using four factors that

significantly differentiate alternative market mechanisms in the B2B electronic

market place we have proposed a framework to understand how an organization can

exploit these market structures. The framework suggests that all the available market

structures have relevance to every organization. In order to gainfully exploit these

market structures organizations need to devise new strategies and reconfigure their

supply chain.

REFERENCES

[1] N. Kshetri and N. Dholakia, “Determinants of the global diffusion of B2B E

Commerce,” Electronic Markets, vol.12, pp 120 – 129, 2002.

[2] B. Mahadevan, “Business models for Internet based E Commerce: An

anatomy,” California Management Review , vol. 42, no.4, pp 55 – 69, 2000.

21

[3] M. Barratt and K. Rosdahl, “Exploring business-to-business market sites,”

European Journal of Purchasing and Supply Management, vol. 8, pp 111 – 122,

2002.

[4] H. Blodget and F. McCabe. (2000, Feb.). The B2B market maker book. Merrill

Lynch. [Online]. Available: http://www.nmm.com/documents/merrill.pdf

[5] S. Kaplan and M. Sawhney, “E-Hubs: The new B2B market places,” Harvard

Business Review, vol. 78, May – June, pp 97 – 103, 2000.

[6] C. Philips and M. Meeker. (2000, Apr.). The B2B Internet report: Collaborative

commerce. Morgan Stanley Dean Witter. [Online]. Available:

http://www.morganstanley.com/institutional/techresearch/pdfs/b2bp1a.pdf

[7] T.T. Le, “Pathways to leadership for Business-to-Business Electronic market

places,” Electronic Markets, vol.12, 112 – 119, 2002.

[8] K. Tomak and M. Xia, “Evolution of B2B market places,” Electronic Markets,

vol.12, pp 84 – 91, 2002.

[9] [Online] Available: http://www.forbes.com/bow/b2b/main.jhtml

[10] J.Y. Bakos, “Reducing buyer search costs: Implications for electronic market

places,” Management Science, vol. 43, pp 1676 – 1692, 1997.

[11] T.M. Siebel and P.House, Cyber Rules. Currency Doubleday, New York, 1999,

pp 135 – 136.

[12] [Online] Available: http://www.freemarkets.com/benefits/default.asp

[13] [Online] Available: http://www.nmm.com/events/gzeurope/press/68FINAL_NMM.ppt

[14] O.E. Williamson, The Economic Institutions of Capitalism. Free Press, New

York, 1985, pp 20 – 21.

[15] J.Y. Bakos, “A strategic analysis of electronic market places,” MIS Quarterly,

vol. 15, no.3, pp 295 – 310, 1991.

22

[16] V. Gurbaxani and S. Whang, “The impact of information systems on

organizations and markets,” Communications of the ACM, vol. 34, no.1, pp 59 –

73, 1991.

[17] L. Margherio, S. Cooke, S. Monks and K. Hughes. (1998, Apr.). The emerging

digital economy. US Department of Commerce, Washington, DC, pp 28.

[Online]. Available: http://www.esa.doc.gov/508/esa/pdf/EmergingDig.pdf

[18] P. B. Evans and T.S. Wurster, “Strategy and the new economics of

information,” Harvard Business Review, vol. 75, Sep. Oct., pp 71 – 82, 1997.

[19] O.E. Williamson, “The modern corporation: Origins, evolution and attributes,”

Journal of Economic Literature, vol. XIX, pp 1537 – 1568, 1981.

[20] T.W. Malone, J. Yates and R.I. Benjamin, “Electronic markets and electronic

hierarchies,” Communications of the ACM, vol.30, pp 484 – 497, 1987.

[21] Y. Bakos, “The Emerging Role of Electronic Marketplaces on the Internet,”

Communications of the ACM, vol. 41, no.8, pp 35 – 42, 1998.

[22] J. Hagel, “Net gain: Expanding markets through virtual communities,” Journal

of Interactive Marketing, vol.13, no.1, pp 55 – 65, 1999.

23

Table 1. List of B2B Electronic Market Structures

Sl. No. Name of the market structure Remarks & Examples*

1 Extranet www.aventail.com,

www.adventnet.com, www.citrix.com.

2 Trading Partner Network (TPN) www.geis.com, www.nexprise.com

3 Web EDI www.1edisource.com www.geis.com

4 Buyer Centric Private Market 5 Supplier Centric Private Market

www.ariba.com, www.i2.com, www.commerceone.com www.verticalnet.com.

6 Consortia Market Place www.avendra.com, www.aeroexchange.com

7 Seller-oriented (Forward) Auction Sites www.fedsales.gov 8 Buyer oriented (Reverse) Auction Sites www.freemarkets.com 9 Neutral Auctions www.dovebid.com,

www.assettrade.com 10 Exchanges www.eSTEEL.com (Now

renamed as New View), www.HoustonStreet.com

11 Catalogue Aggregators www.sciquest.com, www.officedepot.com

12 On-line community www.creativethought.com, www.dentalarena.com, www.electronicsweb.com.

13 Click & Mortar Office Depot * The URLs given against the first five market structures point to the service providers that

enable firms to create these market structures. They provide several supply chain collaboration tools to enable the features required for such market structures.

24

Table 2. Degree of fragmentation and its implications

Degree of Fragmentation Sl. No. Buyer Side Supplier Side

Industry examples Some effects on the market

1 Low Low

Buyers – Aerospace, Firms operating in cutting edge technology sectors. Suppliers – High-tech sub-contractors

Close cooperation between the two is a critical issue.

2 Low High

Buyers – Aerospace, Automobile, Telecommunication, Petro-chemical, Energy Suppliers - Low and medium-tech components.

Buyers are in a position to influence the market

3 High Low

Buyers – A large number of manufacturing & service organizations. Suppliers – Electronics, Telecommunication, High-tech capital goods

Suppliers are in a position to influence the market

4 High High

Buyers – Manufacturing & Service firms belonging to several sectors of Industry Suppliers – MRO Supplies, Commodities, Standard and low-tech components & services

Buyers’ and Suppliers’ behavioural patterns are governed by the guiding principles of pure market mechanisms

25

Figure 1. A screen shot of services offered by www.chemconnect.com1

1 Source: www.chemconnect.com as of March 8, 2002.

26

Figure 2. Value creation opportunities in B2B Electronic Markets

Reach Search Costs

Transaction Costs

Transaction Efficiency

Price Lead Time

Better resource Deployment

High Market

Liquidity

Huge Cost Saving

Potential

High Operational

Velocity

27

Figure 3. B2B Market classification on the basis of degree of fragmentation

Supplier Side EDI

Buyer Side EDI

Neutral Markets Catalogues, Exchanges,

Auctions, Online communities

Supplier Control

Buyer Control

One Supplier Few Buyers

Few Suppliers Many Buyers

Many Suppliers Few Buyers

Many Suppliers Many Buyers

One Buyer Few Suppliers

Open/Competitive Private/Control

Supplier Centric Marketplace

Buyer Centric Marketplace

Forward Auctions

Reverse Auctions

TPN

TPN

Supplier Consortia

Buyer Consortia

28

Figure 4. A classification framework for B2B market structures

Extranet/ Web EDI

Extranet/ TPN

Not Relevant

Buyer centric Private Market

Reverse Auctions

Buyer Consortia

Supplier centric

Private Market

Forward Auctions

Supplier Consortia

Not Relevant

Neutral E Market Places

Sup - Low Buy - Low

Sup - High Buy - Low

Sup - Low Buy - High

Sup - High Buy - High

Fragmentation

of

Market Partici-pants

High Medium Low

Asset Specificity

29

Figure 5. Classification of Neutral B2B Market Structures ` ̀

Simple Moderate Complex

PPrroodduucctt DDeessccrriippttiioonn

Easy

Moderate

Difficult

VVaalluuee

AAsssseessss--mmeenntt

EExxcchhaannggeess

AAuuccttiioonnss

CCaattaalloogguueess

CClliicckk && Mortar

OOnnlliinnee CCoommmmuunniittyy