THE B2B OPPORTUNITY - UVA Darden School of Business · 2009-02-25 · Business-to-business e-commerce is taking root in the competitive landscape. Suddenly, the issue of whether and

OCTOBER 2000

THE B2B OPPORTUNITYCREATING ADVANTAGE THROUGH E-MARKETPLACES

The Boston Consulting Group is a general management consulting firm

that is a global leader in business strategy. BCG has helped companies

in every major industry and market achieve a competitive advantage by

developing and implementing unique strategies. Founded in 1963, the

firm now operates 47 offices in 32 countries. For further information,

please visit our Web site at www.bcg.com.

THE B2B OPPORTUNITY:CREATING ADVANTAGE THROUGH E-MARKETPLACES

OCTOBER 2000

www.bcg.com

JAMES P. ANDREW,

ANDY BLACKBURN,

AND HAROLD L. SIRKIN

2

© 2000 The Boston Consulting Group, Inc. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: 617-973-1339, attention IMC/PermissionsMail: IMC/Permissions

The Boston Consulting Group, Inc.Exchange PlaceBoston, MA 02109

This report and other BCG publications can be found on our Web site: www.bcg.com.

T A B L E O FC O N T E N T S

INTRODUCTION 6

THE OPPORTUNITY 9

How E-Marketplaces Will Create Value 9

The Collaboration Challenge 10

How E-Marketplace Services Will Evolve 11

THE ECONOMICS AND EVOLUTION OF E-MARKETPLACES 15

The Revenue Breakdown 15

Capitalizing on Collaboration 18

The Shakeout 19

The Landscape 20

Marketplace-to-Marketplace Links 23

Placing Strategic Bets 24

CHOOSING E-MARKETPLACES 26

Selecting an E-Marketplace 26

Deciding When to Participate 28

STRATEGIES FOR PARTICIPANTS 30

Seller Strategies 30

Buyer Strategies 32

CONCLUSION 34

APPENDIX 35

3

Harold L. SirkinSenior Vice President and Leader of the Global E-Commerce BusinessThe Boston Consulting Group, Inc.200 South Wacker Drive, 27th FloorChicago, IL 60606Telephone: 312-993-3300Fax: 312-876-0771E-mail: [email protected]

A B O U T T H E A U T H O R S

5

James P. AndrewVice PresidentThe Boston Consulting Group, Inc.200 South Wacker Drive, 27th FloorChicago, IL 60606Telephone: 312-993-3300Fax: 312-876-0771E-mail: [email protected]

Andy BlackburnVice PresidentThe Boston Consulting Group, Inc.Two Embarcadero Center, Suite 2800San Francisco, CA 94111Telephone: 415-732-8000Fax: 415-732-8200E-mail: [email protected]

About the Authors

James P. Andrew is a vice president in the Chicago office of The Boston Consulting Group and leader of thefirm’s e-commerce activities in the Midwestern United States. Andy Blackburn is a vice president in the SanFrancisco office and leader of the firm’s global business-to-business e-commerce activities. Harold L. Sirkinis a senior vice president in the Chicago office and leader of BCG’s global e-commerce business.

Acknowledgments

The authors would like to acknowledge the contributions made by the BCG project team: Julie Herlihy,David Kim, Chris Mark, Steve Prokesch, and Lynn Segal. They would also like to acknowledge the contribu-tions of the advisory team: Jill Black, Paul Gordon, and Chris Keevil.

For Further Contact

The ideas in this report represent ongoing learning based on BCG’s client work and research. If you haveany questions about this report, please send an e-mail to [email protected]. The authorswelcome your feedback. For inquiries about BCG’s E-Commerce practice, please contact:

6

Business-to-business e-commerce is taking root inthe competitive landscape. Suddenly, the issue ofwhether and how to participate is high on the corpo-rate agenda. Business-to-business e-marketplacesare already allowing companies to cut their pro-curement costs dramatically. And, despite theplunge in business-to-business Internet stocks,many corporate leaders cling to the hope that theirstakes in big e-marketplaces will give a boost to theircompanies’ market capitalizations.

But low procurement costs and potential windfallsare not why the emergence of business-to-businesse-marketplaces matters. Procurement savings areimportant, but a large proportion of them will ulti-mately be passed on to the end customer. And thebig return on that e-marketplace stock will probablynever materialize. What does matter is competitiveadvantage. Yes, business-to-business e-commercewill have a tremendous impact on the competitivelandscape. But, more important, companies canshape that impact.

To better understand the evolution of this newlandscape and the implications for competitivestrategy, The Boston Consulting Group conducted acomprehensive study of e-marketplaces in the

I N T R O D U C T I O N

E-marketplaces will create value, but participants—not the e-marketplaces themselves—will capturethe lion’s share of that value. This economic re-ality will affect how e-marketplaces evolve andwhich ones will survive. The surviving e-market-places will be either major, broad-based players orniche competitors that provide specific productsor functions. Because no one e-marketplace will beable to fill all of a company’s needs, companies andthe various e-marketplaces will be linked in a com-plex web of relationships. The coming shakeoutmeans that companies must be especially carefulabout where and how they place their bets.

Because e-marketplaces will reshape the competi-tive landscape, the companies that transform theirbusinesses most aggressively to use e-marketplacesand influence their evolution stand to gain themost. Sellers can use the new markets to changecompetitive dynamics more than they may realize.And as buyers are beginning to recognize, e-marketplaces represent more than a means ofexacting lower prices from suppliers. Over time,many of the benefits generated by e-marketplaceswill flow to the end customer. This means that earlymovers that can overcome the implementationchallenges will have the greatest opportunity tocapture and retain most of the benefits.

7

United States and their potential impact on thecompanies that either use them or are consideringusing them. Over the past three months, we sur-veyed nearly 500 buyers, sellers, and e-market-places, and conducted in-depth interviews at morethan 30 companies active in business-to-business e-commerce. We also studied publicly available dataand analyses. Finally, we synthesized the knowledgewe gained from working extensively with leading e-marketplaces such as Covisint, MetalSpectrum,and ForestExpress.

From our principal findings on the economics andevolution of e-marketplaces, three major themesemerge, which will profoundly influence how com-panies can use e-marketplaces to their advantage.

Online business-to-business marketplaces are grow-ing very quickly, but realizing the benefits will takemore work and time than many companies recog-nize. Online collaboration services—the mostpromising area for e-marketplaces—are only begin-ning to surface: just the most basic services arebeing offered today. And realizing the promisedbenefits of more sophisticated collaboration serv-ices will require companies to implement changesin systems, processes, culture, and behavior—a for-midable task.

T H E O P P O R T U N I T Y

To put it simply, e-marketplaces make it dramati-cally easier and less expensive for companies to findand conduct business with one another. By loweringthe cost of existing interactions and making possi-ble all sorts of new ones, e-marketplaces allow com-panies to lower transaction costs, product costs, andinventory-carrying costs; reduce cycle times andtotal cost in use (the total cost of utilizing a prod-uct); and improve asset utilization. (See Exhibit 1.)

Drawn by these opportunities, companies are con-tinuing to move their purchases rapidly online.BCG believes that the value of goods and servicespurchased online in the United States—includingthrough electronic data interchange (EDI) sys-tems—will total roughly $1.2 trillion in 2000, orapproximately 13 percent of the total dollar volumeof intercompany gross purchases. This is a tremen-dous leap from the $670 billion total in 1998 andthe $865 billion total in 1999. With the rate ofgrowth accelerating, BCG projects that business-to-business online purchasing will reach $4.8 trillion,or about 40 percent of total purchasing, in 2004.(See Exhibit 2.)

Initially, direct corporate e-procurement or e-salessites (those owned by and serving the interests of asingle seller or buyer) will dominate. By 2004, how-ever, we expect public industry e-marketplaces(those that connect many sellers to many buyers) toaccount for 30 to 50 percent—or around $1.5 tril-lion to $2.5 trillion—of the transaction volume con-ducted online.

The enormous potential of online business-to-business marketplaces lies well beyond lower pro-curement costs. The largest prize is the sophisti-cated new kinds of collaboration among companiesthat e-marketplaces will eventually make possible.But winning that prize will require more work, andthus more time, than many companies anticipate.This sobering fact, however, has a big upside: itmeans that companies—both buyers and sellers—have much more power to influence how e-market-places evolve than they might think. Companies canshape the outcome in ways that not only protect butactually increase their competitive advantage. Thejob of developing a robust strategy for exploiting e-marketplaces begins with understanding exactlyhow e-marketplaces create value, the basic princi-ples governing their evolution, and how the com-petitive dynamics of individual industries will affectthat evolution.

H O W E - M A R K E T P L A C E S W I L L C R E A T E V A L U E

For the U.S. economy as a whole, the impact ofbusiness-to-business e-marketplaces will clearly beenormous. That is because these e-marketplaceswill enable companies to break compromises in thevalue chain that they previously could not. (SeeAppendix, Exhibit A.) We estimate that by 2004, e-marketplaces will enable U.S. companies to gen-erate financial benefits equivalent to 1 to 2 percentof sales. And by 2010, those benefits should rise toat least 6 percent of sales, or roughly $1 trillion.

9

10

T H E C O L L A B O R A T I O N C H A L L E N G E

Procurement transactions and collaboration activi-ties will account for almost all the value that e-marketplaces will help create. E-marketplaces willalso offer commerce services such as finance andlogistics. But the purpose of these services is to sup-port and permit procurement transactions; in andof themselves, those services will not create muchvalue. As companies are realizing, the sophisticatedcollaboration activities that e-marketplaces makepossible or support will be the pot of gold. Theyinclude services that will allow multiple companiesto manage inventories, design products, and man-age projects in concert much more effectively. Oursurvey found that 66 percent of buyers and 75 per-cent of sellers either are engaged in projects toincrease online collaboration or will undertakesuch projects in the next two years. (See Exhibit 3,which describes some of the initiatives under way.)

S O U R C E S O F V A L U E C R E A T I O N

Source of value Driver

Value shift activities Aggregation • Achieved discounts by consolidating volume

Process automation • Decreased maverick buying

Transparency/auctions • Increased competition among suppliers

Value creation activities Lower marketing and sales cost • Lower cost to reach and serve customers

Lower transaction cost • Fewer ordering errors

• Streamlined approval process

• Lower supplier-evaluation costs

• Streamlined accounts-payable-and-receivable process

Lower cost in use • Access to superior products

• Customization of inputs and after-sale service raise quality and yield of output

Lower inventory costs • More efficient supply chain reduces need for inventory

• Less obsolescence, less rework

Lower cycle time • Collaborative design and project management improves products, reduces redesign, and speeds time to market

Improved asset utilization • Increase scale by reorganizing the value chain

• Higher labor productivity

• Better capacity planning and utilization

SOURCES: BCG analysis; interviews; literature review.

E X H I B I T 1

Activities that create new value throughimproved efficiencies or productivity (a “win-win” scenario)

Activities that take value from one party andtransfer it to another (a “zero-sum game”)

Today, however, only the more basic collaborationactivities are occurring. And the challengesinvolved in developing and implementing the high-value-added services are much greater than manyexecutives realize. Consequently, this race will be amarathon, not a sprint.

The infrastructure and capabilities needed to sup-port the more sophisticated forms of real-time col-laboration among multiple participants are not inplace. Developing and implementing them willrequire companies and e-marketplaces to invest sig-nificant amounts of time and resources. For exam-ple, linking engineering design systems so thatcompanies can go online together and designproducts jointly is a huge job. So is integratingenterprise resource planning (ERP) systems somembers of a supply chain can, say, continuouslymonitor one another’s inventories and jointly man-age them.

E X H I B I T 3

11

SOURCES: Center for Advanced Purchasing Studies; Purchasing Magazine; U.S. Bureau of

Economic Analysis; WEFA Industrial Monitor; U.S. Department of Commerce: Bureau of

the Census; BCG survey of buyers, sellers, and e-marketplaces; BCG analysis.

NOTE: Gross purchases count each purchase along the supply chain, not just the net

value added.1Includes EDI via value-added networks, EDI via Internet, and Internet-only transac-

tions.2CAGR = compound annual growth rate.

E X H I B I T 2

Buyers

Sellers

0 4020 60 80

Mechanisms to givesuppliers and buyers online,real-time information about

orders and production

Online projectmanagement with

suppliers or buyers

Access to supplychain for customers

Online build-to-orderor product configuration

with links to procurement

Online collaborativeproduct design withsuppliers or buyers

6685

4840

4343

3541

3435

SOURCE: BCG survey of buyers, sellers, and e-marketplaces.

O N L I N E C O L L A B O R A T I O N I N I T I A T I V E S P U R S U E D B Y C O M P A N I E S

Of the respondents pursuing online collaboration initiatives, % that are undertaking each type of initiative

But improving collaboration is not simply a systemsintegration or technology issue. It will also requireenormous changes in internal processes and behav-iors. These include the way factories monitor andmaintain inventories, and the way companies workwith their suppliers to design products. Corporateleaders will have to champion these efforts andmake sure they happen. They will have to make surethat people from the highest to the lowest level ofthe organization provide support, which in manycases will require substantial changes in corporateculture and individual behavior. As a director ofproduct development at one e-marketplace canattest, halfhearted backing from the top just won’tsuffice. “The biggest obstacle we face is completeinertia on the part of the buyers,” he told us. “Thisis a new way of doing their job, and they don’t wantto change the way they’re doing it, which is tothumb through catalogs, pick up a phone to call alocal distributor for availability, and then fax in anorder confirmation. It takes more than getting their

bosses’ sign-off to implement the use of our e-marketplace.” (See the insert “Negotiating andSetting Prices Online.”)

As a result of these challenges, we believe it willtake at least two years for extensive collaborationservices to be widely available on e-marketplaces;two to three years more for them to be widely usedby early adopters; and much longer for smallercompanies in the supply chain to come onboard.(See Appendix, Exhibit B.)

H O W E - M A R K E T P L A C E S E R V I C E S W I L L E V O L V E

Creating a strategy for harnessing the power of e-marketplaces—deciding when and how to partici-pate in them—requires a deep understanding ofthe value potential of their activities and how thoseactivities are likely to evolve in the coming years. Ingeneral, three categories of functional activities willdevelop along parallel paths. (See Exhibit 4 andAppendix, Exhibit C.)

1998 2000(estimated)

2004(projected)

15

10

5

0

Off-line ordering

Online ordering1

$9.0$9.6

$12.1

$0.67

CAGR2

34%

CAGR2

41%

$1.2

$4.8

U . S . B U S I N E S S - T O - B U S I N E S S O N L I N E P U R C H A S I N G , 1 9 9 8 – 2 0 0 4

$trillions

12

NEGOTIATING AND SETTING PRICES ONLINE

The activities involved in negotiating prices and termsare among the more basic to move online. That said,moving them online is anything but easy. This indicatesjust how enormous the challenge will be to move onlinesuch complex collaboration activities as product design,and demand forecasting and capacity planning.

To set prices and terms online, buyers and sellers mustagree to common metrics for describing products andtheir performance and service attributes. Then theyhave to collect the actual data for the metrics so theycan compare offers online. “Conducting online auctionstakes a lot of preparation: creating a detailed RFQ,selecting suppliers to participate, working with suppliersto bid properly, and much more,” a director of an e-marketplace pointed out. “Some e-marketplaces thinkthat just putting up a dynamic pricing technology isenough. There is a lot more involved in getting parties tonegotiate online.”

Our survey of nearly 500 companies and e-marketplacessuggests that even by 2004, only about 10 percent ofall intercompany purchases will be negotiated online.(See the exhibit “Online Price Negotiation Will LagOnline Ordering.”) One big reason is the difficulty ofgathering important qualitative information online, suchas suppliers’ level of commitment to supporting buyers’products. As a vice president of product marketing foran e-marketplace noted, “No one is going to complete amultimillion-dollar transaction online. Even if an auctionfor an order was held online, a buyer will always ‘kickthe tires’ off-line to validate the supplier before closingthe deal.”

Despite that difficulty, the survey respondents may beunderestimating the rate at which companies will adoptonline pricing functions. Many activities involved innegotiating and setting prices are already moving online.(Dynamic pricing functions such as online auctions areone of the most common initial services that e-market-places offer.) And those activities are having a signifi-cant impact on off-line price negotiations.

Of course, the pace of the migration online will vary byproduct segment. It is likely to happen faster in basiccommodities (for example, oil, gas, or electricity) andmore slowly in strategic components (for example, sub-systems for complex products such as airplanes). Inaddition, buyer-driven e-marketplaces will push price

negotiations online more quickly than seller-driven e-marketplaces.

Although online price negotiation will be adopted widely,the important lesson is that the effort involves morethan deploying a technology and setting standards. Itrequires changing ingrained behaviors such as the waysellers and buyers traditionally interact with each other.The challenges of moving such a basic activity onlineillustrate why it is going to take a lot of time and effortto make e-marketplaces a center for more complexforms of collaboration.

SOURCES: Center for Advanced Purchasing Studies; Purchasing Magazine; U.S.

Bureau of Economic Analysis; WEFA Industrial Monitor; U.S. Department of

Commerce: Bureau of the Census; BCG survey of buyers, sellers, and

e-marketplaces; BCG analysis.

1Gross purchases count each purchase along the supply chain, not just the

net value added.7CAGR = compound annual growth rate.

2000

2

Purchases negotiated online as a %

of gross purchases

2004

11

15

10

5

0

Off-line ordering Online ordering Online negotiation

$8.4

$1.2

$9.6

CAGR2

58%$0.2

$7.3

$4.8

$12.1

$1.3

Purchases negotiated online as a portion of total intercompany gross purchases1

O N L I N E P R I C E N E G O T I A T I O N W I L L L A G O N L I N E O R D E R I N G

$trillions

13

Some will evolve in a strictly linear fashion: easier-to-implement activities will have to be developedbefore tougher-to-implement activities can be pur-sued. For example, online purchasing must pre-cede collaborative inventory management. But thedevelopment of other activities does not have to besequential. The creation of online services to sup-port collaborative product design does not neces-sarily require online purchasing activities to be inplace, because they are independent activities andinvolve independent flows of information. Soalthough most e-marketplaces will launch with sim-ple catalog-purchasing transactions, some e-marketplaces will provide more complex collabo-ration services from the outset.

Industry dynamics and internal business processesare other important factors. The number of play-ers, the relationships among them, and the infor-mation infrastructures supporting those relation-ships vary by industry. So it follows that the value ofindividual functional activities and the constraintson their development will vary enormously byindustry. In situations where buyer-supplier rela-tionships and purchasing processes are relativelyunsophisticated and decentralized, or are not partof the main production process, the biggest initialgains will be in the form of much lower search andtransaction costs. Purchases of experimental chem-ical reagents by pharmaceutical companies forR&D fall into this category.

E X H I B I T 4Lo

wHi

gh

Valu

e ad

ded

Collaboration

Inventory

visibility

Collaborative

forecasting and

planning

Product

design

collaboration

Asset

netting

Online

build-to-order

capabilities

Transactions

RFQ

executed fully

online

RFQ

information

sharing

Auctions/

online price

negotiation

Catalog/

matching

Product

informationFinance

Logistics

Commerce services

Invoicing

Logistics

pricing

Risk

management

Logistics

netting

Settlement

and clearing

Logistics

availability

Difficult Very difficultImplementation difficulty

SOURCE: BCG analysis.

S E V E R A L P A R A L L E L P A T H S O F E - M A R K E T P L A C E E V O L U T I O N

It will be four to five years before collaboration services are widely used.

14

In contrast, the role of e-marketplaces is likely togo beyond improving the efficiency of purchasingtransactions in the automotive industry and otherindustries in which buyer-supplier relationships arewell established and the purchasing process is fairly sophisticated. In these cases, e-marketplaceswill have a big impact—or create more value—byproviding services that make it easier for compa-nies to collaborate in managing inventories,designing products, and performing other, morecomplex activities. So the collaboration activitieswill progress beyond online purchasing to in-depthinformation sharing and project and design man-agement. (See Exhibit 5.)

Identifying and assessing the most valuable oppor-tunities, including the options for pursuing them,will be very difficult. But the reward for companiesthat can create and implement robust strategies willbe tremendous. Rarely have companies had such anopportunity to change the competitive landscape.By being able to influence how e-marketplacesevolve, they can significantly improve how theycompete. Even more important, they can changethe bases of competition in their industries.

E X H I B I T 5

SOURCES: BCG analysis; interviews; literature review.1Systems, software, and data structure. 2Some Tier 1 collaboration is now occurring.

S O U R C E O F V A L U E C R E A T I O N D E P E N D S O N I N D U S T R Y C H A R A C T E R I S T I C S

Primary sources of value creation

Industry Characteristics

Business processes

Trade partner relationships

Level of standardization of systems1

Supply chain maturity

Noncore Core

Loose Well established, deep

Low High

Less sophisticated Sophisticated 2

Simple transactions Complex collaboration

But to get from here to there, e-marketplaces willhave to survive some lean years. Transaction feesare already plummeting, and for most, collabora-tion revenues will not amount to much for at least afew years. This will create a serious revenue gap justwhen e-marketplaces will need to invest heavily indeveloping collaboration services. They need tokeep this gap in mind in their planning.

In other words, the vast majority of business-to-business e-marketplaces will capture little of thevalue they help create. Therefore, companies’ over-riding motive for participating in e-marketplacesshould be to gain greater competitive advantage,not to profit from a hot Internet stock.

T H E R E V E N U E B R E A K D O W N

Our outlook for public e-marketplaces is based onan analysis of their three major sources of revenues.

Transaction fees will continue to decline; as aresult, many e-marketplaces that depend on themfor their main source of revenues will not survive.To date, most of the focus has been on transactionfees. But there is a dawning realization that, withsome exceptions (fragmented markets, for exam-ple), the opportunity in this area will be muchsmaller than originally anticipated. Financial mar-kets give some indication of how much volume isrequired to generate significant transaction rev-enues. Although the New York Stock Exchange’srevenues of $736 million in 1999 were respectable,it took a transaction volume of $8.9 trillion to gen-erate them.

To know where to place bets and what kinds of betsto place, companies must have a good sense of whatthe e-marketplace landscape will ultimately looklike. This means understanding the economics of e-marketplaces, the types of e-marketplaces that arelikely to emerge, how companies are likely to usethem, and the relationships they are likely to havewith one another.

Much of the picture that emerges from our analysisis sobering. The revenues of individual publicindustry e-marketplaces will be much smaller, andthe business as a whole will be more brutal, thanmany people currently believe. We project that infour to five years, when the full range of onlinebusiness-to-business services will probably be avail-able, the total annual revenues of public e-market-places will be between $6 billion and $9 billion.This overall size is certainly respectable.

But the prospects for the typical public e-marketplace are not as alluring as many expect.Our aggressive, or best-case, scenario for a leadingpublic e-marketplace in a sizable industry yieldsannual revenues of $350 million to $450 million in2005.1 In smaller industries, most online market-places will generate annual revenues of much lessthan $100 million. (See Appendix, Exhibit D.)There will be exceptions, however. A few major e-marketplaces—ones that serve very large indus-tries and execute superbly on a number of fronts—may exceed these levels. And many smaller e-marketplaces will prosper in profitable niches.

1. A sizable industry is one with a volume of $500 billion in gross purchases.

T H E E C O N O M I C S A N D E V O L U T I O N O F E - M A R K E T P L A C E S

15

16

The transaction fees of business-to-business e-marketplaces have already declined on averagefrom 2 to 8 percent of the transaction value a yearago to 0.5 to 2 percent today. Some now chargenothing for transactions, using transaction servicesas a loss leader to attract users. “We have given uptrying to make money on transaction fees,” a direc-tor of business development at an e-marketplacetold us. “We are charging nothing now and willmake money on other value-added services.”

So as low as transaction fees may be now, we believethe downward trend will continue. Our researchand interviews indicate that they will fall below 50 basis points in most e-marketplaces by 2002—and then keep declining. However, there will beexceptions: some e-marketplaces will be able tobuck the trend. (See the insert “When E-Marketplaces Can Charge More for TransactionServices.”)

The next revenue stream that many e-marketplacesare counting on—commerce services such asfinance and logistics—will also be limited.E-marketplaces are likely to outsource noncoreservices to established players in those fields thathave the requisite skills and reputations. Manybusiness-to-business e-marketplaces are already tak-ing this route. So while we believe that commerceservices will be a must for most e-marketplaces,these services will garner only incremental rev-enues for them. According to our revenue model,commerce services in 2005 will account for 8 to 10percent of the total revenues generated by success-ful e-marketplaces that offer both transaction andcollaboration services.2

Services that support collaboration activities willmake up the lion’s share of the revenues that suc-cessful e-marketplaces generate. BCG’s model indi-cates that in 2005, collaboration services could rep-resent 40 to 50 percent of the total revenues of e-marketplaces that provide such services. (SeeExhibit 6.)

2001

8Revenue ($millions)

2003

76

2005

249

100

80

60

40

20

0

Implementation and consulting

Collaboration services

Commerce services

Transaction commissions

2001


2003

11

2005

56

100

80

60

40

20

0

Implementation and consulting

Collaboration services

Commerce services


2001


2003

6

2005

27

100

80

60

40

20

0

Commerce services


SOURCE: BCG analysis.1Collaboration services not offered.

E X H I B I T 6

Baseline scenario for a small market (transaction focus)1

% of total revenue

Baseline scenario for a midsize market (collaboration focus)

% of total revenue

Baseline scenario for a large market (collaboration focus)

% of total revenue

T R A N S A C T I O N A N D C O L L A B O R A T I O N W I L L B E T H E M A I N R E V E N U E S O U R C E S B Y 2 0 0 5

2. But commerce services will represent approximately 40 percent of the revenues

of transaction-focused e-marketplaces that do not offer collaboration services. These

e-marketplaces will typically have small revenues.

17

Although we believe that the total fees for online trans-action services will continue to decline, e-marketplacesthat act as principals in transactions or shoulder morerisk in other ways may be able to buck the trend. It isno secret that principals in financial markets generallygenerate higher fees than agents. E-marketplaces willbe no different. For business-to-business e-market-places, taking a principal position can mean manythings: from taking formal title to the goods involved inthe transaction to taking possession.

Another factor that influences how much an e-market-place can charge is the level of fragmentation in anindustry. The small players in fragmented industries

might value an e-marketplace that makes it easier forthem to find one another. They also might value an e-marketplace that adds liquidity to a low-volume mar-ket. (See the exhibit “Factors That Influence the Level ofTransaction Fees.”)

In summary, e-marketplaces can exact more from theirparticipants by acting as principals or by providing addi-tional services. But doing so often entails putting upmore capital, bearing a higher level of risk, investing inhard assets such as warehouses and trucks, or develop-ing or acquiring highly specialized expertise.


NOTE: Figures as of October 2000.

F A C T O R S T H A T I N F L U E N C E T H E L E V E L O F T R A N S A C T I O N F E E S

Matches buyers and sellers

Takes title to goods

Orchestrateslogistics

Takes possession of goods and provides distribution services

A chemicals e-marketplace 6.0%

A forest products e-marketplace 3.0%

A metals e-marketplace 0.875%

Financial exchanges 0.25%Low

Level of transaction charges

High

Concentrated Fragmented Industry structure

Agen

tPr

inci

pal

Role

of t

he e

-mar

ketp

lace

WHEN E-MARKETPLACES CAN CHARGE MORE FOR TRANSACTION SERVICES

18

C A P I T A L I Z I N G O N C O L L A B O R A T I O N

However, in order to capitalize on collaborationservices, e-marketplaces must develop “killer apps”(compromise-breaking services or applications) orleverage the so-called network effect. Opportunitiesfor killer apps are industry specific. An e-market-place in the airline industry, for example, may beable to pool spare-parts inventory for several com-panies. (See Exhibit 7 for additional examples.)

An e-marketplace creates a network effect when itgarners a critical mass of players in an industry and,as a result, the remaining companies in the industryfeel compelled to join it, too. One opportunity forcreating such an e-marketplace is a multitieredindustry with numerous small and midsize compa-nies. A network that links all the players, allowingthem to act in concert, is the only way for such anindustry to reduce inventories significantly. Clearly,building such a network is very hard. The chal-

lenges include not only setting standards and inte-grating the participating companies’ IT systems andbusiness processes but also changing corporate cul-tures and behaviors. But if an e-marketplace canclear the initial hurdles and build a robust network,adding new participants will become less and lessexpensive and the incentive for potential partici-pants to join (or the cost of not joining) willbecome greater and greater.

However, simply developing a killer app or leverag-ing the network effect will not be enough to createa viable business. There also are aspects of imple-mentation that e-marketplaces must excel at inorder to succeed. Indeed, given the limited busi-ness opportunities, only those e-marketplaces thatexcel in these dimensions will endure. (See theinserts “Serving Smaller Suppliers” and “Creat-ing a Viable Business: Critical Tactics for E-Marketplaces”.)

K I L L E R A P P S A R E I N D U S T R Y S P E C I F I C

Industry Killer app Compromise addressed Value created


E X H I B I T 7

Life sciences

Food service

Forest products

Electricity

Airlines

Online modeling of reactions,linked to catalog

Online certification management

Netting of logistics

Real-time trading/pricing of trans-mission and identification of mostefficient route

Parts pooling

50% of chemical reactions failowing to improper reagent selection

Approximately 25% of shipments in certain product categories arerejected owing to improper or missing certification

High relative cost of shipping limits buyers to purchasing from local mills

Selecting the lowest-cost transmission route through multipleflow gates is time consuming andcomplicated

Each airline must warehouse spare parts at every airport, creating excess inventories andhigh costs

Increased product utilization

Increased product utilization

Reduced logistics costs

Lower transmission andprocess costs

Lower inventory costs

19

SERVING SMALLER SUPPLIERS

To reach their full potential, large e-marketplaces mustengage not only large companies but also relativelysmall companies deep in the lower tiers of the supplychain. Inventory reduction provides a good illustration:because smaller suppliers often have relatively highlevels of inventory on hand, e-marketplaces may beunable to remove the majority of the inventory andrelated costs in an industry without obtaining theirparticipation. In the heavy equipment industry, forexample, a Tier 3 supplier could have eight to tenweeks’ worth of inventory on hand, a Tier 2 suppliercould have four weeks, and a Tier 1 manufacturercould have 1.5 days. In this case, unless the e-marketplace can get the Tier 3 supplier onboard, themaximum reduction in days of inventory on hand thatcan be achieved is less than one-third.

But smaller companies are expensive and sometimesdifficult to serve. First, e-marketplaces are limited inwhat they can charge them: even modest subscriptionfees can represent a significant portion of the compa-nies’ revenues. Second, the relative cost of integratingthem with an e-marketplace can be daunting. Manysmaller companies do not have the sophisticated ITsystems needed to support real-time information shar-ing. Their connection with the e-marketplace may bethrough a simple Web interface, which will restrict theextent of real-time or dynamic services offered

throughout the entire e-marketplace. But improvingtheir connections can be prohibitively expensive forthem. Third, because there can be dozens or even hun-dreds of smaller companies in the lower levels of anindustry’s supply chain, the sales force and customersupport that e-marketplaces will need to acquire andsupport them will be expensive.

To serve smaller suppliers efficiently, e-marketplacesmust pursue several tactics. If the upper tiers of sup-pliers can be used to recruit these smaller companies,the e-marketplace can save on acquisition costs.Lower levels of customer service for these companiescan reduce support costs. In addition, an e-market-place can “lease” the necessary technology and serv-ices to smaller suppliers, which is similar to the wayan application services provider (ASP) works. That tac-tic, in particular, offers three important benefits. First,it allows the e-marketplace to ensure that many of thereal-time or dynamic services are adopted all the waythrough the lower tiers. Second, it can lower the costfor smaller suppliers to integrate with the e-market-place. Third, the e-marketplace can offer additionalservices to smaller companies in order to encourageparticipation.

T H E S H A K E O U T

A shakeout has already begun among the morethan 700 e-marketplaces that now exist in theUnited States. The high volume of transactions thate-marketplaces need to defray operating costs isdetermining how many major e-marketplaces eachindustry can support, at least on a profitable basis.

BCG’s analysis suggests that most industries will beable to support only one to three major e-market-places. That said, some industries are composed ofdistinct vertical sectors and may end up with one ortwo focused e-marketplaces serving each sector’sneeds. In other words, the shared characteristics ofan industry—in terms of the products purchased,the sellers and buyers, and the purchasing and col-laboration processes employed—will determine the

structural boundaries of a sector that an e-market-place can address. So while most of the aerospaceindustry can be served by the same set of onlinemarketplaces, it is likely that different e-market-places will ultimately serve the needs of each of thedistinct sectors of the chemicals industry, such asplastics and industrial chemicals.

Another factor in the shakeout is the reluctance ofcompanies to participate in many major e-market-places: 62 percent of the buyers and 69 percent ofthe sellers that BCG surveyed said they expected towork with only one or a few per category of goodsby 2004. There are understandable reasons for theirreluctance: the effort and investment required totrain employees, adapt long-established businessprocesses, and sign up trading partners; the com-plexity of integrating systems; the hassle of coping

20

with the competing standards of different e-market-places; and the fear of losing control over strategicactivities.

T H E L A N D S C A P E

So who will be left standing? Much of the debatehas focused on the verticals versus the horizontalsand the consortia versus the dot-coms. This kind ofdebate implies that one type of e-marketplace willendure and that companies will ultimately conductbusiness with one or maybe two online market-places. We think the world will be much more com-plex. The survivors will consist of a handful ofgiants, or majors, and a large number of small nicheplayers. Companies won’t rely exclusively on one e-marketplace; most will use several for differentpurposes. There will be an array of options.Companies will pick the set of relationships thatbest suits their individual strategies.

Two types of major e-marketplaces are emerging:private e-marketplaces and public industry e-market-places. Complementing the majors will be two typesof niche players: matchmakers, which provide trans-action and commerce services in fragmentedindustries, and specialists, which excel at a particu-lar function. Although there will be overlaps andcompetitive tensions among the different types,they will coexist. In addition, many e-marketplaceswill eventually be linked in one way or another.

The Major E-MarketplacesBy a major e-marketplace, we mean an online mar-ketplace that serves the overall needs of its indus-try, including purchases of “indirect” materials formaintenance, repair, and operations (MRO); pur-chases of “direct materials” used in products; andcollaborative efforts such as designing products ormanaging inventories. (See Exhibit 8.) The majorplayer may provide the services on its own or intight partnerships with other e-marketplaces,

Leave companies room to differentiate themselves.The best way to attract sellers is to give them theopportunity to differentiate their offerings in the e-marketplace. This can range from featuring multipleproduct attributes in the selection process to allowingsellers to set up their own storefronts within the e-marketplace.

Stay cost-effective and focused during implementa-tion. This is especially important for the large consor-tium e-marketplaces. These companies need to stayfocused on the most critical issues and be lean andfast in implementation.

Clearly communicate the value that the e-market-place creates. This sounds simple, but it is tough todo. It is particularly important for collaboration serv-ices. To take advantage of many of the services offeredby e-marketplaces, participating companies will haveto change their internal processes significantly. Themagnitude of those efforts, however, may actuallycause companies to underappreciate the contributionsof e-marketplaces to their success in reducing invento-ries, increasing capacity utilization, or shortening thetime required to design products. So to maximize the

portion of the value they capture, e-marketplaces needto communicate the value they create.

Be flexible about changing the business model.E-marketplaces must be able to quickly recognize whatworks and what doesn’t—and change their businessmodels accordingly. For example, FreeMarkets, aprovider of online auction services, first charged sellersa transaction fee but later charged buyers. The primaryreason was FreeMarkets’ recognition that buyers sawthe value of its services and were willing to pay forthem. Another reason was to induce more sellers toparticipate in the market. FreeMarkets is equally flexi-ble about other fundamental aspects of its business. Acase in point is its attitude toward a service that is crit-ical to making online auctions work: formulating RFQsfor buyers and assisting sellers to prepare bids. Thisservice currently requires a lot of manpower and time.But, realizing that the people-intensive service is notscalable (in other words, it cannot be built into a muchbigger business without incurring significant additionalcosts), FreeMarkets is striving to standardize RFQs sothat buyers and sellers can participate in online auc-tions with much less handholding.

CREATING A VIABLE BUSINESS: CRITICAL TACTICS FOR E-MARKETPLACES

21

E X H I B I T 8

T W O T Y P E S O F M A J O R E - M A R K E T P L A C E S

Type Characteristics and drivers Examples

Private e-marketplace Characteristics

(one to many) Driven by a single seller or buyer• Participation open primarily to suppliers and/or customers of the company

Drivers

Significant competitive advantage in supply chain management

Significant market share and power• Company generates sufficient volume on its own to ensure liquidity

without the participation of competitors

Highly differentiated supplier with few substitutes

Public industry e-marketplace Characteristics

(many to many) Founded by an industry consortium and open to any industry participant (or an independent dot-com supported by major industry participants)

Serves across the entire industry (or a specific vertical segment)

Focuses development on collaborative services

Drivers

Concentrated market where founding and/or supporting members can generate sufficient liquidity

Deals in products that are less standardized and complex• Greater need for vendor qualification

Higher level of supply chain sophistication• Great value in integration through multiple tiers


DellCisco SystemsGE Aircraft Engines

CovisintMetalSpectrumForestExpressOmnexus

essentially aiming to be a one-stop shop for the pro-curement and supply-chain-management needs ofan industry. Whether a private (one to many) or apublic (many to many) e-marketplace controls thisrole or the two coexist depends on many factors.

Although most companies will have their ownonline sites for buying and selling, relatively few willbe able to establish private e-marketplaces that sup-port a significant portion of their industry’s pro-curement and supply-chain-management activities.(See the insert “Is a Private E-Marketplace anOption?” on page 28 for more on this topic. See alsoAppendix, Exhibit E for further illustration on thedistinction between e-procurement or e-sales sitesand major private e-marketplaces.) Companies thatcan exploit their position as leading sellers or buy-ers to persuade others in their markets to transactand collaborate through their hubs will succeed.

But the online sites of many companies that enjoysignificant market share and power may not be ableto achieve the critical mass of participation and thetransaction volume required to make it as major e-marketplaces. These companies are likely to helpestablish or participate in a public industry e-marketplace as their primary means of procure-ment and supply chain management. In manyinstances, public e-marketplaces will host the pri-vate sites of such companies. In addition, the bigpublic e-marketplaces could be a greater force forinnovation than any company could be on its own.

A public e-marketplace may be an industry consor-tium or an independent start-up. The latter will beable to become a major e-marketplace only in cer-tain situations: if the leading industry players agreeto use it for most of their transactions or if itmerges with a consortium-sponsored e-market-place. Its only other option is to become a nicheplayer by focusing on a fragmented subsegment ofan industry or a specialized functionality.

22

The Niche PlayersThese are online marketplaces that either serve aspecial segment of an industry or specialize in afunction that can be applied across many indus-tries. Chemdex, an e-marketplace for experimentalchemical reagents and lab equipment, is an exam-ple of the former, and FreeMarkets, a provider ofonline auction services, is an example of the latter.(See Exhibit 9.)

Matchmakers will focus primarily on transactionsand commerce services in relatively fragmentedindustries. The volume of these typically smallindustries will be relatively low, and a matchmakerwill survive only if it remains lean and focused. Forexample, if Chemdex tried to expand its offeringsbeyond its niche to cover the whole pharmaceuticalor chemicals industry, it almost certainly would failto excel at serving either the niche or the industry.Systematic purchases for production are totally dif-ferent from spot purchases for experiments.

Specialists focus on perfecting a particular functionthat can be applied across multiple industries.Providers of commerce services, such as financeand logistics, are the most common types of spe-cialist e-marketplaces. Others might focus on a par-ticular function. FreeMarkets, for example, hasdeveloped online auction services that can be usedas a dynamic pricing tool (a tool that allows buyersand sellers to compare prices in real time) for manykinds of products and services in almost any indus-try. FreeMarkets is likely to provide those services tocompanies both directly and indirectly, meaningthrough industry e-marketplaces as a third-partyservice provider. In general, however, the successfulspecialist e-marketplace will refrain from expand-ing its offerings to products and services outside itscore expertise. For example, FreeMarkets is un-likely to offer an MRO catalog or a tool for collabo-rating on product design.

E X H I B I T 9

T W O T Y P E S O F N I C H E E - M A R K E T P L A C E S

Type Characteristics and drivers Examples

Matchmaker Characteristics

Typically founded by an independent dot-com and open to any industry participant

Serves a specific subsegment of an industry

Focuses on matching transactions and finding new suppliers and customers

Drivers

Fragmented market in which an e-marketplace can add value through aggregation

Deals in products that are either standardized or scarce

Low level of supply chain sophistication

Specialist Characteristics

Focuses on a specific functionality• Cutting across multiple industries• Industry-specific deep collaborative services

Drivers

Need for highly specialized functionality

Rapidly evolving technology and/or processes where a niche can better succeed• More nimble and quicker to serve evolving needs• Able to leverage experience by focusing on one functionality


Heavy construction equipment• IronPlanet.com

Lab experiment chemicalreagents and equipment• Chemdex• SciQuest

Online auctions• FreeMarkets• SupplierMarket

Logistics• NTE• Logistics.com

23

M A R K E T P L A C E - T O - M A R K E T P L A C E L I N K S

No single e-marketplace will address a business’sfull requirements. One or two major e-market-places will fulfill most of a business’s needs, andsmaller niche players will fill in the holes. In addi-tion, major e-marketplaces will link with oneanother. The result will be varying kinds of linksamong e-marketplaces. Our survey findings indi-cate that an explosion of such links will soon occur:68 percent of the responding e-marketplaces saidthey had been approached about linking withanother e-marketplace. (Other sources indicatethat many are now in discussions.)

An important reason for these links is that manycompanies will find it hard to manage connections

to several e-marketplaces on their own. There is aparticularly strong incentive for the majors to fillthis role: links will be the only way they can satisfy a customer’s full requirements. (See Exhibit 10.)

Other factors that will drive marketplace-to-marketplace links include:

• Liquidity and domain expertise. Depending on theproducts being procured, it may make sense foran e-marketplace to look to another e-market-place to provide the transaction platform for theproducts. For example, an aerospace exchangemay try to link with an e-marketplace for procur-ing metals such as MetalSpectrum. This type of e-marketplace would offer more product choicesand more robust functionality in its segment.

E X H I B I T 1 0

Publicindustry

e-marketplace

Privatee-marketplace

E - M A R K E T P L A C E S W I L L L I N K W I T H O N E A N O T H E R

Company Specialist Match-makerCo SpecialistSpecialist Match-makerCo MatchmakerSpecialist Match-makerCo

24

• Specialized functionality. A public industry e-marketplace may be able to provide a betterrange of high-caliber functions by linking withniche players specializing in offerings such asonline auction, finance, and logistics services.

• Time and resource constraints. By linking with othere-marketplaces to provide noncore services suchas office supplies, an e-marketplace will be able tobring such services online earlier than if it tried todevelop them itself.

Initially, e-marketplaces that are partners will beconnected by hyperlinks. But as they strive to pro-vide more value, they will become more tightlyintegrated. In some instances, the ultimate step willbe consolidation: in a bid to become one-stopshops, majors will either acquire the partners thatprovide the more important functions or licensetheir technologies. Just like merging companies,creating strong links among e-marketplaces—ortightly integrating them—will involve a great dealof work. (See Exhibit 11 and the insert “MakingPartnerships Work.”)

P L A C I N G S T R A T E G I C B E T S

Because of the limited economic potential of moste-marketplaces, companies must carefully considerwhich ones will have staying power. They should beespecially mindful of the revenue gap that willmaterialize before broad collaboration activitiestake hold, and consider the additional capital thate-marketplaces are likely to require during thisperiod. Accordingly, companies should be highlyskeptical of the hype and soberly assess the likelyreturns and ongoing cash requirements of the e-marketplaces in which they are considering invest-ing. The greatest value that most participants willreap from e-marketplaces will be enhancements inthe performance and competitive position of theirown businesses, not a big return on their equityinvestments in the e-marketplaces.

There will be a variety of ways in which companiescan participate in e-marketplaces. This means thatbuyers and sellers must painstakingly analyze theoptions and craft the set of relationships that bestsuit their purposes. A primary goal should be influ-encing how e-marketplaces evolve. For every majorcorporation, shaping that outcome should be a pil-lar of its strategy.


E - M A R K E T P L A C E S W I L L L I N K I N S E V E R A L W A Y S

Description

E-marketplace acquires the partner and integrates the part-ner ’s site completely with its own

E-marketplace licenses the functionality from the partner andcreates its own version

E-marketplace retains control of customers’ navigation at apartner ’s site (“cul-de-sac”hyperlink)

E-marketplace provides a link to the partner ’s site via a “clickthrough”

Integration requirements

Consolidation of databases and integration of functionality• May require migration to a new

platform standard

Implementation of functionality and link to existing database

Linking partner ’s service to the e-marketplace database• Must identify customer and

match appropriate data for use

Placing hyperlink in the appropriate Web pages

E X H I B I T 1 1

Marketingalliance

Business alliance

Technology licensing

Acquisition

Low

High

Diffi

culty

of i

nteg

ratio

n

Low HighLevel of integration

25

MAKING PARTNERSHIPS WORK

Even if there are compelling reasons for e-marketplacesto link with one another, serious challenges must beovercome before such partnerships can succeed. Theyinclude the following:

The partnership must make business sense for every-body. In order for a partnership to endure, both partiesmust deliver real value, such as providing best-in-classfunctionality in return for critical-mass liquidity. Thepublicity value of linking should not be a major reasonto forge a partnership.

Technical obstacles must be overcome. Among others,these hurdles include allowing databases to communi-cate with one another and integrating the partner’sservices within the general architecture of a site.

A sensible financial arrangement must be reached.Determining the total value created by a partnershipand how much each partner is responsible for is aninexact science. Coming to an agreement on other

commercial issues (such as payment terms and per-formance metrics) is also no easy matter.

Tough questions about customer ownership must beaddressed. An e-marketplace may pay a partner forbringing in a customer. But what if that customer wasalready a customer of the e-marketplace? Should ithave to pay its partner? There are arguments that sup-port both sides, but resolving the question requiresdetailed and painstaking negotiation.

Potential regulatory obstacles must be taken intoaccount. Exclusive partnerships may run afoul ofantitrust laws. So e-marketplaces should think aboutpotential antitrust issues from the outset and preparealternative courses of action. For example, two e-marketplaces seeking to cement an exclusive part-nership should understand how much of the valuesought is dependent on that exclusivity and what thealternatives might be if regulators raise objections.

26

company? The answer to the last question isstrongly influenced by factors such as the opportu-nity to use information to differentiate, rather thancommoditize, product categories; the level of indus-try concentration for buyers as opposed to sellers;and the potential to aggregate supply or demand.In addition, individual e-marketplaces may focus tovarying degrees on value-creating opportunitiessuch as supply chain collaboration.

What is the company’s competitive advantage andlevel of influence? A company needs to understandwhether it has a competitive advantage that the e-marketplace will erode. It also needs to assess can-didly its level of influence in the industry. How doits power and influence compare with its competi-tors’? Does the company have the power to per-suade business partners to align with it or the influ-ence to shape the evolution of e-marketplaces in itsindustry? (See the insert “Is a Private E-Marketplacean Option?”)

The answers to these two sets of questions can helpexecutives begin to think about the appropriate e-marketplace for their company. (See Exhibit 12.)Consider the following three examples:3

• A buyer has significant influence and believes thatan e-marketplace will result in a gain in value forthe company. (In other words, the buyer is in box2 of Exhibit 12.) As a result, it is likely to chooseto participate in a public e-marketplace or to tryto build its corporate Web site into a major privatee-marketplace. The company should choose a pri-

Although many online marketplaces will not evolveinto gigantic stand-alone businesses, they willclearly play a huge role in shaping the competitivedynamics of industries. It is precisely because thevalue they create flows to the participants that theparticipants will be the ones most affected by theirevolution. How the e-marketplaces will change anyparticular company or industry, however, is not pre-ordained. Buyers and sellers still have time to shapethe development of e-marketplaces to their advan-tage—provided that they move now.

S E L E C T I N G A N E - M A R K E T P L A C E

Deciding how to participate in e-marketplacesdepends on many factors, including industry struc-ture, the company’s competitive position, and thecurrent state of development of e-marketplaces inthe particular industry segment. Since these factorsmay vary by industry or even product category, acompany may need to have different strategies fore-marketplace participation for different lines ofbusiness. Before crafting their strategies, however,company executives should ask themselves two setsof fundamental questions.

What is the nature of the opportunity presented bye-marketplaces? This means the opportunity for theindustry in general, as well as for specific buyer andseller groups. How large is the opportunity andcould it alter the basis of competition in the indus-try? Will the opportunity result in a gain in value forthe company or will it shift value away from the

C H O O S I N G E - M A R K E T P L A C E S

3. Assume that each of these companies has a distinctive competitive advantage.

27

e-marketplaces will result in a gain in value for it.But it also determines that it has a competitiveadvantage in the form of its supplier relationshipsand purchasing processes, which could be erodedby participating in a public e-marketplace. (Thiscompany is in box 2 of Exhibit 12.) Not surpris-ingly, it decides not to participate in either publice-marketplace and to focus its efforts on creatinga private e-marketplace.

In many instances, a company will formulate differ-ent strategies for participating in e-marketplaces fordifferent business units or product lines. For exam-ple, a leading manufacturer of industrial equip-ment may have one strategy for fairly standardproducts that are sold from a catalog and are hardto differentiate, and another strategy for customproducts. For standard products, it might decide itis better off participating in a public e-marketplace.That way it can try to influence the e-marketplace’smetrics for comparing products so they focus moreon the company’s strong suit—total cost in use—and less on price and basic functionality.

For its custom products, the company might decideto build a private e-marketplace with an onlineproduct configurator, which allows customers todesign their own equipment. In this manner, thecompany might offer increased customization inmuch less time and manufacture custom productsas if they were low-volume standard items. Ofcourse, just creating such a site would not suffice.The company would also have to introduce modu-lar product designs, integrate the online site withmanufacturing, and revamp operations. Otherwise,operational complexity and costs would soar. (For amore extensive discussion of options available tocompanies, see the next section, “Strategies forParticipants.”)

vate model if it believes it has a competitive advan-tage (such as exclusive supplier relationships)that could be eroded by participating in a publice-marketplace.

• A seller has some (but not enormous) influence inits industry and therefore could not easily create aviable major private e-marketplace. In addition,the seller believes that e-marketplaces will shiftvalue away from sellers in its industry. (This com-pany is in box 3 of Exhibit 12.) Even in this case,the company has choices: it can avoid participat-ing in a public e-marketplace or it can join a pub-lic e-marketplace and try to stall or alter the e-marketplace’s development.

• A large and influential electronics manufactureris considering whether to participate in one of thetwo competing public e-marketplaces in its indus-try. The manufacturer expects participating in


1 The choice depends on the level of competitive advantage the company is

trying to protect. If it is protecting a significant competitive advantage, it is more

likely to choose a private e-marketplace.

E - M A R K E T P L A C E P A R T I C I P A T I O N M A T R I X E X H I B I T 1 2

Has influenceand does not need cooperation

Has influence but needscooperation

Has no influence

135

246

Private e-marketplace

Avoid participation or

Participate in public e-marketplace to stall oralter development

Join public e-market-place if forced and/or

Adapt strategy

Value shifts from the company

Private e-marketplace or

Public e-marketplace1

Public e-marketplace

Public e-marketplace or

Matchmaker

Value gain for the company

Com

pany

’s le

vel o

f inf

luen

ce a

nd n

eed

for

coop

erat

ion

from

oth

er in

dust

ry p

laye

rs

28

D E C I D I N G W H E N T O P A R T I C I P A T E

The first step in evaluating when to participate in apublic e-marketplace is to identify the value to begained from participating and to figure outwhether the benefits can be obtained more easily inanother way. Companies should also evaluate therisks and advantages of moving early or waiting.This involves understanding the possible scenariosand the likelihood of their coming to pass. Thereare two primary reasons for moving early: to influ-ence the development of the e-marketplace and toget a head start on extracting the savings, knowl-edge, and other benefits of participation.

One example is the importance of influencing stan-dards, including the potential impact of a competi-tor setting them while the company in questionstands on the sidelines. Moreover, a companyshould evaluate the longer-term benefits of movingearly. If it participates early in an e-marketplace, itmay be able to gain an advantage over its competi-tors and, as a result, gain market share. One way ofdoing this is by profiting from the insights that aparticipant gains from involvement in the earlydevelopment of e-marketplaces. Eventually, theother competitors will probably join the e-market-place and extract its advantages, and the valuegained may be passed on to end customers. But

IS A PRIVATE E-MARKETPLACE AN OPTION?

Establishing a major private e-marketplace is realisticonly for large companies with strong brands thataccount for a high portion of their industry’s transac-tion volume. Although most companies will have adirect Web site for e-procurement or e-sales, only alimited number of them will develop into major e-marketplaces. General Electric Aircraft Engines, forexample, was able to set up a major private e-market-place—a closed procurement site that only GE suppli-ers can access—because it controls more than 60 per-cent of the market. Its leaders believe that opening thesite to competitors or a dot-com would undermine GE Aircraft Engines’ core competitive advantage: itsstrong relationships with its suppliers.

Unless the company in question is a major force in theindustry, its trading partners have little incentive toemploy a separate process for it. Their natural prefer-ence is to have a single venue for conducting all trans-actions. Indeed, part of the business logic behindCovisint, the auto industry e-marketplace, is the sup-pliers’ preference for a single e-marketplace ratherthan three different venues with three different sets ofstandards and processes.

But companies must make brutally honest assess-ments of their competitive position when deciding howto participate in e-marketplaces. This may sound obvi-ous, but our survey of companies and e-marketplacesindicates that many companies deceive themselves.For example, many sellers may overestimate their abil-

ity to go it alone and establish a major private e-marketplace. Our survey found that 54 percent ofsellers believe that the venue for transactions will betheir own direct Web sites, yet only 13 percent of buy-ers see the single-seller sites as the primary venue.

Similarly, companies may conclude that having astrong competitive advantage in an area of, say, supplychain management means they should not participatein a public e-marketplace. They, however, should con-sider whether a public e-marketplace could permitcompetitors to erode or potentially overtake thatadvantage. Indeed, it is not necessarily true that com-panies unable to build their own sites into major pri-vate e-marketplaces will find themselves in a weakerposition than more powerful rivals that can.Participation in a public e-marketplace, supplementedby ties to niche e-marketplaces, may allow companiesto narrow the gap or even surpass larger, more power-ful rivals by giving them access to the best procure-ment and supply-chain technology and practices.

Finally, companies may be right in deciding that theyshould go it alone in order to gain or preserve specificadvantages, but wrong in concluding that this meansthey should build their own private e-marketplace. Agrowing number of public e-marketplaces are offeringprivate buyer- or seller-specific sections that can givecompanies the benefits of private e-marketplaces with-out a high level of investment and effort.

29

there is a chance that, even over the long term, acompany may be able to retain some of the advan-tages and market share that it gained by participat-ing early.

Some companies think they can always join later.Others believe they can dabble in several fledglingefforts to build e-marketplaces without committingto any of them. Both groups should rigorouslyassess how delaying or dabbling will affect theirpositions. Will they miss opportunities to influencethe way e-marketplaces evolve? Will they receive lessfavorable terms? Can they capture benefits nowthat will later be passed on to end customers? In theend, will dabbling consume resources without gen-erating significant value? Companies reluctant to

participate in an effort to build an e-marketplacebecause of fears of price pressure or channel con-flicts should ask whether one or both will happenanyway. They might be better off driving or influ-encing the initiative.

All this said, there will be cases in which a companywould be wise to hold back—to sit on the sidelinesor be only lightly involved in the early developmentof an e-marketplace. Ultimately, companies will par-ticipate in a number of e-marketplaces, but not allof them will be of strategic importance. If they arenot of strategic importance, a company typicallyhas nothing to lose by waiting until their services orfunctions are well developed and then jumpingonboard.

30

S T R A T E G I E S F O R P A R T I C I P A N T S

Conventional wisdom has it that the primary impactof e-marketplaces on competitive dynamics will bepressure on prices. That is, by making it vastly eas-ier to compare product attributes and prices, e-marketplaces will bring about a transfer in valuefrom sellers to buyers. To be sure, price pressurewill occur in many situations, and it will be signifi-cant at times. Sellers, in fact, are already seeing ithappen: of the suppliers we surveyed, 24 percentsaid they have felt price pressure as existing cus-tomers moved online, and 79 percent said theyexpected to feel price pressure by 2004.

But in deciding how to participate in e-market-places, both buyers and sellers need to think expan-sively about how they can influence the develop-ment of e-marketplaces to create competitiveadvantage. This means thinking beyond the issuesof commoditization and pricing to the many othertactics they might employ.

Buyers can utilize e-marketplaces to do more thansqueeze suppliers. Beating up suppliers in order toobtain lower prices may be counterproductive any-way if those suppliers provide other benefits (suchas high quality, greater dependability, or sophisti-cated design capabilities). Beyond cutting purchas-ing costs, e-marketplaces give buyers the means toimprove their position within their own markets.The same is true for sellers, which can shape theirfuture more than they may realize.

The results of our survey highlight this opportunityfor sellers. For many buyers—41 percent of those

surveyed—the most important deterrent to joininge-marketplaces was that their suppliers were not yetonline. And 79 percent said they expected somechange in their supplier bases as a result of e-marketplaces—meaning that e-marketplaceswould cause those buyers to concentrate on fewersuppliers, add new ones, or both. So suppliers—orat least those that move first and execute well—havean opportunity to add new customers andstrengthen relationships with existing ones.

S E L L E R S T R A T E G I E S

With e-marketplaces already changing competitivedynamics, sellers must pursue one or more of threesets of strategies: embrace, alter, and adapt.

Embrace. In some cases, an e-marketplace canstrengthen a seller’s existing competitive advantageand allow it to overcome its shortcomings. Considera manufacturer that has a superior product but aninferior sales model and distribution channel. Itshould embrace the e-marketplace because doingso will allow it to reach more buyers and overcomeits sales and distribution disadvantages.

Alter. Suppliers that are early participants canchange the basis of competition in e-marketplacesby shaping them to their advantage. A supplier thathas superior quality and durability but higherprices will want an e-marketplace to highlight areasin which it excels—such as the total cost of owner-ship—as a major criterion for comparing products.A supplier that has better order-to-delivery times

31

0 4020 60 80

Increase service levels

Increase investment in R&D

Increase collaboration with buyers for product design

Increase competitive benchmarking of product performance

Increase product configurability

Introduce or enhancebuild-to-order capabilities

Increase online project management

Increase tightness of supply chain management

Increase service

Enhance product

Lower cost

79

53

58

57

48

47

53

45


NOTE: Survey question: Do you have initiatives to increase your differentiation

in response to pressure from e-marketplaces? If so, what specific activities are

you pursuing?

S E L L E R S A R E I N V E S T I N G I N D I F F E R E N T I A T I O N E X H I B I T 1 3

% of respondents who are investingin these differentiation initiatives

than its competitors will want to work with the e-marketplace to ensure that time is a criterion inproduct selection and that suppliers’ performanceon this dimension is tracked and shared throughthe e-marketplace.

Adapt. Finally, sellers can make internal changes tocompete more effectively in the e-marketplace. Forexample, they need to focus on the crucial compet-itive factors that e-marketplaces will make evenmore important—such as cost position, productquality, product differentiation, and delivery per-formance. The tactics that each company employswill certainly vary. But by analyzing the elements oftheir value chain, companies can determine themost powerful ones for them. Some examplesinclude:

• Market. Sellers should measure and communicatethe total cost of a product, not just its price. Takebacon, a seemingly simple product. Many restau-rants, hotels, and other institutions consider onlyprice when they buy bacon. But one supplier witha higher-yield product that generated less wasteand splatter (and therefore required less cleanuptime) than competing brands began trackingyield and waste metrics to highlight the total costin use so that buyers would not focus only onprice when making a decision. When given thisinformation, buyers cared.

• Design and deliver. Sellers can do more than simplyoffer a product. They can collaborate with buyersin areas such as product development and inven-tory management. One example is the advantagethat a contract manufacturer of electronic com-ponents achieved by integrating its setup processwith the design and specification systems of OEMclients through a Web interface. The enhancedcollaboration allowed the manufacturer to reducedramatically its time to volume (the time it takes todesign and develop a component and ramp upproduction). In an industry where products canbecome obsolete in a matter of months, thisimprovement made a big difference.

• Manufacture and sell. Given the price pressuressome sellers will face, they should consider fol-lowing the airlines’ lead and hiring or developingpeople with skills in yield management anddynamic pricing. This is particularly relevant inindustries where prices fluctuate sharply in rela-tion to industry capacity utilization.

• Manufacture and provide customer support. Althoughmany sellers are preparing to compete moreaggressively on prices, product differentiation isbecoming an increasingly important tactic. Of thesellers we surveyed, 65 percent said they werealready investing in differentiation in response topressures from e-marketplaces. (See Exhibit 13.)

32

One obvious option is increasing the customiza-tion of products—moving closer to “build to e-order.” Some manufacturers have discoveredthat build-to-e-order capabilities resulted in anincrease in the average price paid per unit. DellComputer is a classic example: its customers oftentrade up as a result of being able to order theexact features they want. Another way to differen-tiate is to improve customer support by offeringonline self-help services in areas such as productmaintenance.

Whatever tactic a seller chooses, however, it mustbe certain that it isn’t deluding itself. Do buyersreally care about the product or service attributes inwhich the company excels? Does it really excel inthose attributes? Can it make the internal changesthat will be required? If a company decides that itsbest bet is to alter the basis of competition in an e-marketplace to highlight delivery times, for exam-ple, it may need to hire experts in real-time capac-ity planning, reposition factory layouts, and reviseoperating metrics. E-marketplaces offer an oppor-tunity to change competitive dynamics, but sellersmust not fool themselves into thinking it will onlytake some tinkering when in reality it will requirean organizational overhaul.

B U Y E R S T R A T E G I E S

Buyers are already beginning to realize that theopportunities presented by e-marketplaces extendbeyond simply extracting better prices from suppli-ers. Our survey found that reducing the cost ofmaterials is but one of the benefits that buyersexpect to reap from participating in e-market-places. (See Exhibit 14.)

Like sellers, buyers can also embrace, alter, and adaptto change the competitive dynamics in an industry.

Embrace. Given the large upside potential andsmall downside risk, most buyers will embrace e-marketplaces for procurement and basic supply-chain management. But the more interestingopportunities lie in how they can use e-market-places to change the competitive dynamics to theiradvantage. To do so, buyers must alter or adapt.

Alter. Buyers, like sellers, can alter the basis of com-petition in their favor by influencing the develop-ment of an online marketplace. Consider a buyerthat chooses raw material suppliers by using a pro-prietary algorithm based on very specific criteria.This is important to the company because the qual-ity of its raw materials is a key point of differentia-tion in competing. The buyer will want the e-marketplace to include all of its criteria but willwant to keep its algorithm proprietary. By doing so,the buyer gains the benefits of participating in thee-marketplace but maintains the advantage in sup-plier selection that the algorithm provides.

Adapt. Buyers can make changes in their valuechains that will enable them to use e-marketplacesto compete more effectively. These kinds of tacticsare harder to implement than the other twobecause they can require significant, even radical,

0 2010 30 40 50

Reduce transaction costs

Reduce order-processingtime

Find new suppliers

Reduce inventory

Reduce material/input costs

Integrate better with existing partners

Circumvent distributors/intermediaries

Aggregate buying power with other buyers

Comply with supplier requirements

Influence e-marketplace development

48

43

34

32

28

25

18

18

11

8


W H Y B U Y E R S A R E J O I N I N G E - M A R K E T P L A C E S

% of respondents who ranked the following drivers as one of their top four reasons for buying online

E X H I B I T 1 4

33

reorganization and process changes. But the hand-ful of players that can adapt will garner the biggestcompetitive advantage. Some examples include:

• Design. Many e-marketplaces will eventually allowproduct design information to be shared and willalso offer tools for collaborating in developingnew products. The buyers that excel at using thisfunctionality will gain an advantage in the form ofshorter development cycle times. E-marketplacesare already allowing buyers to work more inti-mately with suppliers. A construction company,for example, used a collaborative project-management tool provided by an e-marketplaceto complete a building for its client three monthsahead of schedule. It was able to do this by shar-ing real-time information on design changes andthe availability of supplies.

• Select and Buy. Buyers can use the additional infor-mation on suppliers’ products and quality avail-able from e-marketplaces to evaluate new suppli-ers. One company had been working for severalyears to consolidate its supplier base because ofthe high cost of identifying and screening poten-

tial suppliers. However, as a participant in an e-marketplace, the company found that it couldaccess and evaluate additional suppliers very inex-pensively. As a result of these lower search costs,the company decided to widen its supplier base forsome classes of products. This decision allowed itto work with multiple suppliers to obtain productsat a lower cost than its competitors.

• Receive. By enabling companies to share real-timeinformation on inventories, e-marketplaces allowthem to reduce the buffer stocks they had main-tained as protection against delayed shipmentsfrom suppliers. The result is lower inventory-carrying costs.

Those buyers that go beyond using e-marketplacesfor basic purchasing and use them to integrate allthe links in their supply chains much more tightlywill reap the biggest gains. Such integration is cru-cial for a manufacturer that wants to be able tobuild to e-order. Of course, much of the manufac-turer’s success will ride on its ability to change itsinternal processes: an e-marketplace can only pro-vide it with many of the essential tools.

34

C O N C L U S I O N

An e-marketplace must achieve tremendous scale orquickly secure a profitable niche. The alternative islife as a profitless industry utility—or death.

For companies—the participants in e-market-places—the prospects are both intimidating andexciting. Very occasionally in history, a seminaldevelopment occurs that gives companies an oppor-tunity to rewrite the rules, remake themselves, andchange their position in the competitive hierarchy.The steam engine, the harnessing of electricity, therailroad, the telegraph, and the telephone weresuch developments. The Internet—which of courseis making e-marketplaces possible—is another.

It goes without saying that massive change can bemassively wrenching—especially if it is quick andunpredictable. But while the changes that e-marketplaces will help bring about will be mas-sive, they will not be quick. Nor do they have to beunpredictable. Companies can influence them.

Shaping the outcome, however, requires a strat-egy—and a strategist who can digest the complexity,see what is possible, and understand how to achieveit. In the Internet era, when a business model thatis sound today may be flawed tomorrow, flexibility isalso crucial. Companies must be able to adapt—

maybe even reinvent—their strategies and tacticsconstantly. This means that companies must also befast. Given the shrinking half-life of ideas, they mustbe able to learn and to apply what they have learnedquickly, before a competitor identifies the sameopportunity and seizes it.

Seizing an opportunity is a grand way of sayingimplementation. Considering how profoundly compa-nies must reorganize in order to turn the potentialof e-marketplaces into realities, implementation isthe challenge. It is as big as the challenges that com-panies faced in reorganizing so they could capital-ize on the advent of commercial electric power.That took roughly a half century. The Internet isreaching critical mass much faster.

The companies that wield the greatest influenceover the evolution of e-marketplaces will be theones that have more than robust strategies. Theywill be the companies that also have the leadership,discipline, and sheer stamina required to overhaultheir systems, processes, relationships, and cultures.These companies will shape how e-marketplacesand their industries evolve.

35

A P P E N D I X

E X H I B I T A

C O M P R O M I S E S I N T H E V A L U E C H A I N

Buyer Compromises Seller Compromises


• Limited or inaccessible information on installation, use, andmaintenance results in high cost in useUse

• Manual reconciliation and payment consume time and result in errors

Pay andaccount

Receive

• Cumbersome manual-ordering process consumes time andresults in errors

• Manual reconciliation consumes time and results in errorsOrder

• Selection and approval is time consuming• Maverick buying undermines the ability to realize bulk

discounts

• Analyzing products and services is time consuming and costly• Lack of input from suppliers during product design or

specification leads to redesign and longer cycle timeSpecify

• Absence of data on purchasing behavior and performanceleads to poor and costly customer service and supportSupport

• Lack of link to accounting system results in errors andlonger receivable cycle timeInvoice

• Links to logistics providers are inefficient and are notautomated, and result in suboptimal logistics planningDeliver

• Traditional orders by mail and fax consume time and result in errors

• Availability is often unknown due to inadequate links toupstream suppliers and results in lost sales

Promise

• Producing quotes is time consuming and expensive• Decision and approval process is long and fragmented• Lack of inventory and production visibility to check

availability results in lost sales

Sell

• Lack of rich interactions with buyers makes it difficult to customize offerings

• Limited or no product design collaboration with buyers leadsto redesign and longer cycle time

Design

• Manual reconciliation consumes time and results in errors• Manual recording of inventory consumes time and results

in errors• Limited insight into suppliers’ inventory results in poor

inventory management

Buy orselect

36

T I M E L I N E F O R E - M A R K E T P L A C E S E R V I C E S

Near Term Medium Term Long Term Selected Services (within 2 years) (5 years) (10+ years) Comments

Order management • Web-based interface is increasingly common today

• Increased process efficiency is achieved through e-marketplace

Distribution management • Sophisticated optimization techniques are already available

Financial settlement • Some online settlement is occurring, but most payments for online business-to-business transactions are made by check

• Security concerns will need to be addressed

Collaborative replenishment • Some collaborative processes (VMI, JIT, ECR) are common in certain industries for Tier 1 suppliers1

• Web-based systems will allow extension of this practice to Tier 2 or 3 suppliers or customers and to additional industries

• Business process hurdles will need to be overcome

Collaborative forecasting • Some is in limited use today, but participants are maintaining theirown forecasts


Collaborative planning • Some is in limited use today (Cisco, Dell, Heineken) to coordinate activities throughout the supply chain


Collaborative product development • Some is in limited use today



1VMI = vendor managed inventory;

JIT = just in time; ECR = efficient consumer response.

E X H I B I T B

Partial adoption Modest adoption Significant adoption Extensive adoption

37

E X A M P L E S O F E - M A R K E T P L A C E S E R V I C E S

Activity Definition What It Takes to Implement Value Added

Transaction Services

Product information

Catalog/matching

Auctions/onlineprice negotiations

RFQ informationsharing and fullexecution of RFQsonline

Providing content related to product data, availability and/or dealer locations

Basic online ordering from Web-based catalogs

Online auctions/dynamic pricing

Online posting of RFQs and changes/explanations

Online execution and completion of bidding• Real-time pricing transparency

Digitization of product data and adding dealer locator functionality

Digitization and maintenance of product catalog• Online ordering and confirmation capability• More sophisticated online ordering will be

integrated with ERP systems

Preparation of RFQs to ensure “apples-to-apples” bids and prequalification of sellers• Online bidding parameters and real-time

monitoring of bids

Standardization of RFQ specs/componentsand formulation and communication of postings and changes to qualified bidders• Qualification of bidders—i.e., formulating

and enforcing eligibility rules

Greater marketing reach for sellers andreduced information costs for buyers

Greater reach and volume for sellers andreduced search costs for buyers• If ordering is automated (i.e., online

ordering integrated to ERP systems), transaction costs are reduced

• If volume is aggregated, product costs are reduced

Buyers exposed to new suppliers (lowersearch costs)• Significant product-cost savings

Product and search costs online are loweredthrough auctions, and transaction costs arereduced by automating RFQs

E X H I B I T C

FinanceInvoicing

Settlement andclearing

Risk management

LogisticsLogistics pricingand availability

Logistics netting

Automation of order confirmation and billing functions

Automation of closing and settlementaccounting

Insurance, warranty, and escrow services

Calculating the final price, including shipping (full-landed-cost pricing)• Providing availability and expected

shipment schedules• Tracking and tracing functionality

For commodity products with high shipping costs, the ability to net out shipment costs by switching deliveries to nearby suppliers/buyers

Integration of online ordering functionalitywith back-end accounting systems

Integration of online ordering functionalitywith back-end accounting systems of theclearance and settlement service provider

Online information sharing of terms and integration with finance service providers

Services that enable buyer to specify shipping requirements (e.g., bulk to one destination versus break bulk to multipledestinations), and automatically calculateadditional shipping costs associated with the transaction• Integration with systems of logistics

service provider

Functionality that identifies all the shipment schedule for same grade products in real time and maximizes netting benefits

Transaction cost savings from replacingpaper/manual processes

Transaction cost savings from replacingpaper/manual processes• Reduced accounts payable and

receivable cycle time

Reduced search costs and transaction costs• Enables parties to execute transactions

with new trade partners

“Apples-to-apples” comparison of total costof purchase for buyers and expected deliveryschedules• Enables parties to execute transactions

with new trade partnersCoordination of production scheduling withexpected delivery scheduling

Savings of shipment costs, which can be significant for bulk commodity products such as paper or steel

Commerce Services

38

Inventory visibility

Collaborativeforecasting andplanning

Product design collaboration

Asset netting

Online build-to-order capabilities

Sharing of forecast and inventory-level dataamong trade partners on a static basis

Sharing of forecast and inventory-level data on a real-time basis and joint planningof capacity use and inventory• Supplemented by analytical tools to

map out responses to changes

Sharing of product design specifications and works in progress• Ability to make and communicate design

changes in real time with trade partners

Sharing of inventory and capacity acrossmultiple parties• Joint production planning and “netting”

out resource use among the parties

A company ’s manufacturing processesdesigned to build in response to customerorders—a “pull” instead of a “push” model

Communications links and protocols to send and receive information in batches

System-to-system integration so trade part-ners’ ERP and MRP systems can communi-cate with each other automatically• Messaging system to flag changes and

exceptions with decision support analytics

Implementing links among engineering designsystems and establishing online platformswhere partners can jointly create and modifydesigns • Standardization of specifications

System-to-system integration and real-time planning capabilities and processes

System-to-system integration (and informa-tion sharing) along the supply chain and collaborative decision-making processes• Dynamic, real-time information sharing

and collaborative design capabilities• Manufacturing processes designed to

respond to real-time demand

Allows better management of inventory levels • Maintain more efficient level of safety

stock

Enables trade partners to manage inventorylevels and plan capacity utilization jointly—i.e., eliminating the “bullwhip” effect.Additional benefits:• Improved quality as defective parts are

detected earlier in the production process• Improved capacity planning

Allows real-time product design, whichresults in shorter product-development cycle time• Leads to faster time to market and

increased revenues

Enables participating partners to maximizeasset utilization and gain scale through collaborative use of assets

Permits production upon order, which eliminates inventory• In many cases, this disintermediates

traditional distribution channels• Also, improves response to customer needs

and changes in demand

E X A M P L E S O F E - M A R K E T P L A C E S E R V I C E S ( C o n t i n u e d )

Activity Definition What It Takes to Implement Value Added

Collaboration Services

39

E X H I B I T D

2001

Total gross amount spent ($billions)(1)

2003Large-market scenario (collaboration focus)

500

2005

500

400

300

200

100

0

Aggressive

Base

2001 2003Medium-market scenario (collaboration focus)

80

2005 2001 2003Small-market scenario (transaction focus)

25

2005


1Gross purchases count each purchase along the supply chain, not just the net value added. Includes both online and off-line gross spending in 2001.

O N L Y E - M A R K E T P L A C E S T H A T S E R V E L A R G E M A R K E T S H A V E A S H O T A T S I G N I F I C A N T R E V E N U E

Revenue ($millions)

40

E X H I B I T E


E - M A R K E T P L A C E T Y P E S : D E F I N E D B Y S C O P E A N D B R E A D T H O F F U N C T I O N A L I T Y

Scope

Collaboration(e.g., design, supply chain management)

Commerce services(e.g., finance, logistics)

Advanced transaction services(e.g., auctions, RFQ)

Simple transactions(e.g., catalog)

Major private e-marketplace

Sim

ple

Com

plex

Collaborative specialist niche

Major public e-marketplace

Commerce services specialist niche

Functional specialist niche

Direct corporate Web site (e-sales or e-procurement)

Matchmaker niche

One to many Many to many

Func

tiona

lity

The Boston Consulting Group has published a series of

reports on e-commerce. It includes the following:

Online Retailing in Latin America: Beyond the Storefront

A BCG report in partnership with Visa International, October 2000

(Available in English, Spanish, and Portuguese)

Organising for E-Commerce: Global and Asia Pacific Challenges

A BCG NetBizAsia strategy report, September 2000

The U.S. B2B E-Commerce Landscape Through 2004

A research bulletin by The Boston Consulting Group, September 2000

Racing Season: B2B E-Commerce in Germany

A report by The Boston Consulting Group, August 2000

(Available only in German)

Organizing for E-Commerce

A discussion paper by The Boston Consulting Group, April 2000

For a complete list of BCG publications and information about

how to obtain copies, please visit our Web site at www.bcg.com.

The State of Online Retailing 3.0

A Shop.org study by The Boston Consulting Group, April 2000

E-Tail of the Tiger: Retail E-Commerce in Asia-Pacific

A BCG NetBizAsia strategy report, March 2000

Winning the Online Consumer: Insights into Online Consumer Behavior

A report by The Boston Consulting Group, March 2000

The Race for Online Riches: E-Retailing in Europe

A report by The Boston Consulting Group, February 2000

www.bcg.com EC-R17-11/00

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