1 Chapter 2 E-Commerce Market Mechanisms. 2 Learning Objectives Define e-marketplaces and list their...

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Chapter 2

E-Commerce

Market Mechanisms

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Learning Objectives

Define e-marketplaces and list their componentsList the major types of electronic markets and describe their featuresDefine supply chains and value chains and understand their rolesDescribe the role of intermediaries in ECDiscuss competition, quality, and liquidity issues in e-marketplacesDescribe electronic catalogs, shopping carts, and search engines

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Learning Objectives (cont.)

Describe the various types of auctions and list their characteristicsDiscuss the benefits, limitations, and impacts of auctionsDescribe bartering and negotiating onlineDescribe the impact of e-marketplaces on organizationsDefine m-commerce and explain its role as a market mechanism

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How Raffles Hotel is Conducting E-Commerce

The ProblemThe company’s success depends on the its ability to lure customers to its hotels and facilities and on its ability to contain costs

SolutionBusiness-to-consumer—maintains a public portal (raffles.com) that includes:

Information on the hotelsReservation systemLinks to travelers’ resourcesCustomer relationship management (CRM) programOnline store for Raffles products

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Raffles Hotel (cont.)

Business-to-business—maintains an interorganizational systems that enable efficient contacts with its suppliers

The e-marketplace also has a sell-side, allowing other hotels to buy Raffles-branded products from electronic catalogs (bathrobes)

Competitors buy Raffles-branded products because they are inexpensive, but look upscale

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The ResultsPublic portal helps in customer acquisitionHotel is able to maintain high occupancy rates using:

Promotions Direct sales

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The private marketplace is strategically advantageous:

Raffles in forcing suppliers to disclose their prices, thus increasing competition among suppliersRaffles is saving about $1 million a year on procurement of eight high-volume supplies; more savings on other productsSuccess is evident in its aggressive expansion in the Asian markets

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Electronic Marketplaces

Markets facilitate exchange of

InformationGoodsServicesPayments

Markets create economic value for

BuyersSellersMarket intermediariesSociety at large

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Electronic Marketplaces (cont.)

3 main functions of marketsMatching buyers and sellersFacilitating the exchange of information, goods, services, and payments associated with market transactionsProviding an institutional infrastructure

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NTE Evens the Load

National Transportation Exchange (nte.com) is attempting to keep trucks on the road full on both outbound and return trips—uses the Internet to connect shippers with fleet managers who have space to fill

Creates spot market Gets information from shippers about their needs and flexibility in datesWorks out the best deals for the shippers and the haulers Issues the contract and handles paymentsThe process takes only a few minutes

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NTE Evens the Load (cont.)

NTE collects a commission based on the value of each dealFleet manager gets extra revenue that they would otherwise have missed out on The shipper gets a bargain price, at the cost of some loss of flexibilityNTE reaches down to the level of individual truck drivers and provides a much wider range of services (wireless Internet access)

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Marketspace Components

Marketspace—a marketplace in which sellers and buyers exchange goods and services for money (or for other goods and services), but do so electronically

Customers SellersGoods (physical or digital) InfrastructureFront-end Back-endIntermediaries/business partnersSupport services

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Marketspace Components (cont.)

CustomersWeb surfers looking for

Bargainscustomized itemsCollectors’ itemsentertainment etc.

Organizations account for over 85 percent of EC activities

SellersHundreds of thousands of storefronts are on the WebAdvertising and offering millions of Web sitesSellers can sell

Direct from their Web site E-marketplaces

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Products Physical productsDigital products—goods that can be transformed to digital format and delivered over the Internet

InfrastructureHardwareSoftwareNetworks

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Front-end business processes include

Seller’s portalElectronic catalogsshopping cartSearch enginePayment gateway

Back-end activities are related to

Order aggregation and fulfillmentInventory managementPurchasing from suppliersPayment processingPackaging and delivery

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Intermediary—a third party that operates between sellers and buyers

Other business partners—collaborate on the Internet, mostly along the supply chainSupport services such as

Certification and trust servicesKnowledge providers

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Types of Electronic Markets

Electronic storefronts—a single company’s Web site where products and services are soldMechanisms for conducting sales

Electronic catalogs Payment gatewaySearch engine Shipment courtCustomer services Electronic cartE-auction facilities

Electronic malls (e-malls)—an online shopping center where many stores are located

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Types of Electronic Markets (cont.)

General stores/malls—large marketspaces that sell all types of products Public portalsSpecialized stores/malls—sell only one or a few types of products

Regional vs. global storesPure online organizations vs. click-and-mortar stores

Types of stores and malls

E-marketplaces—online market, usually B2B, in which buyers and sellers negotiate; the three types of e-marketplaces are private , public , consortia

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E-Marketplaces

Private e-marketplaces—online markets owned by a single company:

Sell-side—company sells either standard or customized products to qualified companiesBuy-side marketplaces—company makes purchases from invited suppliers

Public e-marketplaces—B2B markets, usually owned and/or managed by an independent third party, that include many sellers and many buyers (exchanges)

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Consortia & Information Portals

Consortia—e-marketplaces that deal with suppliers and buyers in a single industry

Vertical consortia are confined to one industryHorizontal allow different industries trade there

Information portal—a personalized, single point of access through a Web browser to business information inside (and marginally from outside) an organization

Publishing portals Commercial portals

Personal portals Corporate portals Mobile portals

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Supply Chains

Supply chain—the flow of materials, information, money, and services from raw material suppliers through factories and warehouses to the end customers

Includes organizations and processes that create and deliver the following to the end customers:

Products InformationServices

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Supply Chains (cont.)

A supply chain involves activities that take place during the entire product life cycleIt also includes:

Movement of information and money and procedures that support the movement of a product or a service

The organizations and individuals involved

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Exhibit 2.3A Simple Supply Chain

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Supply Chain Components

Upstream supply chain—includes the activities of suppliers (manufacturers and/or assemblers) and their suppliersInternal supply chain—includes all in-house processes used in transforming the inputs received from the suppliers into the organization’s outputsDownstream supply chain—includes all the activities involved in delivering the product to the final customers

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Types of Supply Chains

Integrated make-to-stockContinuous replenishmentBuild-to-order—model in which a manufacturer begins assembly of the customer’s order almost immediately upon receipt of the orderChannel assembly—model in which product is assembled as it moves through the distribution channel

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Exhibit 2.4Supply Chains: Integrated & Build-to-Order

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Value Chain & Value System

Value chain—the series of activities a company performs to achieve its goal(s) at various stages of the production process; each activity adds value to the company’s product or service, contributes to profit, and enhances competitive position in the marketValue system—a set of value chains in an entire industry, including the value chains of tiers of suppliers, distribution channels, and customers

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Supply Chain & Value Chain

Value chain and the supply chain concepts are interrelated

Value chain shows the activities performed by an organization and the values added by eachThe supply chain shows flows of materials, money, and information that support the execution of these activities

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Supply Chain & Value Chain (cont.)

EC increases the value added by:Introducing new business modelsAutomating business processes

EC smoothes the supply chain by:Reducing problems in the flows of material, money, and information

EC facilitates the restructuring of business activities and supply chains

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Intermediation in E-Commerce

Intermediaries provide value-added activities and services to buyers and sellers: wholesalers, retailers, infomediariesRoles of intermediaries

Search costs—databases on customer preferencesLack of privacy—anonymity of sellers and buyersIncomplete information—gather product informationContract risk—protect sellers against non-paymentPricing inefficiencies—induce appropriate trades

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E-Distributors on B2B

E-distributor—an e-commerce intermediary that connects manufacturers (suppliers) with buyers by aggregating the catalogs of many suppliers in one place—the intermediary’s Web siteE-distributors also provide support services

PaymentsDeliveriesEscrow servicesAggregate buyers’ and or sellers’ orders

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Disintermediation &Reintermediation

Disintermediation—elimination of intermediaries between sellers and buyersReintermediation—establishment of new intermediary roles for traditional intermediaries that were disintermediated

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Syndication as an EC Mechanism

Syndication—the sale of the same good (e.g., digital content) to many customers, who then integrate it with other offerings and resell it or give it away free

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Competition in the Internet Ecosystem

Competition in the Internet ecosystem (business model of the online economy)

Inclusive with low barriers to entrySelf-organizingOld rules may no longer apply

Competition is tenseLower buyers’ search costSpeedy comparisonsDifferentiation and personalization

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Competition in the Internet Ecosystem (cont.)

Differentiation—providing a product or service that is uniquePersonalization—the ability to tailor a product, service, or Web content to specific user preferencesLower prices

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Customer service is an extremely important competitive factorSome competitive factors are less important as a result of EC:

Size of company is no longer significantGeographical location is insignificantLanguage barriers are being removedDigital products do not have normal wear and tear

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EC supports efficient markets and could result in almost perfect competition with these characteristics:

Many buyers and sellers must be able to enter the market at no entry costLarge buyers or sellers are not able to individually influence the marketThe products must be homogeneousBuyers and sellers must have comprehensive information about the products and about the market participants’ demands, supplies, and conditions

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Porter’s Competitive Analysis

Porter’s competitive forces model applied to an industry views 5 major forces of competition that determine the industry’s structural attractivenessThese forces, in combination, determine how the economic value created in an industry is divided among the players in the industrySuch an industry analysis helps companies develop their competitive strategy

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Exhibit 2.6: Porter’s Competitive Forces Model

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Liquidity

Liquidity—the need for a critical mass of buyers and sellers

The fixed cost of deploying EC can be very highWithout a large number of buyers, sellers will not make money

Early liquidity—achieving a critical mass of buyers and sellers as fast as possible, before the market-maker’s cash disappears

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Quality Uncertainty & Assurance

Quality uncertainty—the uncertainty of online buyers about the quality of products that they have never seen, especially from an unknown vendor

Provide free samplesReturn if not satisfied

Microproduct—a small digital product costing a few cents

Insurance, escrow, and other services

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E-Market Success Factors

Product characteristics

TypePriceAvailability of standards and product information

Industry characteristics

Brokers currently necessaryIntelligent systems may replace brokers

Seller characteristicsConsumers find sellers with the lowest prices

Low-volume, higher-profit-margin transactions

Consumer characteristics

Impulse buyers

Patient buyers

Analytical buyers

Contributors to e-market success

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Electronic Catalogs

Electronic catalogs—the presentation of product information in an electronic form; the backbone of most e-selling sitesEvolution of electronic catalogs

Merchants—advertise and promoteCustomers—source of information and price comparisonsConsist of product database, directory and search capability and presentation functionReplication of text that appears in paper catalogsMore dynamic, customized, and integrated

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Classifications ofElectronic Catalogs

Dynamics of information presentation—static or dynamicDegree of customization—ready-made or customizedElectronic catalogs allow integration of:

Order taking and fulfillmentElectronic paymentIntranet workflowInventory and accounting systemSuppliers’ extranetRelationship to paper catalogs

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Customized Catalogs

Assembled specifically for:A companyAn individual shopper

Customization systems can:Create branded, value-added capabilitiesAllows user to compose orderMay include individualized prices, products, and display formatsAutomatically identify the characteristics of customers based on the transaction records

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Electronic Catalogs at Boise Cascade

Boise Cascade Office Products--$3-billion office products wholesaler of over 200,000 different items

They had a 900-page paper catalog that was mailed once each year; minicatalogs tailored to customers’ individual needsThe company placed its catalogs online in 1996 (boiseoffice.com)

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Boise Cascade (cont.)

Sales through the Web site:1997—20 percent1999—30 percent2004—80 percent (expected)

Production of a single paper catalog took 6 weeks/production of Web catalog takes 1 weekMajor advantage of customized catalogs is pricingElectronic orders cost 55 percent less to process than paper-based orders

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Boise Cascade (cont.)

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Search Engines

Search engine—a computer program that can access a database of Internet resources, search for specific information or keywords, and report the resultsSoftware (intelligent) agent—software that can perform routine tasks that require intelligence

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Search Engines, Intelligent Agentsand Shopping Carts

E-commerce users use both search engines and intelligent agents

Search engines find products or services Software agents conduct other tasks (comparisons)

Electronic shopping cart—an order-processing technology that allows customers to accumulate items they wish to buy while they continue to shop

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Auctions

Auction—a market mechanism by which a seller places an offer to sell a product and buyers make bids sequentially and competitively until a final price is reachedAuctions deal with products and services for which conventional marketing channels are ineffective or inefficient

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Limitations of Traditional Auctions

Traditional auctions are generally a rapid processIt may be difficult for sellers to move goods to the auction siteCommissions are fairly high

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Electronic Auctions

Electronic auctions (e-auctions)—auctions conducted online

Host sites on the Internet serve as brokers offering:

Services for sellers to post their goods for saleAllowing buyers to bid on those items

Many sites have certain etiquette rules that must be adhered to in order to conduct fair business

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Electronic Auctions (cont.)

Major online auctions offer:Consumer productsElectronic partsArtworkVacation packagesAirline ticketsCollectiblesExcess supplies and inventories being auctioned off by B2B marketers

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Dynamic Pricing

Dynamic pricing—prices that change based on supply and demand relationships at any given timeThe four major categories of dynamic pricing are based on the number of buyers and sellers involved:

One buyer, one sellerOne seller, many potential buyersOne buyer, many potential sellersMany sellers, many buyers

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Exhibit 2.8Types of Dynamic Pricing

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Dynamic Pricing (cont.)

One buyer, one seller usesNegotiationBargainingBartering

Price will be determined by:Each party’s bargaining powerSupply and demand in the item’s marketPossibly business environment factors

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One seller, many potential buyersForward auction—an auction in which a seller entertains bids from buyersEnglish auction—an auction in buyers bid on an item in sequence and the price increases with timeYankee auction—auction of multiple identical items in which bidders can bid for any number of the items offered, and the highest bid wins

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Dutch auction—auction of multiple identical items, with prices starting at a very high level and declining as the auction time passes

Free-fall (declining price) auction—a variation of the Dutch auction in which only one item is auctioned at a time; the price starts at a very high level and declines at fixed time intervals, the winning bid is the lowest one when the time expires

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Exhibit 2.9English Auction, Ascending Price

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One buyer, many potential sellersReverse auction (bidding, or tendering system)—auction in which the buyer places an item for bid (tender) on a request for quote (RFQ) system, potential suppliers bid on the job, with price reducing sequentially, and the lowest bid wins; primarily a B2B or G2B mechanism

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Exhibit 2.10The Reverse Auction Process

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One buyer, many potential sellers (cont.)

”Name-your-own-price” modelConsumer-to-business (C2B) model

Many sellers, many buyersDouble Auction—buyers and their bidding prices and sellers and their asking prices are matched, considering the quantities on both sides

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Limitations of Electronic Auctions

Possibility of fraud—defective goods or receive goods/services without payingLimited participation—invitation only or Open to dealers onlyLack of security—C2C auctions sometimes not done in an unencrypted environmentLimited software—only a few “complete”or “off-the-shelf” market-enabling solutions

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Impacts of Auctions

Auctions as a coordination mechanismAuctions as a social mechanism to determine a priceAuctions as a highly visible distribution mechanismAuctions as a component in e-commerce

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Reverse Mortgage Auctions in Singapore

Homebuyers like to get the lowest possible mortgage rates

In Singapore, Dollardex.com uses reverse auctions that are combined with “group purchasing”

Dollardex’s first project:Site invited potential buyers to fill out applications on a secure Web site7 lending banks were invited to bid on the loans

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Reverse Mortgage Auctions in Singapore (cont.)

In a secure electronic room, borrowers and lenders negotiated the deal, 2 days later the borrowers voted for one bankBorrowers negotiated loans 0.5 per-cent less than the regular rate and waiver of the legal fees with United Overseas Bank (UOB)UOB generated $10 million of business

Dollardex allows customers to participate in an individual reverse auction if they do not want to join a group

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Bartering—an exchange of goods and servicesBartering exchanges

Give your offer to intermediaryIntermediary asses value of your product or service in”points” Use “points” to buy what you need

Bartering sites must be financially secureAlternative to bartering is to auction surplus and then use the money collected to buy items needed

Bartering Online

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Bartering Online (cont.)

E-bartering—bartering conducted online, usually by a bartering exchangeBartering exchange—a marketplace in which an intermediary arranges barter transactions

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Online Negotiating

Online negotiation—electronic negotiation, usually done by software (intelligent) agents that perform searches and comparisons; improves bundling and customization of products and servicesDynamic prices can be determined by negotiationNegotiated prices result from interactions and bargaining among sellers and buyers

Expensive items like cars and real estateDeal with nonpricing terms like payment method and credit

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Online Negotiating (cont.)

Three factors that facilitate negotiated prices

Intelligent agents that perform searches and comparisonsComputer technology that facilitates negotiation processProducts and services that are bundled and customized

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Mobile computing permits real-time access to information, applications, and tools that, until recently, were accessible only from a desktop computerMobile commerce (m-commerce)—e-commerce conducted via wireless devicesM-business—the broadest definition of m-commerce, in which e-business is conducted in a wireless environment

Mobile Commerce

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The Promise of M-Commerce

Mobility significantly changes the manner in which people and customers:

InteractCommunicate Collaborate

Mobile applications are expected to change the way we:

LivePlayDo business

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The Promise of M-Commerce (cont.)

The PC-based Internet culture may change to one based on mobile devicesM-commerce creates new business models for EC, notably location-based applicationsMany large corporations with huge marketing presence are transforming their businesses to include m-commerce-based products and services

Microsoft AT&TIntel AOL-Time-WarnerSony

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I-Mode: Successful Mobile Portal

Shopping guidesMaps and transportationTicketingNews and reportsPersonalized movie service

EntertainmentDining and reservationsAdditional services

BankingStock tradingTelephone directory searchesDictionary servicesHoroscopes

An example of the spread of m-commerce is DoCoMo’s i-Mode; some applications of I-Mode are:

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Impacts of E-Markets on Business Processes & Organizations

Product promotionNew sales channelDirect savingsReduced cycle timeCustomer service

Brand or corporate imageCustomizationAdvertisingOrdering systemsMarket operations

Impacts of e-markets on B2C direct marketing:

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Exhibit 2.11Analysis-of-Impacts Framework

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Transforming Organizations

Technology and organizational learningTo survive, companies will have to learn and adapt quickly to the new technologiesCorporate change must be planned and managedNew technologies will require new organizational structures and approaches

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Transforming Organizations (cont.)

The changing nature of workDriven by increased competition in the global marketplace, firms are Reducing the number of employees and Outsourcing whatever work they can to countries where wages are significantly lessThe upheaval brought on by these changes creates new opportunities and new risks; forces us to think new ways of about jobs, careers, and salaries

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Transforming Organizations (cont.)

Digital-Age workers will have to be very flexible—truly secure jobs will be few, many will work from homeDigital-Age companies will have to prize its core of essential workers as its most valuable asset—empowering them and providing them with means to expand their knowledge and skill base

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Redefining Organizations

New and improved product capabilitiesE-markets allow for new products to be created and/or for existing products to be customized in innovative waysCustomer profiles and data on customer preferences—source of information for improving products or designing new onesMass customization enables manufacturers to create specific products for each customer, based on the customer’s exact needs

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Redefining Organizations (cont.)

New business modelsE-markets affect individual companies, products, entire industries

Improving the supply chainImpacts on manufacturing

Manufacturing systems changing from mass production lines to demand-driven, just-in-time manufacturingVirtual manufacturing enables global manufacturing plants to run as though they were one in location

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Exhibit 2.12aChanges in the Supply Chain

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Exhibit 2.12bChanges in the Supply Chain

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Impacts on Manufacturing (cont.)Build-to-Order—the biggest change in manufacturing will be the move to build-to-order systems

Manufacturing or assembly will start only after an order is receivedWill change not only the production planning and control, but also the entire supply chain

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A New Model for Small Movers

When the U.S. economy started to slow down, and fuel prices increased

DM & S (a small trucking company with $1.8 million in annual sales) started to lose moneyA major problem in the trucking industry:

Trucks need to move cargos at certain timesThey may not have a full load causing lost revenue

DM & S created a reverse-auction serviceSmall moving companies bid on jobs of moving goods for individualsCustomers with flexible moving dates benefit the most

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Small Movers (cont.)Dickerabid.com cost $15,000 to create:

Customers place notice of their job on the siteSmall truckers start to bidCustomers can get huge discountsTruckers can earn money to help cover their fuel expenses

During the first few months of operation4 truckers increased to 20Increased revenues by $14,000The Web site won third place in Inc.’s Web innovations in 2000

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Impacts on finance and accountingE-markets require special finance and accounting systems—most are electronic payment systems complicated by legal issues and international standards Executing an electronic order triggers back-office transactionsThese activities must be efficient, synchronized, and fast so the electronic trade will not be slowed down

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Cisco’s Virtual Close

Cisco Systems supplies vast networks that connect computers to the Internet

Virtual Close was developed to allow companies to close its accounting records (its “books”) more quicklyCisco is implementing such a system for itself for closing quarterly accounts

Used to take up to 10 days; within 4 years it took 2 days—significantly cut its costBy 2002 or 2003 Cisco hopes to close the books with 1 hour’s notice, on any day in the quarter

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Cisco’s Virtual Close (cont.)

Advantages of Virtual CloseCompanies can become proactive, spotting problems at any timeNew opportunities can be detected earlyEnables quick “drill down” analysis, which locates the causes of either poor or excellent performanceBrings huge productivity gains related to corporate financial reporting

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Impact on human resource management and training

EC is changing how people are recruited, evaluated, promoted, and developedEC also is changing the way training and education are offered to employees

Online distance learning and virtual courses are explodingCompanies are cutting training costs by 50 percent or more

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New e-learning systems offer two-way video, on-the-fly interaction, application sharingE- learning may be their ticket to corporate survival as changing environments, new technologies, and continuously changing procedures make it necessary for employees to be trained and retrained constantly

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Managerial Issues

How do we compete in the digital economy?What about intermediaries?What organizational changes will be needed?Should we auction?What should be auctioned?Should we have our own auction site or use a third-party site?Should we barter?What m-commerce opportunities are available?

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Summary

E-marketplaces and their componentsThe major types of e-marketsSupply chains and value chainsThe role of intermediationCompetition, quality, and liquidity in e-marketsElectronic catalogs, search engines, and shopping cartsTypes of auctions and their characteristics

1 Chapter 2 E-Commerce Market Mechanisms. 2 Learning Objectives Define e-marketplaces and list their...

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