E-markets - The next evolution

• By Samuel W. Butcher
• Jun 01, 2000

In August 1995, the record-breaking public offering of Netscape Communications marked the beginning of an information revolution that promised to change almost every aspect of our lives. To date, the Internet is holding true to this promise. In the business-to-business (B2B) arena, small and large corporations are continually adopting Internet technologies that are changing the way business is conducted. Industry analysts predict the growth of B2B e-commerce (i.e., spending of goods and services through the Internet) will exceed $1.2 trillion by the year 2003.¹

As evidence of this B2B boom, there is a proliferation of Web sites that offer B2B e-commerce functions. Some of these B2B Web sites will mature into complete electronic marketplaces (e-markets) that promise to save time and reduce costs for buyers and sellers. By the end of 2001, it is predicted that tens of thousands of e-markets will exist in various industries.²

Industry insiders offering domain expertise within specific markets have been responsible for starting most of these e-markets. In addition, large consumer Internet brands such as Yahoo! and eBay Inc. are also moving into the B2B space. Within the environmental industry, there has been a growing trend by plant engineers, EH&S managers, consultants, sales people and other professionals toward using e-markets for a variety of everyday tasks, such as getting competitive quotes, purchasing and acquiring sales leads. Why is there such increasing interest in the B2B arena from both industrial and consumer-oriented companies?

The value proposition

E-markets ranging from commodity products to professional services hold the promise of saving time, reducing costs and enhancing productivity to both buyers and sellers. In the business-to-consumer (B2C) context, e-markets are currently used in many areas, including automobiles, insurance, furniture, mortgage loans and airplane tickets. Similarly, there are growing e-markets in many B2B areas, including office supplies, industrial equipment, environmental, construction, software, consulting, chemicals, lab equipment, architecture and legal services. As they grow and mature, these e-markets are predicted to streamline commerce and remove inefficiencies that exist within current business practices. By incorporating e-markets into traditional supply chains, many conventional buy-sell functions and distribution channels can be automated. As a result, significant efficiencies will be gained in the areas of product/service search, procurement, sales, distribution, manufacturing and customer service. In some cases, the e-market may replace the traditional middleman (such as a retailer or distributor), whereas in others, the e-market will supplement the traditional middleman. The results of this transition will differ from market to market and will depend upon the value offered by the e-market versus that of the traditional middleman in performing specific market functions. For those functions where it does not perform was well, the traditional middleman will still play a role in the marketplace. As traditional marketplace functions are replaced or supplemented with e-markets, buyers and sellers will realize efficiency gains that are manifested in terms of time savings, cost reductions and convenience.

B2B Web site differences

B2B Web sites offer a wide spectrum of services through very different means. While one B2B Web site may offer directory services, another may offer an online catalog and still others may offer request for proposal (RFP) services. The amount of value that a B2B Web site offers to the individual user will correlate primarily to the Web site's functionality and users, as shown by Figure 1. For example, a B2B Web site that falls in category I has a limited number of buyers and sellers with a limited number of useful functions. These factors generally result in a limited amount of value to each individual user, whether buyer or seller. Categories II and III illustrate B2B Web sites that exhibit either a high degree of functionality or a high number of buyers and sellers, respectively.

These B2B Web sites do offer a value-added service to its users, but fall short of being an e-market. In the category II example, there is high functionality but insufficient number of users to create the value from multiple buyer-seller interactions. In the category III example, there are a high number of users but insufficient functionality to add significant value to the supply chain. In category IV, an e-market exists with extremely useful functionality and plentiful users. Multiple buyer-seller interactions create a phenomenon of a successful e-market known as the "butterfly" effect. To create the butterfly effect requires a robust e-market, where multiple buyers and sellers find the B2B functionality useful enough to conduct commerce. Buyers and sellers are able to extend their reach, while reducing costs and saving time in performing commercial transactionsl

Useful functionality

Basic B2B functionality may include a simple directory listing of companies or products or a bulletin board of jobs. Other B2B Web sites may offer buyers the ability to browse through "web storefronts," which in many cases serve as an electronic brochure or mini-Web site for sellers with product listings and a company background. These B2B services tend to be less transactional in nature and thus provide less value than more e-commerce oriented services. More comprehensive B2B functions will include e-commerce capabilities such as online catalogs, auctions or RFP services.

For example, many B2B Web sites offer directory listings or a bulletin board as a basic function. There is some value in these functions to a prospective buyer or seller, who might be able to go to a single site to search for companies or jobs, as opposed to multiple print directories. However, this function has less value than one that is more transactional in nature, such as one that actually matches the buyer's needs with the capabilities of multiple sellers. To maximize their individual value proposition, buyers and sellers must seek out those B2B Web sites that provide the most useful functionality for their particular needs. The basic e-commerce functions that are being employed in today's e-markets include:

• Online catalogs. In its simplest form, an online catalog is a web-enabled version of a print catalog. Sellers are generally manufacturers or distributors of commodity products, such as office supplies, chemicals and medical supplies. Similar to print catalogs, prices are fixed according to the seller's terms;

• Auctions. A seller places an item up for sale, and waits for the highest bid among prospective buyers. In the B2B context, the auction platform is being applied to sell used equipment or excess/surplus inventory. Price is not fixed, but rather determined by the highest bidder;

• Reverse auctions. The reverse auction is where buyers post goods or services they want to purchase and sellers compete for the business. Reverse auctions can be used in commodity or non-commodity items. In some reverse auctions, such as an RFP platform, the buyer may even set a price or budget for the demanded goods or services; and

• Demand aggregation. Multiple buyers will join together to purchase a single product or service and multiple sellers compete for the business. As a group, the buyers enjoy lower pricing than if purchasing the same product or service alone. This model is best used for high-demand commodity products and services.

Since each market or industry will have specific needs, the successful e-market will address key industry requirements. As a result, e-markets may offer hybrids or combinations of each of the above e-commerce functions, in addition to their own unique version of each function. Other value added services may also be offered to prospective users. Buyers and sellers should look for those B2B Web sites that offer the most useful functions for their specific needs, as opposed to sites offering generic e-commerce functions.

Moving toward frictionless commerce

The successful e-market will always strive to increase its value proposition through better functionality and growth of its user base. In the future, successful e-markets will be an integral component of their respective supply chains, making the chains operate with less friction and greater productivity. E-markets will begin to integrate with the internal systems of buyers and sellers, resulting in more seamless interaction between company networks and the e-market. In addition, it is predicted that future e-markets in different industries will connect with each other, establishing a network of networks that builds value upon value.

For example, a buyer considering the purchase of equipment will secure proposals through an e-market, which will provide competitive bids from several qualified sellers as well as proposals for logistics and financing of the equipment from other third party e-markets. Upon accepting the proposals, the e-market will consummate the agreement between buyer and seller(s) and communicate with the buyer's procurement system to create the purchase order. Upon purchase, the e-market will deliver information to the seller's manufacturing software which will check inventory and communicate with another third party e-market to order necessary parts. The buyer will be able to track the sales order through the seller's manufacturing process until the equipment is delivered to the plant. E-markets that are successful at integrating themselves into the supply chain will go far to fulfill the promise of frictionless commerce.

Impact of the environmental industry

The growing number of B2B Web sites in the environmental industry reflects a strong demand in this market for more efficient ways of conducting commerce. Due to certain market characteristics, the environmental industry stands to benefit tremendously from e-markets. The industry is extremely fragmented with thousands of technical products and services supplied by thousands of companies for various environmental media, including air, water and waste. Furthermore, the market has a worldwide reach with hundreds of thousands of buyers in manufacturing, laboratories, utilities, government and banks, including facilities managers, purchasing managers, plant engineers, consultants, regulators and lawyers.

In this market, these prospective buyers face a labor-intensive and time-consuming process to find, select and purchase goods and services from qualified suppliers. The successful e-market that can bring together into a collective whole these thousands of buyers and sellers will create tremendous value for each user by smoothing out inefficiencies that exist with conventional buy-sell practices.

For example, a plant engineer looking to specify and buy pollution control equipment using conventional means may spend days or weeks looking for vendors and pre-qualifying them, soliciting proposals, then evaluating the proposals that are returned. Alternatively, if this plant engineer could not afford the time, an outside consulting firm would be hired to perform these functions. By using an e-market for these same tasks, a buyer or his consultant can significantly reduce time spent on this task by as much as 65 percent, have access to more qualified vendors, receive as many competitive quotes as desired and save money in the process.

On the flip side, the e-market provides a more efficient sales channel for sellers that extends sales reach, facilitates sales leads qualification and lowers costs of sales, Due to the compelling value offered by e-markets to environmental buyers and sellers, the traditional customer-vendor relationship will evolve and conventional buy-sell practices will become more efficient.

Conclusion

Over the next several years, the revolution of business brought on by e-markets will occur as an evolution. The numerous Web sites currently on the B2B landscape will clear away, leaving only those e-markets that create sufficient value to their customers. In the long term, buyers and sellers will be the winners of this evolution and will enjoy substantial gains from conducting frictionless commerce in the new economy. Early adopting buyers and sellers who incorporate e-markets into their businesses will reap the richest rewards in the end. As in any revolution, business will have to change. Reject the change and succumb to the evolutionary process. Accept the change, and succeed in the new economy.

E-sources

NetMarketMakers — www.netmarketmakers.com

Business 2.0 Magazine — www.business2.com

Interactive Week Online — www.interactiveweek.com

Forrester Research Inc. — www.forrester.com

Resources

1. Fortune Magazine, August 2, 1999, st 260 (citing Forrester research).

2. Interactive Week, May 3, 1999, at 28 (citing Gartner Group).

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This article appeared in Environmental Protection magazine, June 2000, Vol. 11, No. 6, p. 34.

This article originally appeared in the 06/01/2000 issue of Environmental Protection.