Abstract:

This paper aims to deal with the functional area of Marketing and the topic at hand is 'Rethinking B2B or emarket business model'. In the most basic sense, a business model is the method of doing business by which a company can sustain itself - that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.

The paper has outlined the emerging paradigms in the B2B area, also called as eMarkets, and accordingly specified the reason why there is a huge generation of interest in this area and also the reasons for the same.

Then the basic reasoning of the new eMarket paradigm vis-ŕ-vis the industrial paradigm has been outlined in the form of a table and finally the need to adopt an eMarket business model to create value added communities and a well-structured ownership and governance framework are imperative for success and sustainability.

B2B Environment- A Potpourri of change

Introduction:

Internet is taking the world by storm. It is changing the way business is being done. The Internet economy has produced many offsprings. E-commerce is the most illustrious of them. Put simply, Internet makes it easier for buyers and suppliers to compare prices. It helps to cut out the middlemen between firms and customers. That means lower transaction costs and reduction in entry barriers. Economists have an interesting argument: the main reason why firms exist is to minimise transaction costs. Since the Internet reduces transaction costs, it also reduces the optimal size of firms. Smaller firms can buy services cheaply from outside. Thus, in overall terms entry barriers should fall. The Internet can link up supply chains, make it easy to place and track orders and display specifications right down to the look and feel of products. Hence, few companies are willing to miss out on the benefits e-commerce offers.

Like a giant perfumery that extracts a few precious drops of essence from acres of flowers, e-business is the distillery whose results are encouraging an ever-increasing number of end-user transactions in today's economy. In a few short years, this e-business economy already rivals century-old business sectors like energy, automobiles, telecommunications and biotechnology in size.

Consider the following examples -

• Why is it that Dell computers, FedEx and UPS can help their customers track their packages but banks cannot inform their customers about the status of their online payments to some local utility company?
• How come Cisco carries out nearly 78% of its sales on line and develops an unbeatable business model whereas Nortel Networks is still lagging behind?

Answer: eMarkets

Close encounters of a different kind:

Distribution and sales channels have always conveyed a certain amount of information back to suppliers. But bandwidth, precision, ease, speed and manageability of the information flowing in both directions are orders of magnitude greater on the Internet. The interactive exchange of information, design requirements, component specifications, cost tracking, logistics oversight, service requests and troubleshooting advice permits an unprecedented level of customisation. Competition on this level will necessarily become the rule. Though Internet retailers tend to hog the limelight, the biggest impact of the Internet is likely to come from B2B e-commerce. Gartner group forecasts that global B2B turnover could reach $ 4 trillion in America by 2003 against an online sale of less than $ 400 billion to consumers.

B2B or eMarkets

The Internet economy is an alphabet soup of opportunities: B2C, B2B, VoIP, ASP and much more. The story so far: the initial thunder was stolen by the business-to-consumer (B2C) start-up like amazon.com which sells books, music and films to people like us. Then came the dotcom meltdown. The focus of attention has since shifted to another set of alphabets: B2B, or business-to-business. Here, one company sells to another company over the Internet rather than to an individual. "So what's new?" you could ask. The answer: the hottest opportunities in the B2B space will not be generated by single-company initiatives (company X selling its widgets to company Y), but by a creature which barely existed a year ago: B2B marketplaces. To avoid any more confusing abbreviations, we shall call them eMarkets. Like their real-world counterparts, these eMarkets are trading hubs that bring together buyers and sellers.

Emerging Paradigms:

Network effects: Why will eMarkets be superior? It can all be explained using one of the fundamental concepts of the New Economy: network effects. As the number of participants in a network increases, the value of that network increases exponentially. A telephone is of no use if only one person in the whole wide world has it. Whom does he speak to? But as others get telephone connections, the value of that first telephone rises exponentially: its owner can use it to speak to hundreds, thousands, and finally, millions of people. That is the raw power of the network effect. As with a telephone network, so with an eMarket. One company linked to its suppliers is one thing. A cluster of companies linked to a cluster of suppliers is quite another. The value that can potentially be generated when hundreds, or thousands, of companies join a wired marketplace is awesome. The network is nifty.

No standalone exchanges: We may not have standalone B2B exchanges for long. Eventually, these exchanges will start talking to each other. A completely new business ecosystem is coming up," "Vertical hubs will form a patchwork of alliances with functional hubs." So, for example, an auto exchange will, eventually, be linked to vertical exchanges in allied industries like auto components and steel, as well as horizontal exchanges in functional areas like logistics and financial accounting. So, an auto company will be able to buy a hundred tonnes of steel to make cars and book a dozen trucks to send them to its dealers with just a few clicks, even though it does not directly own a stake in either the vertical steel exchange or the horizontal logistics exchange. An image of a quilt can be evoked: a tapestry of focused vertical and horizontal digital markets wrapping the New Economy. It would seem that no company can afford to reject this warm quilt and stay out in the cold.

B2B or Not To B2B? That's the Question

It is my guess that the Internet economy will never realise its true potential unless it gets a network of eMarkets up and running. A medical analogy will help. The Internet economy currently resembles a body without a heart. The optic fibre pipelines are the veins. What flows through these veins is a range of digital products. Reality check: blood cannot keep flowing through a network of veins unless there is a heart to pump it around. eMarkets can be the heart of the Internet economy. They will pump information and digital products through a fast-maturing network of optic fibre pipelines.

According to PricewaterhouseCoopers (PwC), the number of eMarkets set up by industry players went up from three in November 1999 to over 150 six months later. And in a recent survey conducted in the US, Arthur Andersen found out that nearly half of the large and mid-size businesses involved in e-business have participated in the establishment of a functioning digital marketplace. Of the rest, two out of three plan to participate in the establishment of a digital marketplace in the next 12 months. Make no mistake: two years down the line, just about every major international company will be participating in an eMarket. Indian companies will have to follow suit. There is no choice.

E-Markets change the Strategic Management Paradigm*:

The Five 'E' Framework

Erect Value Added Communities:

While it's tempting to adopt a buyer-centric model with focus on price reduction, this may alienate sellers who may refuse to participate, thus diluting the overall value proposition of the marketplace. Hence, leading ICs (Industry consortiums) are adopting an eMarket model that focuses on creating value for all participants (value added communities). For instance, Enporion (an eMarketplace formed by US utility firms), has created strong partnership incentives among competing utilities and their suppliers, giving it an early edge over rival eMarketplaces which though larger in size have failed to attract sufficient suppliers.

Establish Open Ownership Structures**:

Concentration of ownership of the eMarket in the hands of a few industry players can sometimes create discord among non-owner members. Also, since non-owner members can't participate in market value gains of the marketplace it could lead to insufficient commitment, even to the extent of catalysing formation of a competing eMarket. In addition, majority ownership by one firm (usually on account of its size or being the initial promoter) could derail a budding eMarket initiative. Hence, leading eMarkets are not only ensuring inclusive equity structures but also adopting dynamic ownership patterns, linking equity structures of owners to the transactions they put through the marketplace and other performance metrics. This facilitates gradual shift of ownership from founding members to "performing" members. The India auto consortium should do three things. First, allocate founding member equity equally among partners. Second, create multiple equity categories (OEM founding members, supplier founding members, early participants, late participants, etc.) and devise well-defined entry norms and valuation rules. Three create incentive frameworks that motivate owners to move transactions online quickly, including linking equity structures to performance.

Ensure Independence Of Management Team:

There is a need to ensure that management is independent from ownership of the eMarket. This is essential from the perspective of ensuring neutrality of the eMarketplace and providing operational freedom to management to move fast. To ensure that independence is not left to chance, industry incumbent's interests need to be counter balanced by appropriate presence of neutral third parties in governing bodies of eMarkets. For example, to foster greater independence, Covisint (the US auto eMarket) is considering divesting substantial equity stake in favour of neutral parties like technology vendors, VCs and other financial investors with Net start-up experience and consulting firms.

Ensure Owner-Participant Commitment To Operating Philosophy:

There can exist significant conflict between the value expectations of participating members and the economics of an eMarket model. While the eMarket aims at maximising its revenue, its participants would like transaction and other fees to be as low as possible (ideally, free). Issues -- like who pays for eMarket services? What should be the pricing strategy? Does the pricing ensure value to all participants? -- Should be addressed as part of the operating philosophy of the eMarket and derived from the overall business model. For example, the management of the Weyerhaeuser-promoted paper and forestry eMarket in the US has adopted "creation of participant and ownership value" as its operating philosophy. While, as participants, members derive efficiency gains, as owners, they witness appreciation in equity value. It has evolved a uniform pricing policy for all participants, incentivising higher levels of participation through performance-linked equity grants.

Ensure Effective Governance:

While an open ownership model, independent management team and commitment to operating philosophy are all important; the glue that binds them together is a well thought-out governance framework. The governing framework needs to ensure value maximisation, neutrality, speed, and agility of the eMarket. Governance issues -- like composition and size of board of directors, representation from the founding/neutral members, exclusivity of members, distribution of voting rights, decision-making bodies and mechanisms -- needs to be thought through carefully. While the implementation details may differ, leading eMarkets are limiting the size of the board and restricting participation of members in order to induce speed, transparency and neutrality. Instead, members are often allotted seats in a separately constituted board of governors that acts like an advisory committee. Indian B2B marketplaces and industry consortiums cannot afford to be complacent with their membership strength and associated 'first mile" advantages. Adopting an eMarket business model to create value added communities and a well-structured ownership and governance framework are imperative for success and sustainability.

* E-Business Ževolution. The living and working in a interconnected world, 1/e, Daniel Amor, Bantham press, pp56-72.
** "Unlocking winning strategies to save small businesses: Banking the American dream," p. 58. Bank Administration Institute and McKinsey & Company.