B2B exchanges reviewed by Narges ShahsavaraniDocument Transcript
B2B Exchanges: The Killer Application in the Business- to-Business Internet Revolution-A Review by Arthur Sculley and William Woods Reviewed by Narges ShahsavaraniIn B2B Exchanges, Arthur Sculley and William Woods analyze the feature ofthe revolution that is occurring in “Business-to-Business” (B2B) transactions asa result of the new acceptance of the Internet by corporations. The authors starttheir claim with ‘ the Internet changes every thing in B2B’ and most ofcorporations will have to change themselves over the next five years forremaining competitive in the new economy. They demystify some jargon ofB2B and discuss the nature of business-to-business solutions on the Internet.Some people still believe that the Internet as some type of academic experimentor, a low security replacement for the telephone that allows individuals to sendemail to each other. But in the recent years, the reliability and security issuesassociated with the initial use of the Internet have been largely solved andevery business is now adapting the Internet in one form or another. Nowadays,some innovative new uses of the Internet by business are revolutionizing theway in which many goods and services are produced, price and distributed. Theauthors continue some benefit of B2B exchanges on Internet, describe anatomyof a model of B2B and common membership and ownership structures forexchanges and also four trading model for B2B exchanges. Finally they have avaluable part that is including Seven “Secrets” For Success for B2BExchanges.They mention that the Internet revolution, or new economy, has created manynew companies, produced thousands of new millionaires. That phenomena inthe business word captured investors’ attention to the point where it seems thatevery New York taxi driver is a day trader with some on line brokerage service.Initially, investors’ attention was focused on companies that sell goods orservices to the general public, what they are commonly called “Business-to-Consumer,” or B2C such as Amazon.com. Enabling consumers to sell goods orservices to each other is a “Consumer-to-Consumer,” or C2C model like aseBay.com. Another new economic model is a “Consumer-to-Business,” orC2B, in which the consumer states the price for instance like Priceline.com.The quiet revolution that is developing in the world of B2B transactions willgenerate more profits and millions than anything the C2C, B2C, and C2Bmodels can produce and will have a deep impact on the economy of eachcountry.Sculley and Woods maintain throughout the book that online exchange is
where multiple buyers and multiple sellers come together in a virtual tradingspace. The potential value of a B2B exchange is n^n, where n is the number ofusers connected to that exchange. With Internet network buyers and sellers areonline together from all over the world and thereby to create dynamic pricing,cost reduction and process improvements.Based on Oxford dictionary, Sculley and Woods define exchange as “abuilding, office, institution, etc., used for the transaction of business or formonetary exchange.” The unique feature of a B2B exchange is that it bringsmany buyers and sellers together in one central virtual market space andenables them to buy and sell from each other at a dynamic price according therule of exchange .After that the book describe about ECNs (electroniccommunication networks), one form of electronic trading system thatautomatically match buy and sell orders at specified prices, the ECNs areexchanges but not strictly B2B exchanges and ECNs register with the SEC(U.S. security and exchange commission) as broker-dealers.Sculley and Woods discuss about currently use of the Internet, it has beenworking professional on B2B relationships. Many companies now consider theInternet for procurement of goods from suppliers, management of their supplychain, and product development. Advanced use of the Internet to contactcustomers and suppliers in the production process will enable customers toorder products online such as customized car and then sit back, assured that thecar will be built to their specification and delivered to their door within a fewdays and Internet has enabled online brokers to offer stock quotes and access toresearch data for a fixed commission per trade at rates lower than traditionalbroker. Also after explaining the role of Internet they speak about B2Bexchanges creating new intermediary opportunities as a form of “infomediary”.At the end of first part they speak about why B2B exchanges are developing onthe Internet and they explain the effect of B2B exchanges on traditionalmarkets. The main effects are: Lower cost; Higher potential profits for manufactures with lower procurement costs; Increase extent and liquidity in a market; Lower inventory requirements;
Greater transparency and more orderly markets; Elimination of geographical barriers and time zone differences; Integration of purchasing system; Improve product design schedules through integration with suppliers; and Removal of distribution channel blockages, such as agents and brokers who have a lock on particular market, resulting in a potential loss of jobs or changes in the nature of the role of traditional intermediaries.In the next part B2B Exchanges describe the anatomy of a model of B2B, usingparticular examples throughout, which are drawn from existing successfulBusiness-To-Business Exchanges. The authors believe the B2B exchanges willhave some or all of the following user groups that they have differentobjectives or interests: Owners that is the shareholders; Sellers or suppliers;Buyers or procuring companies; Broker or other forms ofintermediaries/informediaries; Listed companies (such as for stock exchange);Issuers of traded products (for example, securitized contracts); Data vendorsand service providers; The general pubic and The government.Afterwards they discuss about four common membership and ownershipstructures for exchanges:Ownership by one group of users, with closed membership: An exchange maybe owned and controlled by one group of users (for example the traders orbrokers who act for buyers and sellers in the market). In this model, newtrading members are required to buy an ownership stake, often referred to as a”seat” in the exchange. The advantage of this model is that the ownership groupcan design the market to their advantage and profit. In particular they cancontrol membership by limiting who can buy a seat or limiting the number ofseats available. The biggest problem is that all other user groups may bedisadvantaged by the owners’ anticompetitive practices. Now broker ownedstock exchanges like the NYSE want to go public because of competition fromelectronic markets like ECNs.Ownership by many user groups, with open membership: In this model, theapplication for membership, or ability to trade on the exchange, is not linked toan ownership stake and new memberships are on a nondiscriminatory basis. Amember does not have to own a seat, but need a license to trade on theexchange and use its facilities. This license maybe transferable by a member or
the exchange may insist that new members join the exchange directly so thatmembership rights are non transferable. The advantage of this approach is theability to balance the competing interest of each user group. The disadvantageis that it can take a long time to get all these potentially difference groups towork together. The example of the open membership model is the BermudaStock Exchange (BSX).Ownership by one or more commercial investors, with open membership: Inthis model the exchange is set up and operated by one benign investor or agroup of investors and is run completely on a for-profit basis. Membership isthe ability to trade on the exchange, is not linked to ownership, and newmemberships are available to applicants on an open access, non discriminatorybasis without the requirement to purchase a seat (For example PlasticNet).Ownership by government: When a B2B exchange is perceived as a providingthe important public benefit, the government maybe tempted to assert itsnational interest during the development of such a market within theirauthority. An example of exchanges with government ownership is The TaiwanStock Exchange.At the end of part two they describe four trading model for B2B exchangesinclude catalogue aggregators, post and browse, Auction markets, andcontinuous auto-execution systems.Catalogue aggregators: Must be neutral, independent sites that are operated bya third party if they are to bring many competing sellers together and earnbuyers’trust in the information on the site.Post and browse (one-on-one negotiation): Just like a private members’room, apost and browse function creates a virtual community, a group of peopleinterested in buying or selling a particular product that can make a connectionthrough a web based bulletin board.Auction markets: The ability of multiple buyers and sellers to collectively setprice for a wide range of people and services represents a radical departurefrom the older, fixed price model in industrial age and also they mention buyerand seller driven auctions will became increasingly popular, because of thescale, reach, interactive, and real time attributes afforded by the Internet.Continuous auto execution systems: work only for same standardize productswith high liquidity.
After describe four trading model of B2B exchanges they explain how Off-lineexchanges have established revenue models largely based on the structure ofstock exchanges, but the B2B on-line space is creating new forms of revenueopportunities. B2B exchange can generate almost a dozen types of revenue,those are including: transaction fees, percentage of cost saving, posting fees,subscription (or membership) fees, listing (or hosting) fees, information sellingfees, information licensing fees, advertising and permission marketing fees,revenue sharing, software licensing fees, private networks. Lastly they mentionto scale up quickly, B2B exchanges must partner with key suppliers, commercecommunity, and information providers.In the third part of the book based on their combined total of 20 yearsexperience with stock exchanges and 4 years of investing in B2B Exchanges,the authors analyze the key issues in building a successful, credible andeffective B2B Exchange. Some of the secrets for having successful exchangesare as follow:Secret 1: Stay focused-specialized in a verticalThe most important secret to success in the initial phases of developing a B2Bexchanges is to target a specific industry in which you have strong expertiseand then specialized in a vertical within that industry. Specializing on a singlevertical provides the ability to scale up quickly and gain liquidity that are soimportant in the early stages of an exchange. This makes a self-fulfilling“snowball effect” once some level of liquidity is established. After you becamea dominant in one vertical, it may be possible to branch out into other verticalswithin that same industry.Secret 2: play to win-the need to dominateTry to became dominate in market in your chosen vertical is very important forB2B exchanges, building a strong brand name spends the majority of yourresources on building a strong customers’care and support program in the earlystage. Liquidity is everything, at first if necessary to build market share andincrease trading volume, you should sacrifice profit.Secret 3: maintain commercial neutralitySuccessful exchanges must be stayed independent, protecting users’information, establish an advisory board comprised of representatives of alluser groups to ensure each group is represented in the decision making processfor the exchange and user committees for this purpose, providing a neutral third
party for all other parties and also make credible and build trust.Secret 4: Ensure transparency and integrityWe should make a self-regulatory organization (SRO). There is a critical needfor transparency in pricing and the product and also B2B exchanges need tomaintain the integrity of the pricing mechanism.Secret 5: Add value by building a virtual communityThe key of secret number 5 is to provide value-added features that make theexchange “the one-stop shop” in your industry vertical. Successful B2Bexchanges will create powerful virtual communities that will increase thelifetime value of existing customers and decrease the acquisition costs of newcustomers.Secret 6: Make the right strategic partnershipsChoosing the right strategic partners helps you scale up quickly towarddomination. Potential partners for a B2B exchange can come from a variety ofsources including: deep-pocket investors, buyers in the chosen market space,sellers, existing broker intermediaries, new informediaries, content providers,IT vendors, and trading system software developers. If you do not have enoughexpertise in your chosen vertical, be sure to partner early with someone whodoes vertical knowledge is key to success.Secret 7: Operate as a virtual corporationIn this part they mention some key guidelines for virtual corporations such asB2B exchange companies must be flexible and able to adapt quickly to marketchanges, concentrate on your core industry expertise and outsource all non-corefunctions, particularly the technology development, keep staff levels low andfinally hire a expert Chief Technology Officer to manage the outsourcedvendors.The last part is about the future of B2B exchanges, Goldman Sachs InvestmentResearch estimates the value of transactions conducted on-line betweencompanies will reach $1.5 trillion by 2004. In B2B Exchanges the authorsreveal that transactions on B2B Exchanges, in the US alone, could exceed $600billion in annual value and generate annual revenue for the exchanges in $3billion by 2004.
In my opinion the authors draw on their experience in the stock exchanges toadvice on Internet exchanges and I suppose four insights highlighted by theauthors are very valuable: "Think private, act public," "Liquidity is key for anyexchange", "Only one exchange will dominate a vertical" due to increasingreturns and "Pricing is going dynamic". The authors also provide an extensiveappendix that provides short case histories of many of today’ more perfect sB2B exchanges. They provide good advice on the emerging B2B exchangephenomena. I strongly recommend this book and website(www.b2bexchanges.com) as a very useful guide to starting B2B Exchanges.