CASE DESCRIPTION

In early 2001, the ingenious 65-year-old CEO of $112 billion (revenues) General Electric (GE), John F. Welch, was studying the changing environment of the conglomerates industry as a whole and the business-to-business (B2B) segment in particular and noted that, "E-business was made for GE, and the ‘E’ in GE now has a whole new meaning" (GE, 2001). At the time, the industry was experiencing increased globalization of markets and advanced information technology. Specifically, GE management realized that, first, through internally derived productivity, 20% to 50% of selling, general, and administrative expenses could be saved. Second, delaying e-commerce could risk being cut out of the market by traditional and new companies alike (Rudnitsky, 2000). Third, business-to-business (B2B) e-commerce had grown from $43 billion in 1998 to $251 billion in 2000. According to another source, the Gartner Group, e-commerce was projected to reach $6.7 trillion by 2004 with North America accounting for nearly 40% of that. With these issues on hand, Welch devised a winning plan that directed 600 senior executives—in areas ranging from appliances and engines to power systems, plastics, and network programming at NBC—to develop an enterprise-wide strategy of e-commerce (Rudnitsky, 2000). This strategic corporate decision led to the formation of GE's own Web technology-enabled subdivision, Global eXchange Services (GXS) in 2000, with Harvey Seegers as CEO. GXS was an e-commerce service provider that focused on connecting trading partners electronically and enabling them to share information in order to make the supply chain more efficient.

The threats facing B2B companies were vast as well. One threat was that as e-Marketplaces and online trade became an integral part of how industries operated, business on the Internet might experience a massive round of regulation. The success of e-marketplaces would spur strong oligopolies in many industries. The emergence of e-Marketplace oligopolies would lead to renewed debate about whether the government should intervene in the market or simply regulate it to make sure that monopolies were not abused (GE, 2001). Another threat was that as traditional rivalries died hard, some participants might still distrust their competitors and worry about revealing too much information in the exchange. Another threat was that many of the software programs used by exchange participants were not compatible. Also, international B2B marketplaces faced problems with conflicting currencies and language barriers. Another threat that may slow the development of B2B e-commerce was that even though the technology was available, corporate decision-makers might take longer than anticipated to embrace its benefits (Sood, 2001).

There were pros and cons that were associated with being a buyer in the exchange method. The pros for buyers were the following: one-stop shopping exchanges provided a single shopping center for all a company's supplies, eliminating the need to communicate with multiple suppliers. Comparison-shopping buyers used an exchange to find the lowest rates and best terms for products. Volume discount exchanges allowed small businesses to get better prices by pooling their buying power with that of other small businesses. 24/7 ordering buyers ordered any time of the day with no wait for a customer service representative. Access to new suppliers exchanges offered a way for buyers to find items required for one-time use or to make up for a local shortage of critical supplies (known as "spot buying" or "spot sourcing"). The risk associated with buyers was that in replacing trusted vendors with unreliable new-sources buyers, the company tended to lose the relationship with a company's current suppliers (unless they joined the same exchange) and had to start all over again with new suppliers. There was a possibility the new suppliers would not live up to the company's expectations and needs. For mission-critical supplies or suppliers that were required on a tight deadline, a company had to think twice about using an exchange and instead stick with a proven supplier. Loss in customer service quality made it easy to compare prices, but not to compare intangibles or to negotiate contract deals. If quality service and contract deals were important to businesses, all exchanges were not the place for buyers to make deals. To try to address this need, some exchanges were adding features that allowed buyers and sellers to negotiate more complex terms than price and quantity. For example, FreeMarkets offered premium auctions for buyers and sellers of products that required value-added services, such as technical support (Afuah & Tucci, 2000).

The keys to success for buyers were the ability to control the marketplace by developing the marketplaces for oneself, to refine the specifications of the purchase with detailed information listed on line, to screen the potential supplier by setting up and conducting an on online bidding session, to buy more effectively by accepting bids that match the needs, and to reduce order processing time and costs through collective buying and consolidated purchases.

Supplier. A supplier or seller consisted of all business suppliers that offered a product/service online. Sellers comprised of small businesses, corporations, and supply chain partners within a single company, a single industry, and companies in an industry, or across industries (e.g., IBM). E-sellers (as opposed to brick-and-mortar sellers) had an advantage with the ability to reach more customers, gather better information about them, target them more effectively, and serve them better. The corporate Web site set up by Cisco Systems was an example of how a seller controlled the marketplace by enabling buyers to configure their own routers, check lead times/prices/order shipping status, and confer with technical experts. This site generated $3 billion in sales a year (about 40% of Cisco's total) and saved $270 million annually (Berryman, Harrington, Layton-Rodin, & Rerolle, 2000). As the number of sellers was expected to increase in the future, the amount of complementary goods would increase and sellers would increasingly learn from each other (Afuah & Tucci, 2000).

There were also pros and cons to the supplier aspect of exchanges. One benefit to suppliers was that an exchange allowed suppliers to sell on the Internet without having to buy or build their own online store. Some advantages of selling online included reduced errors in orders (sellers avoided traditional phone calls or faxes, which required interpretation of speech or handwriting). An online channel also allowed suppliers to offer customers 24/7 ordering and easy access to product information. A way to reach new customers was another benefit to sellers since if an exchange had a large membership, suppliers were exposed to many potential customers. If you're a small manufacturer, an exchange was used as a way to sell directly to customers. If a company provided services, sellers used an exchange to expand clientele. As an outlet for surplus inventory exchanges, particularly those that offered auctions, exchanges benefited sellers as they offered a great source to find buyers for surplus inventory for which sellers may not have had a local buyer. The risk that suppliers faced included loss of direct customer relationships since suppliers ran the risk of having an exchange supplement the customer relationships. Some customers began to perceive the exchange as the supplier and the other sellers on the exchange as interchangeable commodities. Some suppliers also lost control over the customer experience, including how goods and services were presented for sale. Price wars occurred with small businesses since being grouped with a myriad of other suppliers in a marketplace that only displayed vendor product offerings and prices sometimes spelled doom for them when competing on service or value-added services. Competition for value-added services exchanges increased revenue by offering value-added services, such as providing insurance quotes, arranging logistics, or offering credit. Another disadvantage to sellers was the imposition of transaction fees that most exchanges charged the supplier, not the customer, to promote existing business through the exchange. Possible loss of customers was another disadvantage to sellers since some businesses that joined exchanges expected to reach new customers, also lost customers to other suppliers on the exchange. If competitors were listed on the same exchange a business is on, companies were competing for existing customers every time the customers used the exchange (Afuah & Tucci, 2000).

The Company—GXS

The biggest challenge to GXS was to decide how to differentiate itself from its competition while maintaining a strong hold of the market share. This decision would alter the services and products that GXS were to offer. Would it remain atop the B2B segment or would it expand its services to include business-to-consumer or application-to-business? Or would GXS choose a different B2B model? Also, would GXS further decentralize itself from the General Electric Company? GXS would implement a winning strategy based on understanding and analyzing the necessary changes.

B2B Models

GXS's B2B model was a private eMarketplace or exchange model.

Private EMarketplace or exchange model. This model combined suppliers and business customers by providing full scale sales and procurement to both the suppliers and customer by transferring business documents automatically (Yael, 2001). In its initial stages of formation in 2000, GXS serviced its own customers (i.e., its own set of buyers and sellers involved with GE). In later stages of business, GXS served as a dual-purpose exchange where it linked more than a 100 separate markets through its B2B e-commerce services. On one aspect, by operating as a private exchange, GXS was owned and maintained by GE for the purpose of trading with its own partners. This collaborative process of real-time supply/demand chain management utilized Web-based technologies to squeeze inefficiencies out of processes across enterprises. GXS conducted business with partners using predetermined terms and contracts at privately negotiated price (Sood, 2001). On the other aspect of being a network operator, GXS integrated several B2B exchanges such as Global Healthcare Exchange (that integrated hospitals, healthcare buying organizations, and healthcare product manufacturers), http://BevAccess.com (that focused on integrating the electronic business communications of bars, restaurants, distributors, and alcoholic beverage manufacturers), Exchange Link (that focused on providing billing information to competitive carriers in the telecommunications industry), and PubNet (that was a consortium of book distributors and college bookstores) (GE, 2001). By offering a hot of tools and services to enable e-commerce, GXS ran a global network of 100,000 trading partners with 1 billion transactions annually.

GXS's strength in this private exchange model included sizeable transaction volume through strong backing and financial stability of the GE company and a long roster of suppliers through incentives for sellers to join. Also, GXS was strong in providing services such as financing, settlement, and logistical support through efficient systems and providing cost-savings with enough suppliers to create liquid marketplaces. Other strengths of GXS included short cash-conversion cycles for buyers and sellers through sophisticated trading platforms and search engines, long survivability through high cash flow and strong backing, interoperability of various applications with supreme technical alliances, and security of information through Secure Sock Layer and passwords.

A possible extension of this model was the lease model where GXS could allow small- and medium-sized companies to enter the B2B segment by charging fees as a means of revenue.

Customers

The customers in the B2B segment were broken down into two categories: buyer and supplier.

Buyer. Buyers were scattered over 1,200 e-marketplaces, but most concentrated at select sites that presented the best purchasing opportunities for their needs. GXS aggregated the leading eMarketplaces, comprising the majority of all online dynamic-pricing transactions. GXS gave access to consumer, business and industry-specific audiences, all actively seeking to purchase products. GXS strategically pursued network partners using selective criteria regarding registered users, product offering, and liquidity. Some benefits for GXS were that transaction costs were reduced by automating and streamlining the approval process and the paperwork associated with purchase orders and purchase contracts were reduced as GXS assisted buyers in reducing expenses associated with ordering and expanding vendor options.

For buyers, GXS was strong its ability to control the marketplace by developing the marketplace for itself, to refine the specification of the purchase with detailed information listed on-line, to screen the potential supplier by setting up and conducting an on-line bidding session, to buy more effectively by accepting bids that match the needs, and to reduce order processing time and costs through collective buying and consolidated purchases.

Supplier. For GXS, sellers comprised of small businesses, corporations, and supply chain partners within a single company, a single industry, companies in an industry, or across industries. GXS helped sellers/suppliers reduce transaction cost by eliminating manual processing of purchase orders. There were also more guaranteed, predictable sales through negotiated contracts with buyers. GXS continued to reduce expenses and increase accuracy in processing orders. Furthermore, with GXS backing there was great potential for reaching a larger customer base and broader geography for sellers. Although GXS's suppliers enjoyed many of the services that GXS provided there were some recent trends and weaknesses that suppliers were facing. For suppliers, the two biggest detractions for exchanges were transparency—the fact that every competitor could see what every other competitor was bidding—and lack of liquidity, which meant that there were not enough buyers to really generate much bidding. How GXS would position itself to adjust to these obstacles would determine whether or not they could remain a force in the B2B exchange segment.

For sellers, GXS was strong in its ability to minimize online procurement complexity by enabling buyers to configure their own routers, to handle high volume traffic through advanced technical applications, to advertise aggressively through mass media, to assure privacy protection through SSL and passwords, and to obtain purchase/sale behavior to improve system. In addition, GXS was able to retain strong relations with buyers/sellers by speeding up ordering or order status checking and providing on-line and telephone-based technical assistance.

Services Provided

The three basic services that GXS extended, Enterprise Resource Planning, Quality Control, and Consulting and Training, were incorporated into its products offered.

GXS had developed a collaborative planning solution which took advantage of Internet technologies to extend the virtual company to include suppliers, sub-contractors and customers in planning and design phases of product development. GXS's procurement offered the opportunity to shift staff focus on strategic functions with significant payback to the company and employee job satisfaction. By leveraging message broker technology, clients could accept and send data to and from these systems by virtually any means including web interface. Many companies turned to GXS to conduct the building integration and on-going facilities management of their Extranets. GXS had the expertise and the services to allow companies to have the Extranet they want faster and at a less total lifecycle cost to that company. GXS could help companies use electronic commerce to leverage their current processes and make crucial information available to the right decision-makers when they needed it.

Some of the services GXS offered included Back-Office ServicesSM, Community Implementation ServicesSM, EC Service CenterSM, EDI∗EXPRESSSM Service, Interchange ServicesSM, Systems Integration ServicesSM, Telephony Consulting Services, Tradanet® Service, VPN-Security ANX-TPSM Service, and VPN-SecuritySM Service.

With services provided, GXS was strong in providing software solutions as part of services to increase profitability, offering implementation, consulting, and training services, integrating services from other vendors, sharing services with trading partners, allowing the use of Internet (online) help by extending the virtual company, and streamlining.

Industry Functions

There were two industry directions that B2B companies focused on: vertical and horizontal.

Vertical. GXS supported industries from raw material-stage clients to consumer-clients. By focusing on the entire industry, GXS provided content that was specific to the industry's value chain brought sellers, buyers, and complementors into one virtual area. Some key exchanges that GXS had been selected as the B2B integrator included: Global Healthcare Exchange (which integrated hospitals, healthcare buying organizations, and healthcare product manufacturers), http://BevAccess.com (which integrated bars, restaurants, distributors, and alcoholic manufacturers), Exchange Link (which provided billing information to Competitive Local-Exchange Carriers and Incumbent Local-Exchange Carriers in the telecommunications industry), and PubNet (which was a consortium of book distributors and college bookstores wishing to streamline shared commerce) (GE, 2001).

With vertical industry functions, GXS's strength lay in the secure transport of data through industry-wide systems integration, high-performance network for inter-enterprise data communication, improved quality through cycle times, lower costs, and global standards for manufacturers, distributors, and end-users. Also, GXS was strong in creating special technology to run independent company-run auctions or industry-auctions as well as providing content specific to an industry's value system of sellers, buyers, and those that accompanied them.

Horizontal. With horizontal industry functions, GXS incorporated different products and services across different industries into a single layer of business. By being flexible and with interoperability a non-issue, GXS was able to provide an abstraction between internal systems and the outside world. Furthermore, it simplified the process of data standards proliferating and reduced data communications.

With horizontal industry functions, GXS's strength lay in providing content to build function-specific capabilities for different industries, customized solutions through creativity, minimum compromise of organization's security and internal controls through advanced technology, and ease of information from outsider to company's internal system through advanced technology.

Alliances

With GXS, the only components of alliances comprised of technical partnerships.

Technical Partnerships. GXS entered into strategic alliances to create solutions based on the business strengths and experience of itself and its partners. Companies partnered in technology were companies that provided value-added technical components, such as system platforms, operating systems and Internet infrastructures, to the services and solutions provided to customers. A technology partnership with GXS promoted solutions within its customer base. Within the technical partnerships, GXS had two types: premier level technology and base level technology. Premier level technology partners were companies committing resources to an annual program of structured joint marketing activities. For instance IPS AG and GXS were premier level technology partners. GXS was working together to insure that users of GXS's Purchasing Expert™ software product could access IPS's content management and procurement services over the Internet. IPS was the largest European e-procurement service provider, and its catalog organized over three million products. The integration between GXS Purchasing Expert software and IPS's service would enable customers to use the GXS's procurement portal on the Internet to access IPS's catalog. Base level technology partners were companies interested in promoting the partnership by using the marketing tools available in the Global Alliance Program. For instance, GXS announced an agreement with http://Questio.com, a leading eMarketplace relationship management company. Under the terms of the multi-year agreement, GXS would market, sell, and provide integration services for the http://Question.com service as part of its strategy to build vertical exchanges and extranets that enabled business-to-business supply chain e-commerce. The http://Question.com service would help eMarketplaces attract and retain participants. The ability of GXS to maintain a strong influence and to create strong alliances in different industries would determine how it competes in the ever-changing climate of the B2B area.

With the technical partnerships GXS was strong and careful in selection of partners by defining common goals, exploiting lines of communication through EDI, other systems of the Internet, and leveraging the right technology for additional support through greater R&D capabilities.

Sales and Promotion

GXS continued to take the highest effectiveness measures to ensure B2B e-commerce. Its methods included the following: sales & marketing, support, and training.

Sales and Marketing. As a partner, companies had the opportunity to gain exposure to GXS customers and prospects, as well as enter into joint sales and marketing campaigns with GXS. Activities in this category included both traditional marketing techniques and opportunities to participate in more unique forums. Some of the benefits of the GXS sales and marketing included: Website listing on http://www.gegxs.com, joint trade show participation, visibility/exposure to the GXS sales force, and participation at EC Forum, which was GXS's annual user group conference.

In the sales and promotion aspect of the B2B segment, GXS was strong with its exposure to other companies, participation in unique forums, and continued growth with traditional marketing techniques. However, GXS did not focus on global companies where a larger customer base could be formed and, subsequently, more revenue could be earned.

Support. GXS was committed to providing its partners with non-technical and technical assistance to promote and sell joint solutions into the marketplace. To help its trading partners quickly build practices, GXS included a number of support methods in the program. Some of these include support during the installation and integration of the operational system, support to manage the overall process, and post-installation support.

In the support area, GXS was strong with its ensured technical assistance to alliances and partnerships.

Training. GXS offered a variety of training options so alliance partners could learn about its integration solutions. Training took multiple forms. Some partners required an in-depth technical knowledge of each GXS integration product. Other partners were content to understand how an integration solution benefits a company. Each partner was offered a level of training appropriate for its level of commitment to the program.

With training, GXS ensured in-depth knowledge of the integration products and in-depth knowledge of integration solutions.

Technology

There were three portfolio applications through which GXS conducted its B2B commerce: GE Integration Solutions, GE Interchange Solutions, and GE Marketplace Solutions.

GE Integration Solutions. With this, GXS provided software that permitted any business application to send and receive business information to other business applications in a secure and reliable manner (GE, 2001). These solutions used Enterprise Application Integration (EAI) to homogenize the flow of data and information. Many EAI vendors came to GXS for data transformation capabilities that they, in turn, converted into their own products. GXS was the only EAI vendor with more than 500 installations of its integration brokers around the globe. EAI Journal, an industry trade publication, awarded GXS the prestigious silver medal for best e-business solution. This made GXS the only recipient of an award for assisting a dot-com e-tailor. These solutions were expected to increase in demand as more organizations wanted control of the supply chain.

GE Interchange Solutions. With this, GXS automated paper, fax, telephone, and e-mail transactions to improve quality and efficiency in a supply chain (GE, 2001). These solutions used Electronic Data Interchange (EDI) and extensive Markup Language (XML) as a combination. This was a tremendously popular technology (mainly with XML usage) that was expected to grow with the need for vendors increasing. With XML standardized, GXS believed that electronic commerce over the Internet was poised for unprecedented growth.

GE Marketplace Solutions. With this, GXS provided the business applications and technology infrastructure to enable the development, integration, and service of high-volume, one-to-many and many-to-many B2B electronic marketplaces (GE, 2001). These solutions worked as an exchange that incorporated B2B technology with a B2B business model. The future here was also expected to grow as more buyers and sellers entered into e-commerce.

With all these above applications, GXS was strong in 10 different areas. They were security of information through SL and password, ease of placing orders through advanced technology, ease of returning products and refunds through an organized system, a well-organized website using experienced designers, quality of information about purchase choices through advanced technology, variety of choices through creativity, easy payment procedure through advanced technology, quick delivery through efficient systems, availability of different features through creativity, and price competitiveness through volume and market share (Mockler, 2001).

Employees

GXS had over 1,500 employees world wide, and was headquartered in Maryland, USA. The global presence enjoyed by GE means that support could be extended to all customers. Further to this, multinationals companies could confidently deploy Integration Brokers across all locations, thus maintaining infrastructure consistency. With GXS's employees, GXS strength included hiring an adequate number of staff to handle the business and match the economies of scale and hiring employees experienced in technical requirements for research and development capabilities.

Industry Standards

GXS was monitoring and participating in a number of initiatives which included several groups of experts like Rosetta Net, Commerce Net, Open Buying on the Internet, The Organization for the Advancement of Structured Information Standards, and Microsoft's BizTalk (GE, 2001).

RosettaNet. GXS was a member of the managing board of RosettaNet, a consortium of supply-chain trading partners. As a member, GXS's goal was to define and specify the schema necessary to accomplish collaborative activities such as new products introduction and catalog updates.

CommerceNet. As a participant in CommerceNet, the premier global consortium for companies building electronic commerce solutions on the Internet, GXS worked on several projects. One on-going project was the eCo Framework project that intended to develop a specification for content names and definitions in electronic-commerce documents and an interoperable transaction-framework specification.

Open Buying on the Internet (OBI). As a member of OBI, a consortium of companies dedicated to developing and deploying standards for B2B Internet based procurement, GXS helped in developing the OBI standard. This standard reduced the need for expensive, custom Internet-purchasing systems.

The Organization for the Advancement of Structured Information Standards (OASIS). As an active member of OASIS, a non-profit, international consortium that focused on the first adoption of product independent formats that used public standards for B2B services, GXS encouraged development of a reference repository and technical framework that would enable consistent XML usage.

Microsoft's BizTalk. As a member of BizTalk, a private community facilitated by Microsoft, GXS reviewed proposed specifications and adopted the specifications in its products and solutions.

In the regards to industry standards, GXS's strength included adhering to rules and regulations of these initiatives and participating in educational and awareness seminars conducted by these initiatives. Also, GXS was able to establish an in-house unit to follow up on new regulations and ensure that employees were in compliance.

Management

The combined talent and unique leadership skills of Jack Welch (GE Chairman) and Harvey Seegers (GXS President and CEO) enabled GXS to become one of the world's largest provider of electronic commerce solutions. Jack Welch was widely viewed as one of the best corporate leaders in the U.S. who drove the General Electric Company with a mandate to make it #1 or #2 in every industry it operated. Harvey Seegers had a vision to have nearly every electronic dollar pass through his company's systems. Welch "got with the Net" in January 1999 and, true to character, went out all for it. By 2001, GE had written the book on B2B. In the most recent annual report, Welch announced to shareholders that e-business would "change the DNA of GE forever by energizing and revitalizing every corner of this company" (Rudnitsky, 2000).

Welch did not believe that e-commerce was something left for the "techies." Also, he did not want to permit web start-ups of brand new exchanges to get between him and his customers. As a result, GE developed its own Web-technology enabled division, General Electric Information Services (GEIS).

As President and CEO of GXS, Harvey Seegers focused on creating new business-to-business Internet-based marketplaces. Seegers's intention to divide GE Information Services (GEIS) into the 2 different businesses was to extend the immense assets and expertise. Seegers felt that the company (GEIS) would be unable to stay competitive in B2B e-commerce unless the General Electric Company gave them substantial investment. When Harvey Seegers explained the description and market opportunities to Jack Welch, Welch (with the suggestion of his closest advisors) gave Seegers the green light within a few hours.

With the decision behind him, Harvey Seegers believed that GXS would have impact beyond transaction-based marketplaces as e-commerce spread into design, logistics, marketing, and production. Seegers believed that GXS was more than a mere e-procurement application (Kaneshige, 2001). Seegers' main focus would be how to distinguish GXS as more than an e-procurement, and more of a B2B powerhouse.