2.4 The Internet Marketplace
2.4 The Internet Marketplace So far in this chapter, we have followed the growth of the Internet from a concept in the minds of some forward thinkers to an actual reality that has had profound effects on our society and business. The Internet has evolved from an environment where researchers share ideas to a ubiquitous medium of commerce. We have seen how business has gone from merely posting information on billboards along the information super highway to leveraging the technology to integrate their information infrastructures . We have also seen how the Internet has given businesses the ability to form a single virtual organization that spans the entire supply chain. Before proceeding, let's stop and look at the different types of organizations that we now encounter in the Internet age and their interaction with the market. There are four basic categories: traditional brick and mortar; e - commerce; e - business; and e - enterprise. With the exception of the traditional brick-and-mortar company, these organizations have embraced the Internet as a way to exchange information. What distinguishes them from one another is what information they exchange and with whom they exchange it. Figure 2.2 demonstrates the distinctions between each of these groups. In the following subsections, we will discuss each of these categories in a bit more detail. Figure 2.2. Types of e-organizations. 2.4.1 BRICK AND MORTARWe begin with the traditional brick-and-mortar company. These organizations are really outside the scope of our discussion. They have chosen , for one reason or another, not to participate in the Internet revolution. The point of mentioning them at all, however, is to note that the market in which the company competes mandates the extent to which an organization participates in the Internet revolution. Some companies may have nothing to do with the Internet. While this may be blasphemy in some circles, how a company applies Internet technology to its business processes must be driven by the conditions of its individual market. One company that comes to mind is a map-making company with which I am familiar. The company receives orders over the phone; the vast majority of its customers are not set up for ordering over the Internet. It makes its own maps and deals with one or two local printers. Only two or three maps are produced a year, so it is not cost effective to set up some way of transmitting the maps other than carrying a tape to the printer. In fact, the printer isn't even set up to receive the information electronically . There is no ROI for this small company to become Internet-enabled. Organizations should leverage the Internet where the solution requires this level of communication. One should not look on the brick-and-mortar company with disdain when the market conditions for that organization do not require an Internet-enabled solution. 2.4.2 E-COMMERCECertainly , e-commerce has captured the imaginations of many in the media. When people think of an Internet-enabled organization, they typically envision e-commerce. An e-commerce company is one whose forward-facing functions are Internet-enabled. Forward- facing functions include such activities as marketing, sales, and support. These companies compete in B2C markets. Of course, there are degrees of e-commerce. Some companies may still use traditional outlets for the sale of their products while providing post-sales support over the Internet. Others have integrated the Internet into their brick-and-mortar enterprises : the brick-and-click enterprise. The brick-and-click company integrates the Internet into its brick-and-mortar infrastructure. While such integration poses its own set of challenges, significant benefits can be derived from this approach. Organizations attempting to transform themselves to brick-and-click need to understand how the Internet can complement current business processes. Keep in mind the centaur described in Yoram and Mahajan's Convergence Marketing . The purchasing process is not Internet-enabled or done by physically visiting retail stores. It is not exclusively one or the other; it is a matter of both. The brick-and-click company can market directly to this hybrid consumer. There are also variations on the B2C theme. One variation is the customer-to-customer (C2C) site, where one customer sells directly to the other. In such markets the e-commerce organization becomes a facilitator of the exchange between the two customers. Customer-to-Business (C2B) sites are another variation, where the consumer actually determines the conditions of the transactions to be carried out. These are sites where businesses compete with one another for the consumer's business. In all of the cases cited above, IEBI plays a key role in driving business. We noted earlier in the chapter how the objective of CRM is to establish with the customer a mutually beneficial relationship. The organization does this by striving to understand the needs and desires of the consumer and fulfilling them. It is through this fulfillment that we are able to drive business in B2C, C2C, and C2B markets. There is a difference between a need and a desire. We need to eat. We desire a porterhouse steak smothered in onions with a baked potato and asparagus in Hollandaise sauce on the side. We need to drink liquids. We desire a nice California Merlot vintage 1998. A need is something without which we cannot achieve necessary objectives. A desire is something that we want but can live without. Through personalization, companies can understand the customer's needs and create desires. The creation of these desires will generate new business. We can do this in each of these environments. In a Web-based environment we can record and store the customer's interactions with our site. We can then analyze these activities, comparing them to other customers who demonstrated similar behavior with the same general demographics . Based on this analysis, we can then tailor the customer's shopping experience to address his or her specific needs and desires. In a B2C environment, we can offer products that complement products purchased by the customer. We can also recommend products that were rated favorably by other customers who had similar tastes as the current customer. We can use a similar method in the C2C space. In an online auction, for example, we can notify a customer when a particular product that may be of interest is up for bid. Not only does this benefit the buyer, but the seller has a larger market for the sale of his or her product. In C2B markets, companies can negotiate more effectively with customers. Perhaps companies can offer additional functionality or service to secure a purchase at a desired price. In all of the markets described above, companies use the Internet to reach their customers in some way. The organizations that will be successful in these markets, however, are those that are able to use the Internet to do more than simply reach their customers. They are able to use it to forge a more enduring relationship with those customers. 2.4.3 E-BUSINESSThe e-business organization is the company that has taken its information infrastructure and moved it to the Internet. As shown in Figure 2.2, e-business is internally focused. This is not by any means as glamorous an undertaking as e-commerce, but its reward can be substantial. An example of such a system and the associated benefits is the e-procurement system we discussed earlier. Through Internet-enablement of just this one application, the organization was able to be more effective in purchasing and realized significant cost savings. We need to emphasize that the information infrastructure is to the organization what the nervous system is to the organism. Think of the devastating effects of diseases that attack the nervous systemleprosy, for example. Victims can't feel pain in parts of their body; they don't know when they injure themselves. Consequently, infections set in. Is a sick information infrastructure any different? Inordinate levels of safety stock, the production of unwanted goods, and excess inventories are all symptoms of a sick information infrastructure. These are signs that parts of our organization are not communicating with one another. Think of the power of a tightly integrated information infrastructure. Imagine an environment where the finance, budgeting and planning, forecasting, supply chain management, and manufacturing systems all work together as one, not for just a department or a division but for the entire enterprise. For this to be truly effective, every part of the organization must have access to the same set of applications. Geographically dispersed departments, remote offices, foreign divisions, all must be able to tie into this one system. The vehicle for this integration is, of course, the Internet. We return to our theme of a solution. The e-business uses the Internet to change the business processes of the organization. They transform one another. As the organization becomes Internet-enabled, so too must business intelligence. As the organization moves its internal processes to the Internet, it must also transform its business intelligence systems to provide IEBI. 2.4.4 E-ENTERPRISEReturning to Figure 2.2 we see that the e-enterprise is the organization that has fully Internet-enabled its value chain. The e-enterprise has succeeded in creating the virtual company we discussed earlier. In this environment, the information infrastructures of the organizations within the value chain have become fully integrated with one another. We are reminded of our analogy between information systems and the nervous system. Two organisms can form a symbiotic relationship in which each thrives off the other yet maintains its distinct identities. When two organisms start to share the same systems, nervous systems or cardiovascular systems, for example, they cease to be two organisms and become one. When organizations integrate information systems, their nervous systems, they form one virtual organization. The two have evolved through adaptation into a new more powerful organisman organism fighting for survival in a market of lesser, weaker competitors . You may have noticed a difference in terminology from what we used earlier in this chapter. Here we use the term value chain as opposed to supply chain. You can envision the supply chain as the process that is carried out within an organization that entails the procurement of materials, the processing of those materials to create finished goods, and the distribution of those finished goods to customers. For the purposes of our discussion, the value chain is a chain of supply chains. The value chain extends from the customer all the way back through retailers, distributors , manufacturers, and suppliers. The entire length of the value chain reaches from the customer to the actual supplier of raw materials. As we stated earlier, while the B2C aspects of the Internet have certainly captured the imagination of most industry watchers, the real action is occurring in the B2B space. In their book B2B Exchanges , [6] Sculley and Woods project that the B2B market will reach $1.5 trillion in the United States by the year 2004, while more than $600 billion of that market will pass through B2B exchanges. Compare this to a B2C market of $108 billion.
As the expression says, there is nothing new under the sun. The concept of supply chain integration has been with us for some time. Electronic Data Interchange (EDI) has been with us since the late 1960s. Since then organizations have attempted to share information using a number of different technologies. Some organizations attempted direct connections between systems. Others attempted to create Value Added Networks (VANs) or clearing centers. In these environments, a company will post a message with a destination address in a post box. The VAN takes the messages from the various boxes, sorts them, and distributes them to the recipients. The exchange of files between systems, however, was just one piece in the EDI puzzle. Receiving a message is one thing, understanding it is quite another. Of course, it was always possible to share flat ASCII files. To do this, however, both the sender and the receiver needed to understand the structure of the file in advance; deviation from the agreed upon structure caused errors and possibly the failure of the entire transmission. As one can see, these systems, in addition to their exclusivity, were complex, which made them difficult to implement. This in turn made them expensive. These drawbacks made EDI the domain of large organizations that could afford such costs. Smaller companies that could not afford this investment in technology were excluded from the party. Internet technology solved some of these problems, opening the world of EDI and the ensuing integration of information systems to even the smallest of organizations. The first issue resolved by the Internet is the communication between systems. In the Internet age, anything from a PDA to a supercomputer can communicate. Organizations with the smallest of budgets can easily establish communications with suppliers, sharing data in a variety of ways. Such methods as email, HTTP, and FTP are all simple, inexpensive, and easy ways of sending files over the Internet. The eXtensible Markup Language (XML) was soon seen as a solution to the second part of the problem, which was understanding what was being sent. Being a cousin of HTML (Hypertext Markup Language), XML was viewed as a better way of transmitting data over the Internet. XML is not necessarily the panacea some would claim. There are still issues with XML, such as the extraction and integration of XML data. Yet, it is far simpler than maintaining communication between systems using flat ASCII files. Organizations can now develop communications systems that interact with not only one supplier, but many. Who hosts the system is another important advantage over EDI in the Internet age. In the past, a ball bearing company, interested in EDI, suddenly found itself in the business of setting up a communications network. This was an expensive undertaking. Beyond the initial development costs were network maintenance and support costs. In the Internet age, companies focus on what they do best. Organizations wishing to participate in B2B markets can enter via Application Service Providers (ASPs). The entire system can be outsourced. As we shall see, organizations can become part of exchanges with virtually no additional hardware or software. The Internet has provided the foundation upon which we build our virtual organization. It provides the vehicle for the communication of data along the value chain in addition to a common language, XML. We have Internet-enabled our information infrastructure, expanding it across the entire value chain. As we enhance the power of our information infrastructure with the power of the Internet, we must also enhance the power of our intelligence systems. We transform our business intelligence to IEBI. 2.4.5 THE EXCHANGEWhen EDI was first attempted, many of the connections between companies were peer to peer. The Internet improves on this. Using the Internet, organizations can maintain many simultaneous connections. It is interesting that Bob Metcalfe described the value of a network as the number of people on that network squared. Networks with 10 people on it would have a value of 100, while a network with 100 people would have a relative value of 10,000. This observation was made in the context of a point-to-point network. Kevin Kelly noted in New Rules for the New Economy [7] that in the Internet age multiple simultaneous connections can be maintained . In such environments the value of the network increases not by squaring the number of people on the network but by raising the number of people on the network to power of that number. Using Metcalfe's example, the value of a network of 10 people is 10 to the 10th power, or 10 billion. The network of 100 people has the relative value of 100 to the 100th power, or 1.e + 200.
As we can see, the wider the audience, the more effective and ultimately the more profitable our efforts. For this reason, we see that B2B exchanges have enormous power. Consider the nature of an exchange. In the traditional brick-and-mortar exchange we have a place where a number of people come together to do business. We see this in stock exchanges. Stockbrokers come together to buy and sell stock. We see similar activities in B2B markets. Buyers and sellers come together in one virtual space. The business of the exchange itself is to facilitate business between the participants within the exchange. To this end, the exchange acts as a neutral and independent third party in transactions. If we continue the analogy between B2B exchanges and the stock exchange, the organization operating the B2B exchange would be the equivalent of the Securities and Exchange Commission. There are four basic types of exchanges. The first, aggregate exchanges, collect the products offered by multiple suppliers into one place. The buyer can then compare similar products from multiple vendors. Vendors whose products are included in this aggregation may not necessarily have a Web presence of their own. This is another way for companies that may not otherwise be able to participate in EDI to find entry into B2B markets. In our discussion on e-procurement we proposed that organizations have a catalog of approved vendors. We can easily implement this through an aggregate exchange. The exchange provides for the management of the catalogs, such as maintaining content, approving vendors, and monitoring quality. As new vendors enter the marketplace, the exchange can determine their acceptability. Companies participating in the exchange can accept all or a subset of the vendors as suppliers. The second type of exchange is an auction exchange. In these exchanges, bids are submitted for products and services. These bids can originate from either the buyer or the seller. Auction exchanges can operate in a variety of ways. In the basic auction exchange, blind bids are submitted and evaluated. The auction process can also be fully automated, where the system matches bids between buyers and sellers. Obviously, such markets are highly competitive and offer advantages to both buyers and sellers. While buyers are able to drive prices down, sellers have a distribution channel where they can offload excess inventory. The third type of exchange is a trading hub . A trading hub is a virtual marketplace in which vendors can advertise and sell their products. Trading hubs have a distinct benefit to the buyer in that they typically set up communities comprised of both buyers and sellers. These communities provide the buyer with information concerning their businesses. They can learn the latest on industry trends. Buyers can share information on where certain products fail and helpful tips on the use of other products. Again, we see similarities between B2B and B2C markets. Earlier, we discussed personalization. Part of personalization is the ability to create communities of users. These communities can be centered on basically any aspect of the B2B exchange, whether it is related to product sets, product utilization, or industries that use a particular type of product. All are valid types of communities that can be established within a trading hub. The fourth type of exchange is the video dating exchange. I refer to these types of exchanges as video dating because they provide introductions between potential buyers and sellers. The exchange is involved only in the initial introduction of the two parties. Subsequent activities occur outside of the exchange. A buyer or seller posts a description of the product or service in which he or she is interested. The second party responds, and from there they go on to carry out the transaction as they normally would. |
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