Chapter 2
E-Commerce
Market Mechanisms
1
Learning Objectives
Define e-marketplaces and list their components
List the major types of electronic markets and
describe their features
Define supply chains and value chains and
understand their roles
Describe the role of intermediaries in EC
Discuss competition, quality, and liquidity
issues in e-marketplaces
Describe electronic catalogs, shopping carts,
and search engines
2
Learning Objectives (cont.)
Describe the various types of auctions and list
their characteristics
Discuss the benefits, limitations, and impacts
of auctions
Describe bartering and negotiating online
Describe the impact of e-marketplaces on
organizations
Define m-commerce and explain its role as a
market mechanism
3
How Raffles Hotel is
Conducting E-Commerce
The Problem
The companys success depends on the its ability
to lure customers to its hotels and facilities and
on its ability to contain costs
Solution
Business-to-consumermaintains a public portal
(raffles.com) that includes:
Information on the hotels
Reservation system
Links to travelers resources
Customer relationship management (CRM) program
Online store for Raffles products
4
Raffles Hotel (cont.)
Business-to-businessmaintains an
interorganizational systems that enable
efficient contacts with its suppliers
The e-marketplace also has a sell-side,
allowing other hotels to buy Raffles-branded
products from electronic catalogs
(bathrobes)
Competitors buy Raffles-branded products
because they are inexpensive, but look
upscale
5
Raffles Hotel (cont.)
The Results
Public portal helps in customer acquisition
Hotel is able to maintain high occupancy
rates using:
Promotions
Direct sales
Raffles Hotel (cont.)
The private marketplace is strategically
advantageous:
Raffles in forcing suppliers to disclose
their prices, thus increasing competition
among suppliers
Raffles is saving about $1 million a year
on procurement of eight high-volume
supplies; more savings on other
products
Success is evident in its aggressive
expansion in the Asian markets
7
Electronic Marketplaces
Markets facilitate
exchange of
Information
Goods
Services
Payments
Markets create
economic value for
Buyers
Sellers
Market
intermediaries
Society at large
Electronic Marketplaces (cont.)
3 main functions of markets
Matching buyers and sellers
Facilitating the exchange of information,
goods, services, and payments
associated with market transactions
Providing an institutional infrastructure
NTE Evens the Load
National Transportation Exchange (nte.com) is
attempting to keep trucks on the road full on
both outbound and return tripsuses the
Internet to connect shippers with fleet
managers who have space to fill
Creates spot market
Gets information from shippers about their
needs and flexibility in dates
Works out the best deals for the shippers and
the haulers
Issues the contract and handles payments
The process takes only a few minutes
10
NTE Evens the Load (cont.)
NTE collects a commission based on the
value of each deal
Fleet manager gets extra revenue that
they would otherwise have missed out on
The shipper gets a bargain price, at the
cost of some loss of flexibility
NTE reaches down to the level of individual
truck drivers and provides a much wider
range of services (wireless Internet access)
11
Marketspace Components
Marketspacea marketplace in which
sellers and buyers exchange goods and
services for money (or for other goods
and services), but do so electronically
Customers Sellers
Goods (physical or digital) Infrastructure
Front-end
Back-end
Intermediaries/business partners
Support services
12
Marketspace Components (cont.)
Customers
Web surfers
looking for
Bargains
customized items
Collectors items
entertainment etc.
Organizations
account for over 85
percent of EC
activities
Sellers
Hundreds of
thousands of
storefronts are on
the Web
Advertising and
offering millions
of Web sites
Sellers can sell
Direct from their
Web site
E-marketplaces
13
Marketspace Components (cont.)
Products
Physical products
Digital products
goods that can be
transformed to
digital format and
delivered over
the Internet
Infrastructure
Hardware
Software
Networks
14
Marketspace Components (cont.)
Front-end business
processes include
Sellers portal
Electronic
catalogs
shopping cart
Search engine
Payment gateway
Back-end activities are
related to
Order aggregation
and fulfillment
Inventory
management
Purchasing from
suppliers
Payment processing
Packaging and
delivery
15
Marketspace Components (cont.)
Intermediarya third party that operates
between sellers and buyers
Other business partnerscollaborate
on the Internet, mostly along the
supply chain
Support services such as
Certification and trust services
Knowledge providers
16
Types of Electronic Markets
Electronic storefrontsa single companys
Web site where products and services are
sold
Mechanisms for conducting sales
Electronic catalogs
Payment gateway
Search engine
Shipment court
Customer services
Electronic cart
E-auction facilities
Electronic malls (e-malls)an online
shopping center where many stores are
located
17
Types of Electronic Markets (cont.)
Types of stores and malls
General stores/malls
large marketspaces that
sell all types of products
Public portals
Specialized stores/malls
sell only one or a few
types of products
Regional vs. global
stores
Pure online
organizations vs.
click-and-mortar
stores
E-marketplacesonline market, usually B2B,
in which buyers and sellers negotiate; the three
types of e-marketplaces are private , public ,
consortia
18
E-Marketplaces
Private e-marketplacesonline markets
owned by a single company:
Sell-sidecompany sells either standard
or customized products to qualified
companies
Buy-side marketplacescompany makes
purchases from invited suppliers
Public e-marketplacesB2B markets, usually
owned and/or managed by an independent
third party, that include many sellers and many
buyers (exchanges)
19
Consortia & Information Portals
Consortiae-marketplaces that deal with
suppliers and buyers in a single industry
Vertical consortia are confined to one industry
Horizontal allow different industries trade there
Information portala personalized, single
point of access through a Web browser to
business information inside (and marginally
from outside) an organization
Publishing portals Commercial portals
Personal portals
Mobile portals
Corporate portals
20
Supply Chains
Supply chainthe flow of materials,
information, money, and services from
raw material suppliers through factories
and warehouses to the end customers
Includes organizations and processes that
create and deliver the following to the end
customers:
Products
Information
Services
21
Supply Chains (cont.)
A supply chain involves activities that
take place during the entire product
life cycle
It also includes:
Movement of information and money and
procedures that support the movement of
a product or a service
The organizations and individuals involved
22
Exhibit 2.3
A Simple Supply Chain
23
Supply Chain Components
Upstream supply chainincludes the activities
of suppliers (manufacturers and/or assemblers)
and their suppliers
Internal supply chainincludes all in-house
processes used in transforming the inputs
received from the suppliers into the
organizations outputs
Downstream supply chainincludes all the
activities involved in delivering the product to
the final customers
24
Types of Supply Chains
Integrated make-to-stock
Continuous replenishment
Build-to-ordermodel in which a
manufacturer begins assembly of the
customers order almost immediately upon
receipt of the order
Channel assemblymodel in which product
is assembled as it moves through the
distribution channel
25
Exhibit 2.4
Supply Chains: Integrated & Build-to-Order
26
Value Chain & Value System
Value chainthe series of activities a
company performs to achieve its goal(s) at
various stages of the production process;
each activity adds value to the companys
product or service, contributes to profit, and
enhances competitive position in the market
Value systema set of value chains in an
entire industry, including the value chains of
tiers of suppliers, distribution channels, and
customers
27
Supply Chain & Value Chain
Value chain and the supply chain
concepts are interrelated
Value chain shows the activities
performed by an organization and the
values added by each
The supply chain shows flows of
materials, money, and information that
support the execution of these activities
28
Supply Chain & Value Chain (cont.)
EC increases the value added by:
Introducing new business models
Automating business processes
EC smoothes the supply chain by:
Reducing problems in the flows of
material, money, and information
EC facilitates the restructuring of
business activities and supply chains
29
Intermediation in E-Commerce
Intermediaries provide value-added activities and
services to buyers and sellers: wholesalers,
retailers, infomediaries
Roles of intermediaries
Search costsdatabases on customer preferences
Lack of privacyanonymity of sellers and buyers
Incomplete informationgather product
information
Contract riskprotect sellers against non-payment
Pricing inefficienciesinduce appropriate trades
30
E-Distributors on B2B
E-distributoran e-commerce intermediary
that connects manufacturers (suppliers)
with buyers by aggregating the catalogs of
many suppliers in one placethe
intermediarys Web site
E-distributors also provide support services
Payments
Deliveries
Escrow services
Aggregate buyers and or sellers orders
31
Disintermediation &
Reintermediation
Disintermediationelimination of
intermediaries between sellers and buyers
Reintermediationestablishment of new
intermediary roles for traditional
intermediaries that were disintermediated
32
Syndication as an EC Mechanism
Syndicationthe sale of the same good (e.g.,
digital content) to many customers, who then
integrate it with other offerings and resell it or
give it away free
33
Competition in
the Internet Ecosystem
Competition in the Internet ecosystem
(business model of the online economy)
Inclusive with low barriers to entry
Self-organizing
Old rules may no longer apply
Competition is tense
Lower buyers search cost
Speedy comparisons
Differentiation and personalization
34
Competition in
the Internet Ecosystem (cont.)
Differentiationproviding a product or
service that is unique
Personalizationthe ability to tailor a
product, service, or Web content to
specific user preferences
Lower prices
35
Competition in
the Internet Ecosystem (cont.)
Customer service is an extremely
important competitive factor
Some competitive factors are less
important as a result of EC:
Size of company is no longer significant
Geographical location is insignificant
Language barriers are being removed
Digital products do not have normal wear and
tear
36
Competition in
the Internet Ecosystem (cont.)
EC supports efficient markets and could
result in almost perfect competition with
these characteristics:
Many buyers and sellers must be able to
enter the market at no entry cost
Large buyers or sellers are not able to
individually influence the market
The products must be homogeneous
Buyers and sellers must have
comprehensive information about the
products and about the market
participants demands, supplies, and
conditions
37
Porters Competitive Analysis
Porters competitive forces model applied to
an industry views 5 major forces of
competition that determine the industrys
structural attractiveness
These forces, in combination, determine how
the economic value created in an industry is
divided among the players in the industry
Such an industry analysis helps companies
develop their competitive strategy
38
Exhibit 2.6:
Porters Competitive Forces Model
39
Liquidity
Liquiditythe need for a critical mass
of buyers and sellers
The fixed cost of deploying EC can be
very high
Without a large number of buyers, sellers
will not make money
Early liquidityachieving a critical mass
of buyers and sellers as fast as possible,
before the market-makers cash
disappears
40
Quality Uncertainty & Assurance
Quality uncertaintythe uncertainty of
online buyers about the quality of products
that they have never seen, especially from
an unknown vendor
Provide free samples
Return if not satisfied
Microproducta small digital product
costing a few cents
Insurance, escrow, and other services
41
E-Market Success Factors
Contributors to e-market success
Product
characteristics
Type
Price
Availability of
standards and
product information
Industry
characteristics
Brokers currently
necessary
Intelligent systems
may replace brokers
Seller characteristics
Consumers find
sellers with the
lowest prices
Low-volume, higherprofit-margin
transactions
Consumer
characteristics
Impulse buyers
Patient buyers
Analytical buyers
42
Electronic Catalogs
Electronic catalogsthe presentation of
product information in an electronic form; the
backbone of most e-selling sites
Evolution of electronic catalogs
Merchantsadvertise and promote
Customerssource of information and price
comparisons
Consist of product database, directory and
search capability and presentation function
Replication of text that appears in paper
catalogs
More dynamic, customized, and integrated
43
Classifications of
Electronic Catalogs
Dynamics of information presentation
static or dynamic
Degree of customizationready-made or
customized
Electronic catalogs allow integration of:
Order taking and fulfillment
Electronic payment
Intranet workflow
Inventory and accounting system
Suppliers extranet
Relationship to paper catalogs
44
Customized Catalogs
Assembled specifically for:
A company
An individual shopper
Customization systems can:
Create branded, value-added capabilities
Allows user to compose order
May include individualized prices, products,
and display formats
Automatically identify the characteristics of
customers based on the transaction records
45
Electronic Catalogs at Boise Cascade
Boise Cascade Office Products--$3billion office products wholesaler of
over 200,000 different items
They had a 900-page paper catalog that
was mailed once each year; minicatalogs
tailored to customers individual needs
The company placed its catalogs online
in 1996 (boiseoffice.com)
46
Boise Cascade (cont.)
Sales through the Web site:
199720 percent
199930 percent
200480 percent (expected)
Production of a single paper catalog took 6
weeks/production of Web catalog takes 1 week
Major advantage of customized catalogs is
pricing
Electronic orders cost 55 percent less to
process than paper-based orders
47
Boise Cascade (cont.)
48
Search Engines
Search enginea computer program
that can access a database of Internet
resources, search for specific information
or keywords, and report the results
Software (intelligent) agentsoftware
that can perform routine tasks that
require intelligence
49
Search Engines, Intelligent Agents
and Shopping Carts
E-commerce users use both search engines
and intelligent agents
Search engines find products or services
Software agents conduct other tasks
(comparisons)
Electronic shopping cartan orderprocessing technology that allows
customers to accumulate items they wish to
buy while they continue to shop
50
Auctions
Auctiona market mechanism by which a
seller places an offer to sell a product and
buyers make bids sequentially and
competitively until a final price is reached
Auctions deal with products and services
for which conventional marketing
channels are ineffective or inefficient
51
Limitations of Traditional Auctions
Traditional auctions are generally a
rapid process
It may be difficult for sellers to move
goods to the auction site
Commissions are fairly high
52
Electronic Auctions
Electronic auctions (e-auctions)
auctions conducted online
Host sites on the Internet serve as
brokers offering:
Services for sellers to post their
goods for sale
Allowing buyers to bid on those items
Many sites have certain etiquette rules
that must be adhered to in order to
conduct fair business
53
Electronic Auctions (cont.)
Major online auctions offer:
Consumer products
Electronic parts
Artwork
Vacation packages
Airline tickets
Collectibles
Excess supplies and inventories
being auctioned off by B2B marketers
54
Dynamic Pricing
Dynamic pricingprices that change based
on supply and demand relationships at any
given time
The four major categories of dynamic
pricing are based on the number of buyers
and sellers involved:
One buyer, one seller
One seller, many potential buyers
One buyer, many potential sellers
Many sellers, many buyers
55
Exhibit 2.8
Types of Dynamic Pricing
56
Dynamic Pricing (cont.)
One buyer, one seller uses
Negotiation
Bargaining
Bartering
Price will be determined by:
Each partys bargaining power
Supply and demand in the items
market
Possibly business environment factors
57
Dynamic Pricing (cont.)
One seller, many potential buyers
Forward auctionan auction in which a
seller entertains bids from buyers
English auctionan auction in buyers bid
on an item in sequence and the price
increases with time
Yankee auctionauction of multiple
identical items in which bidders can bid for
any number of the items offered, and the
highest bid wins
58
Dynamic Pricing (cont.)
Dutch auctionauction of multiple identical
items, with prices starting at a very high
level and declining as the auction time
passes
Free-fall (declining price) auctiona
variation of the Dutch auction in which only
one item is auctioned at a time; the price
starts at a very high level and declines at
fixed time intervals, the winning bid is the
lowest one when the time expires
59
Exhibit 2.9
English Auction, Ascending Price
60
Dynamic Pricing (cont.)
One buyer, many potential sellers
Reverse auction (bidding, or tendering
system)auction in which the buyer
places an item for bid (tender) on a
request for quote (RFQ) system, potential
suppliers bid on the job, with price
reducing sequentially, and the lowest bid
wins; primarily a B2B or G2B mechanism
61
Exhibit 2.10
The Reverse Auction Process
62
Dynamic Pricing (cont.)
One buyer, many potential sellers (cont.)
Name-your-own-price model
Consumer-to-business (C2B) model
Many sellers, many buyers
Double Auctionbuyers and their bidding
prices and sellers and their asking prices are
matched, considering the quantities on both
sides
63
Limitations of Electronic Auctions
Possibility of frauddefective goods or
receive goods/services without paying
Limited participationinvitation only or
Open to dealers only
Lack of securityC2C auctions sometimes
not done in an unencrypted environment
Limited softwareonly a few completeor
off-the-shelf market-enabling solutions
64
Impacts of Auctions
Auctions as a coordination mechanism
Auctions as a social mechanism to
determine a price
Auctions as a highly visible distribution
mechanism
Auctions as a component in ecommerce
65
Reverse Mortgage Auctions
in Singapore
Homebuyers like to get the lowest possible
mortgage rates
In Singapore, Dollardex.com uses reverse
auctions that are combined with group
purchasing
Dollardexs first project:
Site invited potential buyers to fill out
applications on a secure Web site
7 lending banks were invited to bid on the loans
66
Reverse Mortgage Auctions
in Singapore (cont.)
In a secure electronic room, borrowers and
lenders negotiated the deal, 2 days later the
borrowers voted for one bank
Borrowers negotiated loans 0.5 per-cent less
than the regular rate and waiver of the legal
fees with United Overseas Bank (UOB)
UOB generated $10 million of business
Dollardex allows customers to participate
in an individual reverse auction if they do
not want to join a group
67
Bartering Online
Barteringan exchange of goods and services
Bartering exchanges
Give your offer to intermediary
Intermediary asses value of your product or
service inpoints
Use points to buy what you need
Bartering sites must be financially secure
Alternative to bartering is to auction surplus and
then use the money collected to buy items needed
68
Bartering Online (cont.)
E-barteringbartering conducted
online, usually by a bartering
exchange
Bartering exchangea marketplace in
which an intermediary arranges barter
transactions
69
Online Negotiating
Online negotiationelectronic negotiation,
usually done by software (intelligent) agents that
perform searches and comparisons; improves
bundling and customization of products and
services
Dynamic prices can be determined by negotiation
Negotiated prices result from interactions and
bargaining among sellers and buyers
Expensive items like cars and real estate
Deal with nonpricing terms like payment method
and credit
70
Online Negotiating (cont.)
Three factors that facilitate negotiated
prices
Intelligent agents that perform searches and
comparisons
Computer technology that facilitates
negotiation process
Products and services that are bundled and
customized
71
Mobile Commerce
Mobile computing permits real-time
access to information, applications, and
tools that, until recently, were accessible
only from a desktop computer
Mobile commerce (m-commerce)
e-commerce conducted via wireless
devices
M-businessthe broadest definition of
m-commerce, in which e-business is
conducted in a wireless environment
72
The Promise of M-Commerce
Mobility significantly
changes the manner
in which people and
customers:
Interact
Communicate
Collaborate
Mobile applications
are expected to
change the way
we:
Live
Play
Do business
73
The Promise of M-Commerce (cont.)
The PC-based Internet culture may change to one
based on mobile devices
M-commerce creates new business models for EC,
notably location-based applications
Many large corporations with huge marketing
presence are transforming their businesses to
include m-commerce-based products and services
Microsoft
AT&T
Intel
AOL-Time-Warner
Sony
74
I-Mode: Successful Mobile Portal
An example of the spread of m-commerce is
DoCoMos i-Mode; some applications of I-Mode
are:
Shopping guides
Maps and
transportation
Ticketing
News and reports
Personalized movie
service
Entertainment
Dining and reservations
Additional services
Banking
Stock trading
Telephone directory
searches
Dictionary services
Horoscopes
75
Impacts of E-Markets on Business
Processes & Organizations
Impacts of e-markets on B2C direct
marketing:
Product promotion
New sales channel
Direct savings
Reduced cycle time
Customer service
Brand or corporate
image
Customization
Advertising
Ordering systems
Market operations
76
Exhibit 2.11
Analysis-of-Impacts Framework
77
Transforming Organizations
Technology and organizational learning
To survive, companies will have to learn and
adapt quickly to the new technologies
Corporate change must be planned and
managed
New technologies will require new
organizational structures and approaches
78
Transforming Organizations (cont.)
The changing nature of work
Driven by increased competition in the
global marketplace, firms are Reducing the
number of employees and Outsourcing
whatever work they can to countries
where wages are significantly less
The upheaval brought on by these
changes creates new opportunities and
new risks; forces us to think new ways of
about jobs, careers, and salaries
79
Transforming Organizations (cont.)
Digital-Age workers will have to be very
flexibletruly secure jobs will be few, many
will work from home
Digital-Age companies will have to prize its
core of essential workers as its most
valuable assetempowering them and
providing them with means to expand their
knowledge and skill base
80
Redefining Organizations
New and improved product capabilities
E-markets allow for new products to be
created and/or for existing products to be
customized in innovative ways
Customer profiles and data on customer
preferencessource of information for
improving products or designing new ones
Mass customization enables manufacturers to
create specific products for each customer,
based on the customers exact needs
81
Redefining Organizations (cont.)
New business models
E-markets affect individual companies, products,
entire industries
Improving the supply chain
Impacts on manufacturing
Manufacturing systems changing from mass
production lines to demand-driven, just-in-time
manufacturing
Virtual manufacturing enables global
manufacturing plants to run as though they
were one in location
82
Exhibit 2.12a
Changes in the Supply Chain
83
Exhibit 2.12b
Changes in the Supply Chain
84
Redefining Organizations (cont.)
Impacts on Manufacturing (cont.)
Build-to-Orderthe biggest change in
manufacturing will be the move to buildto-order systems
Manufacturing or assembly will start
only after an order is received
Will change not only the production
planning and control, but also the
entire supply chain
85
A New Model for Small Movers
When the U.S. economy started to slow
down, and fuel prices increased
DM & S (a small trucking company with $1.8
million in annual sales) started to lose money
A major problem in the trucking industry:
Trucks need to move cargos at certain times
They may not have a full load causing lost
revenue
DM & S created a reverse-auction service
Small moving companies bid on jobs of
moving goods for individuals
Customers with flexible moving dates
benefit the most
86
Small Movers (cont.)
Dickerabid.com cost $15,000 to create:
Customers place notice of their job on the
site
Small truckers start to bid
Customers can get huge discounts
Truckers can earn money to help cover their
fuel expenses
During the first few months of operation
4 truckers increased to 20
Increased revenues by $14,000
The Web site won third place in Inc.s Web
innovations in 2000
87
Redefining Organizations (cont.)
Impacts on finance and accounting
E-markets require special finance and
accounting systemsmost are electronic
payment systems complicated by legal
issues and international standards
Executing an electronic order triggers backoffice transactions
These activities must be efficient,
synchronized, and fast so the electronic trade
will not be slowed down
88
Ciscos Virtual Close
Cisco Systems supplies vast networks
that connect computers to the Internet
Virtual Close was developed to allow
companies to close its accounting records
(its books) more quickly
Cisco is implementing such a system for
itself for closing quarterly accounts
Used to take up to 10 days; within 4 years
it took 2 dayssignificantly cut its cost
By 2002 or 2003 Cisco hopes to close the
books with 1 hours notice, on any day in
the quarter
89
Ciscos Virtual Close (cont.)
Advantages of Virtual Close
Companies can become proactive,
spotting problems at any time
New opportunities can be detected early
Enables quick drill down analysis,
which locates the causes of either poor
or excellent performance
Brings huge productivity gains related to
corporate financial reporting
90
Redefining Organizations (cont.)
Impact on human resource management
and training
EC is changing how people are recruited,
evaluated, promoted, and developed
EC also is changing the way training and
education are offered to employees
Online distance learning and virtual
courses are exploding
Companies are cutting training costs by
50 percent or more
91
Redefining Organizations (cont.)
New e-learning systems offer two-way
video, on-the-fly interaction, application
sharing
E- learning may be their ticket to corporate
survival as changing environments, new
technologies, and continuously changing
procedures make it necessary for employees
to be trained and retrained constantly
92
Managerial Issues
How do we compete in the digital economy?
What about intermediaries?
What organizational changes will be needed?
Should we auction?
What should be auctioned?
Should we have our own auction site or use a
third-party site?
Should we barter?
What m-commerce opportunities are available?
93
Summary
E-marketplaces and their components
The major types of e-markets
Supply chains and value chains
The role of intermediation
Competition, quality, and liquidity in
e-markets
Electronic catalogs, search engines, and
shopping carts
Types of auctions and their characteristics
94
