Prudens Information Resources for the Internet


E-Commerce Update

E-Business

A Prudens E-Report

The Growth of E-Commerce | E-Commerce Business Concepts | B2C Concepts | B2B Concepts | The Future of B2B



The Growth of E-Commerce

E-Commerce continues its rapid growth, continues to evolve, and continues to increase in technical sophistication. It may yet live up to Peter Drucker's prediction that just as the railroad emerged from the Industrial Revolution to forever change the economy, society, and politics of the country, e-commerce is coming out of the Information Revolution to do the same in our own age.1 Many others, however, believe that e-commerce simply provides a new sales channel that will be very useful for some buyers, such as companies looking for additional sources of materials, or for individuals who want to compare prices.

Business-to-Consumer (B2C) sales have grown every year since its inception in spite of well-publicized problems such as failed customer service and fraud. However, its convenience is greatly appreciated by customers when it works "as advertised." It is also used in conjunction with other channels of shopping both in person or via telephone. The Internet can show the full range of products and the lowest price for each.

Online consumer sales grew steadily during the Dot-Com bust, during falling consumer confidence and through a recession. A study by the Pew Internet & American Life Project attributes this to a growing confidence in e-commerce. It shows a steady increase in online sales, in spite of a steady decrease in consumer confidence, during 2000 - 2002.2

Much of the current B2C sales are by traditional retailers. Moreover, the larger B2C startup firms, such as Amazon.com, have built facilities such as warehouses and are beginning to look more like traditional firms.


Amazon.com

Amazon is probably the most famous B2C business. Founded by CEO Jeff Bezos, Amazon went public in 1993 and has been at the center of the e-Commerce revolution ever since. It has changed its business concept frequently to take advantages of its competencies. It also failed to show a profit for many years because even as revenues grew, expenses grew even faster. After 10 years the company posted its first annual profit in 2003, after discount programs and free shipping boosted earnings in the fourth quarter.

Online consumer sales in the U.S. are still a small fraction of total retail sales. In 1998, the retail sector was estimated by the National Retail Federation to be $1.6 trillion in sales, of which online sales comprised 0.5 percent. By 2010 it will be 13% of total U.S. retail sales.

While B2C receives a lot of attention, its revenues are approximately one fifth the value of Business-to-Business (B2B) transactions. Growth in B2B e-business extends far beyond the technology sector, to automobile manufacturing, utilities, shipping, warehousing, chemicals, and other commodities. The cost of procuring goods online in a global marketplace is lower than other methods. Companies are moving their B2B transactions online to remain competitive.

The initial growth of B2B is largely due to the experience of business in electronic purchasing with EDI. But the huge potential for growth, not fully reflected in the e-commerce forecasts, is in B2C sales.

E-Commerce Business Concepts

The business concepts for B2C and B2B commerce are similar. Catalog ordering, or procurement, are essentially the same activities with different names. Auctions are similar too as is the aggregation of supply and demand, which can help both individuals and small companies compete with large companies on an equal footing. But perhaps the most important thing about e-Commerce models is that they continue to evolve. As business concepts take on a larger scope of activities, they overlap other categories of models. For example, both B2C and B2B companies use eBay as an auction site.

Some offerings are sold more successfully in e-Commerce: commodity items, items users tend to know a lot about such as automobiles, and items where buyers utilize a mix of online and offline information to make a purchase. Seldom purchased items such as diamonds and furniture require a knowledge and appreciation by buyers that discourages them from making online transactions. They need to see the diamond sparkle, and the feel the comfort of a good chair.

An early premise of e-commerce was to bypass the middleman, or intermediary, in a process known as disintermediation. Some of these efforts quickly got into trouble with distribution and delivery, or with their reseller channels.


Disintermediation Leads to Channel Conflict

Compaq Computer, which has since merged with Hewlett Packard, never fully recovered from its attempt to bypass its sales channels to sell PCs directly to the public over the Internet like its competitor Dell Computer. Compaq's sales channels, including stores and Value Added Resellers (VARs) rebelled and refused to compete with online sales. Compaq was forced to backtrack and de-emphasize its online approach. Not only did it lose sales, it also lost the trust and support of its channel partners.

Retail activities in different companies are strikingly similar and well known, in contrast to manufacturing and processing activities, on which B2B is based. The capabilities and competencies of B2B sellers are often those of traditional commerce, such as personalized customer service, databases containing customer preference information, and order fulfillment and distribution. Many online merchants outsource the purchase transaction to other firms such as Digital River, which handles sales for about 13,000 firms. But some B2B sellers or intermediaries must have specialized expertise in order to understand the business of the potential customer. It is not unusual for the seller to provide feasibility and ROI analyses, to show how a purchase will provide value.


Competencies: Amazon and Nordstrom

In terms of competencies Amazon.com and Nordstrom are similar. Both are well known for their customer service. Amazon.com's competency in online sales, customer service and order fulfillment allowed it to easily add new items to its list of products. It has grown from selling books into an online variety store.

Nordstrom's return policy is legendary. Part of its folklore is that Nordstrom once accepted a set of tires a customer thought he had purchased from them - even though Nordstrom doesn't sell tires! Nordstrom's high-quality goods, customer service and liberal return policy allowed it to expand from a single shoe store into a very successful national department store chain.

Environment and Strategies

Most e-commerce companies are very concerned about competitors and sometimes less concerned than they should be about the customer. During the Dot-Com era companies needed only to show the same set of strategies as an existing firm, that had a high capitalization in the stock market, to get funding. The point was to show reduced risk for investors by being as similar as possible to other "well-performing" companies.

The similarity of strategies meant that many of the firms that rose together in the stock market, came down together when investors began to realize that they were not going concerns. Many of these firms were criticized for their business models when in fact they didn't have business models or the corresponding strategies.

Business-to-Consumer Business Concepts

There are some interesting differences in B2C concepts and the technical systems required to implement them. Most of the concepts for B2C can be summarized in three categories: e-catalog, auctions, and the aggregation and disaggregation of supply and demand.

E-Catalogs

The e-catalog concept represents one of the simplest ways to transfer everyday experience to the Web. In this approach, a shopper selects items from an electronic catalog on a Web site. Everyone loves this approach. It saves time and it saves money. Think of manually searching huge catalogs, which are expensive to print and quickly outdated. It's a similar situation with repair manuals and personnel manuals.


E-Catalog for Auto Parts

Consider an automobile parts distributor with a huge selection of parts from different suppliers. About ten years ago, suppliers put parts information on a CD-ROM sent it to each store. This sped up searching - if you knew who supplied the part. Now, information for all parts from all of the suppliers can be placed on the distributor's server and access provided to each shop. Mechanics, who are the distributor's customers, can search from their work place to identify the part and determine its availability and price.

The distributor is an intermediary who helps part suppliers offer their products to millions of mechanics and who aggregates information about parts for the mechanic. Also, of great importance, the distributor stocks many parts so they can be immediately available to the mechanic, who is usually under pressure to deliver fast service.

In order to grow, e-catalog sales have had to make inroads against stores, traditional catalog sales, telemarketing and TV home shopping. And since, for most people, a telephone is easier to use than a Web browser, B2C customers must be enticed to the Web. A wide selection of products, special types of products, low prices, free shipping, and ease of purchase are some of the reasons people are attracted to purchase online.

Auctions

Auctions are forums where users can either buy or sell goods to other users in a group process where purchase prices offered for an item, or lot, are refused until an acceptable price is offered. Although auctions have been conducted for more than 400 years in places such as the tulip market in Amsterdam, the Internet has revitalized the process.


Online Auction Growth - eBay Growth

Online auctions grew from $3.8 billion in revenues in 1999, to $10 billion in 2001 and $19 billion in 2004. Auctions are forecast to grow to $54 billion in the U.S. by 2007.

The largest B2C auction site, eBay, led the way with revenues of $3.3 billion in 2004. It is forecast to handle $240 billion in gross merchandise volume, or 4% of the total global retail commerce by 2014.

eBay has also helped grow the national and global economy in another way. An individual who is successful at selling items on the site may decide to start an online retail business, as over 50,000 U.S. and 50,000 foreign eBay users have done!

Source: Forrester, IDC.

There are various approaches for conducting auctions: the traditional auction where buyers bid, the reverse auction where the sellers bid, or the reserve price approach where the seller sets the lowest acceptable bid.

A few companies, such as eBay, and Yahoo! Auctions, grew into giant sites by offering just about anything for sale. Unable to compete directly, some smaller auction sites have formed partnerships with the larger sites, which, for a fee, direct buyers interested in particular items. Small auction sites can also become successful if their reputation as a specialist can grow.

Online Malls

An individual who sells successfully on an auction site may want to set up a small store on a portal, such as a zShop at Amazon. Amazon reportedly has 30,000 zShops at its site! Another example of an e-mall is DealShop.com

Online malls are a collection of catalog stores that are sometimes hosted by a large portal. E-Malls may also be considered a form of intermediation where the host provides a range of services, and each "store" can concentrate on selling its goods.

An individual who is successful at selling on an auction site may decide to establish an B2C business. Online malls provide an optional approach for these startups, as do affiliations, strategic alliances and plain hard work of marketing a stand-alone site. The fundamental question is "who are the potential buyers of the offering and what is the most efficient way to reach them?" The answer to this question should form the business concept, and is likely to be different for different types of businesses.

Aggregation and Disaggregation of Supply and Demand

The aggregation of supply and demand can work in an organized market or where buyers and sellers are willing to try new approaches. Many new online customers appear to be wary of aggregation but may use it in greater numbers in the future.

Seller Aggregation

The aggregation of supply in a particular industry allows a potential buyer to consider purchases with low prices due to volume discounts. A related approach, catalog aggregation, occurs when a range of purchasing options is presented to a single buyer. The process simplifies the experience for the buyer since all product comparisons can be made on one site. Respond.com provides a range of possible purchases from participating stores.

Buyer Aggregation

Buyer aggregation, buying communities, or demand aggregation, combines consumer demand into large volume purchases in order to gain lower prices. The total buying power of a group results in volume discounts beyond the ability of each individual purchaser.

Dynamic Pricing

Some sites have been differentiating themselves with alternative ways for users to name their own price rather than search for good prices. The seller aggregation approach, above, uses comparison pricing. Other approaches differ by letting individuals set their own price. An example is the name-your-price approach that can be found on Priceline. Critics of the approach point out that sometimes it is not possible to find exactly what is being purchased. For example, an airline ticket between two cities may have several undisclosed stops.

No Cash Transfers

B2C buyers are also besieged with offers of free products and services, coupon schemes, and cash rebates for shoppers at various sites. These sites depend on a large number of visitors to justify sales of advertising. Whether this concept can be successful remains to be seen.

The Evolution of B2C Concepts

The e-Catalog, Auction and e-Mall concepts are becoming indistinguishable for two reasons. The first is to successfully adjust to the demands of the marketplace, and second, is due to changes in both attitudes and abilities in technology.

Like any retail store, each of the concepts places a buyer in touch with a seller in the hope that a transaction will take place. One difference with an online store is that it doesn't actually need to have the items at the store to make a sale. Therefore every online store becomes either a channel or a venue where anyone can make a purchase or sale, regardless of whether the concept is an e-Catalog, Auction or e-Mall.

Consider the following changes:

Business-to-Business Concepts

The volume of B2B transactions is growing rapidly even while the types of transactions evolve and the distinction between categories blurs. B2B transactions have taken place in Industry Portals, Digital Business Communities, and the Digital Marketplace. The trend is that these markets will merge into different types of digital markets, with both exchanges and auctions, supported by a range of services.

Industry Portals and Digital Business Communities

B2B users are distinguished by an interest in specific industries. Buyers, sellers, and those engaged in support services are attracted to sites that specialize in a particular industry. At industry portals or digital business communities visitors can read about new developments and exchange industry information in online discussion groups.

Hosts of business communities may get a fee if a transaction initiated on the site takes place offline. But the natural evolution is for these communities to host transactions possibly with aggregated purchasing, or online purchasing groups. The host site can, in effect, become the market maker and take a percentage of each transaction. It may also evolve into a digital exchange.

E-Distribution

The central feature of e-distribution is the use of the electronic catalog, or e-catalog. Companies engaged in e-distribution may sell the products of one company or may combine the products of several companies into an aggregated catalog. These distributors may also resell catalog information to each other.

E-Distributors may sell to a single buyer or to two or more companies through e-purchasing or e-procurement programs. e-distribution also occurs in vertical markets, such as chemicals.

Two features distinguish B2B e-distribution from the use of e-catalogs by consumers. First, single companies may have tens of thousands, even millions of products, and may need assistance in producing and updating an electronic catalog. Aggregators may also need assistance in combining the products of many suppliers, not just due the sheer volume of items, but also because the descriptions of an item may differ form one producer to another - just the type of problem semantic web services will solve.

Another feature is that the catalogs must be interoperable with the programs sold by software vendors, such as Microsoft, Oracle and SAP. This links the catalog directly with order fulfillment and other back-end systems. Catalog editing and management applications are provided by companies such as A2i, Cardonet and IMark.com.

E- Purchasing or E-Procurement

E-Purchasing, or e-procurement is similar to e-distribution except that it is the "other end" of the transaction. This business concept provides tools for catalog aggregation, digital exchange operations, and supply chain management, including the ability to track purchasing.

The switch to online purchasing is having a major impact in U.S. business. For example, using catalog aggregation tools from PartNet, Inc., the U.S. Defense of Department created EMall to buy over $5 billion worth of consumables online each year.


Datastream Systems

Datastream develops software for the management, maintenance, repair and operation of industry equipment and other assets. Its latest product is Datastream 7i asset performance management solution links purchasers to a network of industrial suppliers who sell $300 billion of industrial supplies and services each year.

Traditional enterprise software firms such as Oracle and SAP have decided to get into this growing market and are competing with small software firms such as ICG Commerce Systems, and Moai Technologies.

E-Business Brokers and Intermediaries

The role of the "middleman" or intermediary is in flux in B2B transactions. Before the Internet intermediaries acted as brokers or agents in inefficient markets using their knowledge of transactions and players in the market. Intermediaries do this on the Internet too, but also provide a range of supporting services:

Digital Exchange

The digital exchange, digital market, or online trading exchange made an impressive debut in 1999. These exchanges changed how B2B transactions occur in the business world and may subsume all B2B transactions as they evolve. In the digital exchange concept many buyers and sellers are brought together to form a market where they can establish, through bidding, a price for a transaction. In its simplest form, the exchange features commodities, which are well understood by the buyers and sellers. Commodities, such as natural gas or electrical power have moved to digital exchanges.


PartMiner

PartMiner is a market maker, provider of information, and an exchange for the electronic components industry. Like a surprising number of companies in the B2B arena, PartMiner began as an in-house activity but quickly became a company in its own right because other companies demanded its offerings.

PartMiner provides research, in the form of component data sheets, sourcing, availability information, and the opportunity to purchase components. PartMiner serves 100,000 potential buyers around the globe and sources parts from 2,000 manufacturers. It allows these buyers and sellers to conduct transactions via its Web site.

Types of Digital Exchanges

Three types of digital exchanges have emerged: private, industry-owned, and public. Many of the original public exchanges, operated by a for-profit organization, have gone out of business. Firms using the exchange quickly realized that while the exchange served a valid purpose, it was expensive, not required on a full-time basis, and could be easily duplicated by the users. The result was a rise in private and industry-owned exchanges operated respectively by users with a business relationship, possibly members of a supply chain, or by an industry-related organization, such as a trade association.

The private exchange is the evolution of the supply chain or a business community of firms in which there is a sense of trust between the parties. This type of exchange is particularly important in cultures, such as those in Asia, where business is based on personal relationships that have been built up over a long period of time.

Industry-owned exchanges are supplanting public exchanges that supported buying and selling in particular industries. An example is the World Wide Retail Exchange, owned by a more than 10 retail companies from the U.S. and Europe. Although a seemingly natural approach to taking the business between them online, important questions are emerging. Will these owners be able to cooperate? And, if so, will they cooperate too much; that is, collude to fix prices.

Public exchanges, meaning that they were open to all interested parties, have largely been replaced by private digital exchanges. The companies that formerly provided public exchange services, have changed their business concept to become software and solutions providers to companies establishing an online supply chain, or engaging in online buying and selling. For example, VertMarkets, which has grown to operate 68 vertical exchanges for small and medium sized companies, allows private transactions between firms that can comprise a supply chain. The benefit here is that these firms won't have to spend millions of dollars building and operating a private site.

Public exchanges may still be needed in certain situations:

Vertical and Horizontal Market Digital Exchanges

B2B concepts may differ in whether they serve a vertical or horizontal market. A vertical market refers to a single industry, or type of industry, where the buyers and sellers are potential members of a supply chain. Vertical market exchanges provide the feed stocks, supplies or products needed in a particular industry. They also provide supply chain support and software solutions.

A horizontal market exchange provides a broad range of products that are typically needed by a company. It attempts to fulfill most of the needs of a company in one stop. An example of a horizontal exchange, or "superstore", for business purchases is Buy.com. Others, such as Best Buy and Amazon are moving into this market.

Expect to see some integration and linkage between vertical and horizontal market exchanges if it adds value to the prospective buyer. As sites are joined together by agreement and technology, to form linked exchanges, then the use of search engine "bots" to examine prices offered on the different exchanges may become commonplace.

B2B Auctions

A special type of digital exchange is the B2B Auction, which has evolved with the development of the Internet. The capabilities and resources required to operate a digital exchange and an auction site are so similar that auction activity is often found on a digital exchange site.

Although some transactions may be done through digital exchanges, B2B purchases and sales are usually accomplished through a firm's supply and sales channels. However, companies may approach the auction marketplace to sell a fraction of its goods in order to establish a price, or to attract and identify potential suppliers and customers. Sears has begun to do this on eBay!

One area where B2B auctions have a valuable function is in the sale of odd lot or excess inventory. This is a very inefficient market where online auctions appear to be a real boon. RetailExchange, an offshoot of Gordon Brothers, the nations leading liquidator, moves about $300 million in excess inventory each year, primarily in apparel. This represents about 60 percent of all online sales but it is a small fraction of the $57 billion in offline revenues in the sector.

The Future of B2B Transactions

Analysts generally agree that there were about 1,000 digital, mostly public, exchanges at the end of the year 2000. The B2B public exchanges that haven't closed have taken over related auction activities and also allow for sales of excess inventory to the public, just as B2C sites have begun to allow for transactions B2B between smaller companies. This trend will continue to be driven by the value it provides to both manufacturers and the public, as, for example, when an individual can order an automobile made to his or her specifications - a significant change from the assembly line approach.

Two other developments that will have a strong influence on future B2B transactions are the grid and the semantic web.

The Grid

A grid is network of computing resources such as computers, servers and data storage devices, managed with an advanced form of middleware known as grid services. The grid may be made up of distributed resources owned by a single enterprise, or of resources shared by two or more enterprises. The grid may also be owned by a third party and used by companies as needed. The driver for the growth of grid computing is the potential for an organization to reduce the capital and operating costs of computing resources, while maintaining the computing capability it requires.

Grid services provide access to computational devices and data, network scheduling, security, and storage. Grid services will be replaced by web services, which perform the same functions, but are open source, relatively mature, and better understood by the developer community. Web services are likely to be hosted on grids, which restrict participation and emphasize security, thus reducing the risk of privacy violations or crime.

B2B Digital markets will make use of grids for its members, primarily for sharing data. Large corporations will utilize grids externally as a means to share data and some resources with outside companies. Different grids will be established for different relationships:

The Semantic Web

The semantic web uses machine-readable knowledge structures and inference rules, known as ontologies, to disclose the context and meaning of a term so that it can be compared with other terms in a meaningful way. It will be used by applications to process information rather than just present it as text and images. The semantic web will also allow human language commands to direct web operations, while lessening the requirement for human intervention. Semantic web services, an extension of web services, will be especially useful as the need for personalization increases. A grid which hosts semantic web services will be known as a semantic grid.

The semantic web will be most useful in situations where users are known and access is controlled, as on a grid. In this case semantic web services will serve:

The Future of e-Commerce: Grid Computing and Personalization

Businesses are aggressively pursuing grid solutions, driven by reduced computing costs and encouraged by the growing prospect of universal open standards, which will allow the continued development of web services for the grid.

An underlying feature of grid computing is that it controls access to the network and its various resources. This fits well with another growing trend on the Web - that of personalization. Personalization will allow users maintain contact with the individuals, businesses, other organizations, and communities of their own choice. It will also guide the user to find new and desirable offerings, and keep the barrage of unwanted Internet data at bay. The web will become extremely useful for personalized learning, government, medical, recreation and work-related services. Plus, communities of like-minded people will form. These will be the markets and the clients of evolving e-Commerce companies.

When grid computing projects are developed, they come under the control of a planned or "de facto" virtual organization. By controlling access, resource availability, security and other facets of online activity, grid technology enables online community and personalization services for existing organizations including companies and groups of companies - possibly a modern version of the Japanese Keiretsu.

From a networking perspective, the Internet is a host of networks linked together so that data can be sent between any two nodes. Grids will link users, not networks, and each group of users will form its own Web - representing some type of organization or community. As in real life, individuals are members of many different communities, online they will be members of many of these grid-based webs. Taken as a whole this will form the "web of webs", an online world where user preferences will become the driving force, not technical concerns.



Dr. James E. Burke is a Principal in Burke Technology Services (BTS). BTS provides business assistance to startup technology companies, or organizations planning or integrating new technologies; develops and manages technology projects; performs technology evaluation and commercialization, and assists in technology-based economic development.

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