Chapter 6 public b2b exchanges
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Chapter 6 Public B2B Exchanges. Learning Objectives. List the various types of e-marketplaces Describe B2B portals Describe third-party exchanges Distinguish between e-procurement and e-selling consortia Describe the various ownership and revenue models of exchanges

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Chapter 6 Public B2B Exchanges

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Chapter 6 public b2b exchanges

Chapter 6Public B2B Exchanges

Prentice Hall, 2003

Learning objectives

Learning Objectives

  • List the various types of e-marketplaces

  • Describe B2B portals

  • Describe third-party exchanges

  • Distinguish between e-procurement and

    e-selling consortia

  • Describe the various ownership and revenue models of exchanges

  • Describe the support mechanisms offered by exchanges, including auctions

Prentice Hall, 2003

Learning objectives cont

Learning Objectives (cont.)

  • Describe networks of exchanges and exchange management

  • Describe the critical success factors of exchanges

  • Discuss implementation and development issues of e-marketplaces and exchanges

  • Describe the major support services of B2B

  • Describe the extranet and its role in supporting marketplaces and exchanges

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Chemconnect the world chemical exchange

ChemConnect:The World Chemical Exchange

  • The Problem

    • Thousands of companies trade raw and partially processed chemicals and plastics daily

    • Before the Internet the trading process was slow, fragmented, ineffective, costly

    • As a result:

      • Buyers paid too much

      • Sellers had high expenses

      • Intermediaries were needed for to smooth the process

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Chemconnect cont

ChemConnect (cont.)

  • The Solution

    • Provides free membership in trading marketplaces and information portals

      • Public exchange floor for anonymous bids

      • Commodities floor for buying and exchanging

      • Corporate trading rooms—private online auctions

    • Up-to-the-minute market information

    • Large electronic catalog

    • Independent intermediary

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Chemconnect cont1

ChemConnect (cont.)

  • The Results

    • In ChemConnect trading rooms companies can save up to 15% in just 30 minutes of reverse auction

    • ChemConnect is growing rapidly, adding members and increasing trading volume each year

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B2b exchanges

B2B Exchanges

  • Public e-marketplaces (public exchanges)—trading venues open to all interested parties (sellers and buyers) and usually run by third parties

  • Exchange—a many-to-many e-marketplace. Also known as e-marketplaces, e-markets, and trading exchanges

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B2b exchanges cont

B2B Exchanges (cont.)

  • Market maker—the third-party that operates an exchange (and in many cases, also owns the exchange)

  • Companies that use exchanges are pleased with them and plan to increase the number of exchanges they participate

  • Traders expect to more than double the value of transactions that they do through the exchanges

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Exhibit 6 1 trading communities information flow and access to information

Exhibit 6.1Trading Communities: Information Flowand Access to Information

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Classifications of exchanges

Classifications of Exchanges

  • Systematic sourcing—purchasing done in long-term supplier-buyer relationships

  • Spot sourcing—unplanned purchases made as the need arises

  • Vertical exchange—an exchanges whose members are in one industry or industry segment

  • Horizontal exchange—an exchanges that handles materials traded in several different industries

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Exhibit 6 2 classifications of b2b exchanges

Exhibit 6.2Classifications of B2B Exchanges

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B2b exchanges1

B2B Exchanges

  • Dynamic pricing

  • Ownership of exchanges

  • Governance

  • Organization of exchanges

  • Gains and risks of B2B exchange participation

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Dynamic pricing

Dynamic Pricing

  • Dynamic pricing—a rapid movement of prices over time, and possibly across customers, as a result of supply and demand

    • Stock exchanges sometimes change minute by minute

    • Auction prices vary all the time

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Dynamic pricing cont

Dynamic Pricing (cont.)

  • Typical process that results in dynamic pricing in most exchanges

    • A company lists a bid to buy a product or an offer to sell one

    • Buyers and sellers can see the bids and offers—anonymity is often a key ingredient of dynamic pricing

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Dynamic pricing cont1

Dynamic Pricing (cont.)

  • Buyers and sellers interact in real time with their own bids and offers—join together to obtain a volume discount price (group purchasing)

  • A deal is struck when there is an exact match between a buyer and a seller on price, volume, and other variables such as location or quality

  • The deal is consummated, and payment and delivery are arranged

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Ownership of exchanges

Ownership of Exchanges

  • An industry giant (IBM’s patent exchange

  • A neutral entrepreneur—a third-party intermediary (

  • The consortia (or co-op)—several industry players set up an exchange (

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  • Exchanges governed by guidelines and rules

    • How the exchange operates

    • What the requirements are to join the exchange

    • What fees are involved

    • What rules need to be followed

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Governance cont

Governance (cont.)

  • Security and privacy for documents

  • Contract terms between an exchange and buyers/sellers

  • Assurances that the exchange is fair

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Organization of exchanges

Organization of Exchanges

  • Membership

    • Generate revenue

      • Transaction and other fees

      • Registration fees

      • Annual membership fees

    • qualification process

    • deposit may be required

    • Limits set on how much each member can trade

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Organization of exchanges cont

Organization of Exchanges (cont.)

  • Site access and security

    • Information should be carefully protected—competitors congregate in the same exchange

    • Prevent illegal offers and bids

    • List of individuals who are authorized to represent the participating companies

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Exhibit 6 3 services in exchanges

Exhibit 6.3Services in Exchanges

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Exhibit 6 4 gains and risks of b2b exchanges

Exhibit 6.4Gains and Risks of B2B Exchanges

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B2b portals

B2B Portals

  • B2B portals—information portals for businesses

    • Thomas register—facilitates business transactions for MROs


      • Database

      • Reverse auctions

      • Features and Services

      • Revenue model

  • Vortals--B2B portals that focus on a single industry or industry segment; “vertical portals”

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Third party trading exchanges

Third-Party (Trading) Exchanges

  • Electronic intermediaries

    • Do not favor either sellers or buyers—neutral

    • without a built-in constituency of sellers or buyers they have a problem attracting enough buyers and sellers to attain financial viability

  • Liquidity—the result of having a sufficient number of participants in the marketplace as well as a sufficient transaction volume

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Exhibit 6 6 supplier aggregation model

Exhibit 6.6Supplier Aggregation Model

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Exhibit 6 7 buyer aggregation model

Exhibit 6.7Buyer Aggregation Model

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Suitability of third party exchanges

Suitability of Third-Party Exchanges

  • Fragmented markets

    • Markets that have large numbers of both buyers and sellers

    • Mainly suitable for MROs

  • Buyer-concentrated markets—several large companies sell to a very large number of buyers

  • Seller-concentrated markets—several large companies do most of the buying from a large number of suppliers

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Consortium trading exchanges cte

Consortium Trading Exchanges (CTE)

  • CTE (consortium)—an exchange formed and operated by a group of major companies to provide industry-wide transaction services

    • Vertical, purchasing-oriented

    • Horizontal, purchasing-oriented

    • Vertical, selling-oriented

    • Horizontal, selling-oriented

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Purchasing oriented procurement consortia

Purchasing-Oriented (Procurement) Consortia

  • E-Procurement Consortia can be:

    • Vertical purchasing-oriented

      • All the players are in the same industry

      • Support buying and selling

    • Horizontal purchasing-oriented

      • Owner-operators are large companies from different industries

      • Improving the supply chain

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  • Covisint—e-market of automotive industry

    • B2B integrated buy-side marketplace

      • General Motors

      • Ford

      • DaimlerChrysler

    • Entire industry gains

      • Lower costs

      • Easier business practices

      • Increased efficiency

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Covisint cont

Covisint (cont.)

  • “Co” stands for

    • Connectivity

    • Collaboration

    • Communication

  • “Vis” stands for visibility provided by the Internet

  • “Int” stands for integrated solutions

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Covisint cont1

Covisint (cont.)

  • Collaborative commerce

    • Facilitate product design

    • Enable procurement process

    • Provide broad marketplace of buyers and suppliers

  • Vertical consortia trading exchange

    • Few large buyers

    • Many sellers (suppliers to the industry)

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Covisint cont2

Covisint (cont.)

  • Marketplace’s connectivity integrates buyers and sellers into a single network

    • Flow of information integrates buyers and sellers into a single network

    • Visibility provides real-time information for:

      • Fast decision making

      • Communication throughout the supply chain, anywhere in the world

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Covisint cont3

Covisint (cont.)

  • Web use allows changes to be sent simultaneously and instantly throughout its entire supply chain

  • The result:

    • Less need for costly inventory in the supply chain

    • Increased ability to respond quickly to market changes

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Covisint cont4

Covisint (cont.)

  • One of the major objectives of the exchange is to facilitate product design:

    • Offers best-of-breed functionality

    • Ability to integrate providers across the supply chain creates (collaborative commerce)

    • Enables e-procurement

    • Provides broad marketplace of buyers and suppliers

    • Accesses a wealth of supply chain expertise and experience

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Consortium trade exchanges

Consortium Trade Exchanges

  • Selling-oriented consortia

    • Vertical exchanges

    • Thousands of potential buyers within a particular industry

  • Legal challenges for B2B consortia

    • Exchanges introduce a level of collaboration among both competitors and business partners

    • Antitrust and other competition laws must be considered

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Critical success factors of consortia

Critical Success Factors of Consortia

  • Size of industry

  • Ability to drive user adoption

  • Elasticity—measure of incremental spending by buyers as a result of savings generated

  • Standardization of commodity-like products

  • Management of intensive information flow

  • Smoothing inefficiencies in supply chain

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Dynamic trading

Dynamic Trading

  • Dynamic trading—exchange trading that occurs in situations when prices are being determined by supply and demand (dynamic pricing)

Supply & Demand

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Dynamic trading auctions and matching

Dynamic Trading:Auctions and Matching

  • Matching

    • Market makers conduct matching supply and demand (e.g., stocks)

    • More complex than auctions because they match:

      • Prices

      • Quantities

      • Times

      • Locations

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Dynamic trading auctions and matching1

Dynamic Trading:Auctions and Matching

  • Auctions

    • Private trading rooms—members conduct auctions at the exchange

    • Auction services may be one of the activities

    • Exchange may be fully dedicated to auctions

    • Can conduct many-to-many public auctions

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New entrant to the dutch flower market tfa

New Entrant to the Dutch Flower Market: TFA

  • Dutch auctionmethod

    Were semi-automated

    • Buyers and sellers went to one location to see the flowers

    • Auctioneer used a clock with a large hand set at a high price

      • Price dropped as the time ticked off on the clock

      • Until clock was stopped by pushing an order button

    • Quantity ordered was clarified over an intercom ,

    • Process continued until all of the flowers were sold

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Tfa cont

TFA (cont.)

  • TeleFlower Auction (TFA)—competing electronic auction enables its initiators to penetrate the Dutch flower market

    • Buyers bid on flowers via their PCs

      • Designated times

      • From any location

      • Auction clock shows on buyer’s PC screen

      • Clock stopped by pushing space bar

      • Auctioneer completes sale by telephone

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Tfa cont1

TFA (cont.)

  • Process is much quicker

  • After-sale delivery is much faster—within half an hour after the sale

    • Major issue can be the quality of the flowers

      • Flowers are not physically visible to the buyers

      • Large amount of relevant information is available

    • TFA quickly built a competitive advantage using IT

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Tfa cont2

TFA (cont.)

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Exhibit 6 9 comparing the major b2b many to many models

Exhibit 6.9Comparing the Major B2B Many-to-Many Models

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Building and integrating marketplaces and exchanges

Building and Integrating Marketplaces and Exchanges

  • Step 1—Think ahead

  • Step 2—Planning

  • Step 3—System analysis and design

  • Step 4—Building the exchange

  • Step 5—Testing, installation, and operation

  • Step 6—System evaluation and improvement

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Building and integrating marketplaces and exchanges cont

Building and Integrating Marketplaces and Exchanges (cont.)

  • Integration

    • Between 3rd-party exchange and back-office systems of participants

    • Across multiple, incompatible exchanges

  • External communications

    • Web/client access

    • Data exchange

    • Direct application integration

    • Shared process

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Building and integrating marketplaces and exchanges cont1

Building and Integrating Marketplaces and Exchanges (cont.)

  • Process and information coordination—how to coordinate external communications with internal information systems

    • External process Internal process

    • Data transformation Exception handling

  • System and information management—involves management of:

    • Software

    • Hardware

    • Information components

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Managing exchanges

Revenue models

Transaction fees

Fee for service

Membership fees

Advertisement fees

Networks of exchanges

“First mover” primary objective is the acquisition of buyers and sellers

Integration with other companies or exchanges

Some exchanges are beginning to integrate in order to better serve their customers

Managing Exchanges

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Exhibit 6 11 several exchange one supply chain

Exhibit 6.11Several Exchange, One Supply Chain

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Managing exchanges cont

Managing Exchanges (cont.)

  • Centralized management

    • One market builder builds and operate several exchanges

      • Manages all the exchanges ’catalogs, auction places, discussion forums

      • Centralizes: accounting, finance, human resources, IT services

    • Third-party vendors providing logistic services and payment systems are more efficient when supplying services for “families ” of exchanges

      • VerticalNet (

      • Ventro (

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Critical success factors

Critical Success Factors

  • Early liquidity

    Business’s chance of survival is best when liquidity (volume of business conducted) is achieved early

  • Right owners

    • Partner with companies that can bring liquidity to the exchange

    • Best owner may be intermediary that can push both buyers and sellers

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Critical success factors cont

Critical Success Factors (cont.)

  • Right governance

    • Good management and fair /effective operations and rules are critical

    • Governance provides rules for the exchange, minimized conflicts, decision making support

  • Openness

    • Exchanges must be open to all from organizational and technical point of view

    • Open standards require universal commitment and agreement on the standards

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Critical success factors cont1

Critical Success Factors (cont.)

  • Full range of services

    • Participants are attracted by an exchange that helps cut costs

    • Exchanges team up with banks, logistic services and IT companies to help

  • Importance of domain expertise

    • Market makers need an in-depth understanding of:

      • The industry

      • Business processes inherent in the industry

      • Knowledge of industry structure

      • Government and policy stipulations

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Critical success factors cont2

Critical Success Factors (cont.)

  • Targeting inefficient industry processes

    • Contribute to increased costs and time delays

    • Vertical exchanges can add value

  • Targeting right industries

    • Large base of transactions

    • Many fragmented buyers and sellers

    • High vendor and product search/comparison costs

    • Strong pressure to cut expenses

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Critical success factors cont3

Critical Success Factors (cont.)

  • Brand building is critical

    • Increase switching costs by adding features and functionality

    • Invest in:

      • Gaining brand awareness

      • Attracting businesses to exchange

      • Customer retention

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Critical success factors cont4

Critical Success Factors (cont.)

  • Exploiting economics of scope

    • Value-added services make exchange compelling

      • Industry news

      • Expert advice

      • Detailed product specification sheets

    • Support services

      • Banks and financial information providers

      • Identification supported by sophisticated digital certificate architecture

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Critical success factors cont5

Garner diverse and multiple revenue streams

Software licensing



Critical mass of users will garner more value-added services

Auction services

Financial services

Business reporting

Data mining services

Critical Success Factors (cont.)

Choice of business/revenue models

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Critical success factors cont6

Critical Success Factors (cont.)

  • Blending content, community, and commerce

    • Content and community perspective—stimulate traffic

    • EC transaction perspective—creates higher level of customer “stickiness”

  • Managing channel conflict

    • Hostile phase as buyers interact directly with sellers (disintermediation of supply chain)

    • Short-term revenues impacted by backlash from existing fulfillment channels result in price erosion affecting medium-term profitability

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Communication networks and extranets for b2b

Communication Networks and Extranets for B2B

  • The Internet—a public, global communications network that provides direct connectivity to anyone over a local area network (LAN) via an Internet service provider (ISP) or directly via an ISP

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Communication networks and extranets for b2b cont

Communication Networks and Extranets for B2B (cont.)

  • Intranets—a corporate LAN or wide area network (WAN) that uses Internet technology and is secured behind a company’s firewalls

    • Links various servers,clients,databases,and application programs within a company

    • Limited to information pertinent to the company

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Communication networks and extranets for b2b cont1

Communication Networks and Extranets for B2B (cont.)

  • Extranets—a network that uses a virtual private network (VPN) to link intranets in different locations over the Internet; an “extended intranet”

    • Provide secured connectivity between a corporation’s intranets and the intranets of its business partners

    • protected environment of an extranet allows

    • Allows partners to securely collaborate and share information

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Communication networks and extranets for b2b cont2

Communication Networks and Extranets for B2B (cont.)

  • Virtual private network (VPN)—a network that creates tunnels of secured data flows, using cryptography and authorization algorithms, to provide secure transport of private communications over the public Internet

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Exhibit 6 12 an extranet

Exhibit 6.12An Extranet

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A network loaded with extras anx

A Network Loaded with Extras: ANX

  • Automotive Network Exchange (ANX)—an infrastructure for B2B applications

    • Backed by General Motors, Ford, and Chrysler

      • Allows companies in the automotive market to:

        • Swap supply and manufacturing data

        • Buy

        • Sell

        • Collaborate

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Anx cont

ANX (cont.)

  • Benefits of ANX

    • One-to-one and one-to-many connections

      • Procurement

      • CAD/CAM file transfers

      • EDI

      • E-mail

      • Group-ware

    • “Big Three” expect to save millions of dollars

      • Consolidating communications links

      • Reduce order turn-around time

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Anx cont1

ANX (cont.)

  • A VPN for ANX

    • Most visible B2B implementation of VPNs that run over the Internet

    • Security—all participants must have tools compliant with (IP) security standards covering

      • Authentication

      • Encryption

      • Encryption key management.

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Categories of extranet benefits

Categories of Extranet Benefits

  • Enhanced communications

  • Productivity enhancements

  • Business enhancements

  • Cost reduction

  • Information delivery

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Implementation issues

Implementation Issues

  • Problems with exchanges

    • High transaction fees Sharing information

    • Unclear cost savings Recruiting suppliers

    • Too many exchanges

    • Difficult to coordinate supply chain process

  • Private exchanges—e-marketplaces that are owned and operated by an industry giant or a consortium

  • Problems with private exchanges

    • Lack of trust

    • Liquidity is questionable

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Implementation issues cont

Implementation Issues (cont.)

  • Software agents in B2B exchanges

  • Disintermediation

  • Evaluating exchanges

    • How much will company really save and/or gain?

    • Determine viability of the exchange

    • Contracts and technology that lock into a long-term relationship

    • Membership—who sits on the board.

    • Who provides payment, logistics, other services?

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Support services for b2b exchanges

Support Services for B2B Exchanges

  • Directory services and search engines

  • Partner relationship management

  • Other services:

    • Trust services Digital photos

    • Trademark and domain names Client matching

    • Global business communities Encryption sites

    • E-business rating sites Promotion programs

    • Web-research services

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Managerial issues

Managerial Issues

  • Have we “done our homework?”

  • Can we use the Internet?

  • Which exchange?

  • Will joining an exchange force restructuring?

  • Will we face channel conflicts?

  • What are the benefits and risks of joining an

  • exchange?

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  • E-marketplaces and exchanges defined

  • The major types of e-marketplaces

  • B2B portals

  • Third-party exchanges

  • Consortium trading exchanges

  • Dynamic pricing and trading

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Summary cont

Summary (cont.)

  • Ownership and revenue models

  • Exchange networks and management of exchanges

  • Critical success factors for exchanges

  • Extranets

  • E-marketplaces and exchange implementation and development issues

  • Support services

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