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Chapter 2

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  1. Chapter 2 E-Commerce Market Mechanisms

  2. 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

  3. 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

  4. How Raffles Hotel is Conducting E-Commerce • The Problem • The company’s success depends on the its ability to lure customers to its hotels and facilities and on its ability to contain costs • Solution • Business-to-consumer—maintains a public portal ( that includes: • Information on the hotels • Reservation system • Links to travelers’ resources • Customer relationship management (CRM) program • Online store for Raffles products

  5. Raffles Hotel (cont.) • Business-to-business—maintains 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

  6. Raffles Hotel (cont.) • The Results • Public portal helps in customer acquisition • Hotel is able to maintain high occupancy rates using: • Promotions • Direct sales

  7. 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

  8. Markets facilitate exchange of Information Goods Services Payments Markets create economic value for Buyers Sellers Market intermediaries Society at large Electronic Marketplaces

  9. 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

  10. NTE Evens the Load • National Transportation Exchange ( is attempting to keep trucks on the road full on both outbound and return trips—uses 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

  11. 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)

  12. Marketspace Components • Marketspace—a 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

  13. 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 Marketspace Components (cont.)

  14. Products Physical products Digital products—goods that can be transformed to digital format and delivered over the Internet Infrastructure Hardware Software Networks Marketspace Components (cont.)

  15. Front-end business processes include Seller’s 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 Marketspace Components (cont.)

  16. Marketspace Components (cont.) • Intermediary—a third party that operates between sellers and buyers • Other business partners—collaborate on the Internet, mostly along the supply chain • Support services such as • Certification and trust services • Knowledge providers

  17. Types of Electronic Markets • Electronic storefronts—a single company’s 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

  18. 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 Types of Electronic Markets (cont.) • Types of stores and malls • E-marketplaces—online market, usually B2B, in which buyers and sellers negotiate; the three types of e-marketplaces are private , public , consortia

  19. E-Marketplaces • Private e-marketplaces—online markets owned by a single company: • Sell-side—company sells either standard or customized products to qualified companies • Buy-side marketplaces—company makes purchases from invited suppliers • Public e-marketplaces—B2B markets, usually owned and/or managed by an independent third party, that include many sellers and many buyers (exchanges)

  20. Consortia & Information Portals • Consortia—e-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 portal—a 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 Corporate portals • Mobile portals

  21. Supply Chains • Supply chain—the 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

  22. 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

  23. Exhibit 2.3A Simple Supply Chain

  24. Supply Chain Components • Upstream supply chain—includes the activities of suppliers (manufacturers and/or assemblers) and their suppliers • Internal supply chain—includes all in-house processes used in transforming the inputs received from the suppliers into the organization’s outputs • Downstream supply chain—includesall the activities involved in delivering the product to the final customers

  25. Types of Supply Chains • Integrated make-to-stock • Continuous replenishment • Build-to-order—model in which a manufacturer begins assembly of the customer’s order almost immediately upon receipt of the order • Channel assembly—model in which product is assembled as it moves through the distribution channel

  26. Exhibit 2.4Supply Chains: Integrated & Build-to-Order

  27. Value Chain & Value System • Value chain—the series of activities a company performs to achieve its goal(s) at various stages of the production process; each activity adds value to the company’s product or service, contributes to profit, and enhances competitive position in the market • Value system—a set of value chains in an entire industry, including the value chains of tiers of suppliers, distribution channels, and customers

  28. 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

  29. 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

  30. Intermediation in E-Commerce • Intermediaries provide value-added activities and services to buyers and sellers: wholesalers, retailers, infomediaries • Roles of intermediaries • Search costs—databases on customer preferences • Lack of privacy—anonymity of sellers and buyers • Incomplete information—gather product information • Contract risk—protect sellers against non-payment • Pricing inefficiencies—induce appropriate trades

  31. E-Distributors on B2B • E-distributor—an e-commerce intermediary that connects manufacturers (suppliers) with buyers by aggregating the catalogs of many suppliers in one place—the intermediary’s Web site • E-distributors also provide support services • Payments • Deliveries • Escrow services • Aggregate buyers’ and or sellers’ orders

  32. Disintermediation &Reintermediation • Disintermediation—elimination of intermediaries between sellers and buyers • Reintermediation—establishment of new intermediary roles for traditional intermediaries that were disintermediated

  33. Syndication as an EC Mechanism • Syndication—the 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

  34. 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

  35. Competition in the Internet Ecosystem (cont.) • Differentiation—providing a product or service that is unique • Personalization—the ability to tailor a product, service, or Web content to specific user preferences • Lower prices

  36. 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

  37. 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

  38. Porter’s Competitive Analysis • Porter’s competitive forces model applied to an industry views 5 major forces of competition that determine the industry’s 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

  39. Exhibit 2.6: Porter’s Competitive Forces Model

  40. Liquidity • Liquidity—the 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 liquidity—achieving a critical mass of buyers and sellers as fast as possible, before the market-maker’s cash disappears

  41. Quality Uncertainty & Assurance • Quality uncertainty—the 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 Microproduct—a small digital product costing a few cents • Insurance, escrow, and other services

  42. 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, higher-profit-margin transactions Consumer characteristics Impulse buyers Patient buyers Analytical buyers E-Market Success Factors • Contributors to e-market success

  43. Electronic Catalogs • Electronic catalogs—the presentation of product information in an electronic form; the backbone of most e-selling sites • Evolution of electronic catalogs • Merchants—advertise and promote • Customers—source of information and price comparisons • Consist of product database, directory and search capability and presentation function • Replication of text that appears in paper catalogs • Moredynamic, customized, and integrated

  44. Classifications ofElectronic Catalogs • Dynamics of information presentation—static or dynamic • Degree of customization—ready-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

  45. 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

  46. Electronic Catalogs at Boise Cascade • Boise Cascade Office Products--$3-billion 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 (

  47. Boise Cascade (cont.) • Sales through the Web site: • 1997—20 percent • 1999—30 percent • 2004—80 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

  48. Boise Cascade (cont.)

  49. Search Engines • Search engine—a computer program that can access a database of Internet resources, search for specific information or keywords, and report the results • Software (intelligent) agent—software that can perform routine tasks that require intelligence

  50. Search Engines, Intelligent Agentsand 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 cart—anorder-processing technology that allows customers to accumulate items they wish to buy while they continue to shop