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What is a business market? In its most basic form, a business market is a network of transactions and relationships among buyers and sellers. Questions to consider when designing a market 1. Which activities should we perform ourselves and which should we source from the outside? 2.

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slide1
What is a business market?

In its most basic form,

a business market is a

network of

transactions and relationships

among

buyers and sellers.

slide2
Questions to consider when designing a market

1.

Which activities should we perform ourselves and which should we

source from the outside?

2.

How should we relate to outside parties, including customers,

suppliers, distributors, partners, and others?

slide3
Options

Description

Vertical

Locate all but the most routine, transaction

-

Integration

oriented activities inside the firm.

Selective

Source selected activities from the outside.

Sourcing

Traditionally, sourced activities were controlled

through short term contracts.

Virtual

Become part of a network of highly specialized,

Integration

independent parties that work together to perform,

coordinate, and control value chain activities.

Which activities should we perform ourselves and which

should we source from others?

slide4
Transaction

Contract

Basis of

Discrete exchange of

Prior agreement governs

Shared goals and

Interaction

goods, services, and

exchange; e.g., service

processes for achieving

payments; e.g., simple

contract, lease, purchase

them; e.g., collaborative

buyer/seller exchange

agreement

product development

Duration of

Immediate

Usually short

-

term and

Usually long term and

Interaction

defined by the contract

defined by the relationship

Level of

Low to Moderate

High

Business

Integration

Coordination

Supply and demand

Terms of contract define

Inter-organizational

and Control

(market)

procedures, monitoring,

structures, processes, and

and reporting

systems; Mutual

adjustment

Information

Primarily one way;

One or two way;

Two

-

way (interactive);

Flow

Limited in scope and

Scope & amount are

Extensive exchange of

amount; Low level of

usually defined in the

rich, detailed information;

customization

contract

Dynamically changing;

Customizable

How should we relate to outside parties?

Partnership

Low

slide5
Virtual

Integration

Selective

Structure

Sourcing

Vertical

Integration

Transactions

Contracts

Partnerships

Relationships

A framework for analyzing

market structure and relationships

slide9
What is it?

How will we?

·

An organization's

business concept

defines its

Attract a large and loyal community?

strategy. The concept is based on analysis of:

·

Deliver value to all community members?

·

Market opportunity

·

Price our product to achieve rapid adoption?

·

Product and services offered

·

Become #1 or #2?

·

Competitive dynamics

·

Erect barriers to entry?

·

Strategy for capturing a dominant position

·

Evolve the business to "cash in on strategic options"?

·

Strategic options for evolving the business

·

Generate multiple revenue streams?

·

Manage risk and growth?

·

An organization's capabilities

define resources

Achieve best

-

in

class operating performance?

-

needed to execute strategy. Capabilities are built

·

Develop modular, scalable, and flexible infrastructure?

and delivered through its:

·

Build and manage strong partnerships with employees

·

People and partners

and the community?

·

Organization and culture

·

Increase the lifetime value of all members of the

·

Operations

community?

·

Marketing/sales

·

Build, nurture, and exploit knowledge assets?

·

Leadership/Management process

·

Make informed decisions and take actions that increase

·

Business development/Innovation process

value?

·

Infrastructure/Asset efficiency

·

Organize for action and agility?

A high

-

performing organization returns

to all

value

stakeholders. This value is measured by:

·

Benefits returned to all stakeholders

·

Benefits returned to the firm and its owners

·

Market share and performance

Components of a Business Model (continued)

·

Deliver value to all

stakeholders?

·

Claim value from stakeholder relationships and

transactions?

·

Increase market share and drive new revenues off

existing customers?

·

Brand and reputation

·

Increase brand value and reputation?

·

Financial performance

·

Generate confidence and trust?

·

Ensure strong growth in earnings?

·

Generate

positive equity cash flow?

·

Increase stock price and market value?

slide10
BUY

SELL

New York Stock Exchange market model in 12/2000

Floor

-

based trading of over

Auction Market Model

Screen

-

based

3025 securities

trading enables

complete view of

Specialists maintain a central

Specialist

Acts as Agent

order book

order

-

driven

orders

system

High levels of

Average daily trading volume

transparency within

was 1.0 billion shares per day

global markets

and the # of listings was 2,862

Limited sources of

Average market value was

capital

$US 12.4 trillion

Stocks are traded on a physical trading floor using the open-outcry auction method. Until recently, investors placed orders through stockbrokers who then communicate those orders to floor brokers who completed the trades at the booth of a specialist. In 2000, 30% of orders were transmitted electronically directly to the specialist at his/her booth on the physical trading floor. Specialists are members of the NYSE who act as auctioneers for their assigned stocks. Each stock is assigned to one specialist.

-

slide11
BUY

SELL

Nasdaq

Securities Exchange market model in 12/2000

Screen

-

based trading of over

4734 securities

Market Maker Model

Screen

-

based

Computer displays buy and sell

trading enables

quotes from multiple market

Multiple Market Makers act

makers

quote

-

driven system

complete view of

as Principals

orders

In 2000, the Nasdaq market united

over 500 market making firms

High levels of

transparency within

On average, each stock was

global markets

traded by 10 different market

makers, which encouraged

Limited sources of

competition among market

capital

makers driving prices down

Average daily trading volume was

1.8 billion shares per day and the

# of listings was 4,734

Average market value was $US

3.6 trillion

Unlike the NYSE where trading was driven by the flow of orders received by specialists, trading on the NASDAQ was driven by quotes from multiple market makers that commit their own capital to establish a buy and sell position in each stock that they wish to trade. The position reflects the price they would be willing to buy (bid) and sell (offer) a stock. The pricing window between the best bid and offer is called the “inside spread.”

slide12
SELL

BUY

ECN market model in 12/2000

Screen

-

based automated trading

Automated Trading

Market Model

Computer acts as a specialist

Screen

-

based

attempting to match orders from

individuals and market makers

trading enables

Computer System acts as

order

-

driven system

complete view of

Agent

orders

In 2001, the oldest and largest ECN,

Instinet

, had over 21,000 subscribers

High levels of

and accounted for over 12% of

Nasdaq

transparency within

daily volume

global markets

Unlike exchanges,

ECNs

were not

Limited sources of

required to divulge the identity of

capital

individuals and firms trading on its

network and could charge a

subscription fee of its members

In 2001,

ECNs

charged $2

-

$5 per trade

vs

$50

-

$60 per trade by a human

broker

Like the NYSE, Electronic Communication Network (ECN) trading was driven by the continuous flow of buy and sell orders, rather than by the competitive quote-driven trading as seen on the Nasdaq. But, unlike the NYSE, orders traded without the human intervention of a specialist. When a buyer or seller submitted an order to an ECN, the computer first attempted to match the order within the ECN market; in 2001 ECNs were able to match about 50% of their orders internally. If the order did not match within seconds, the ECN assumed the role of a Nasdaq market maker and the order was submitted to Nasdaq. In 2Q2001, ECNs accounted for 29% of Nasdaq market volume, up from less than 3% in 2Q 1998.

slide13
The TSE/OSE market model (mandated order flow)

Screen

-

based trading of over

1400 securities (TSE) and

ECN Market Specialist

Auction Market Model

Screen

-

based

over 1200 (OSE)

trading enables

Automated System

Automated system

complete view of

acts as an agent

Acts as Agent

Automated central order book

orders

SELL

SELL

BUY

BUY

(limit and market orders)

High levels of

OSE turnover is 9% vs. 18%

transparency within

on TSE, 88% on NYSE, and

global markets

over 100% on

Nasdaq

Limited sources of

In 2001, OSE had 88 domestic

capital

and 20 foreign broker/dealer

members

Until the late 1990s, stocks were traded on a physical floor using open outcry auction. The “itoyose” process was used to set opening price, and the “zaraba” process was used to price continuous order flow. “Saitori” (“nakadashi” at OSE) execute trades but, unlike NYSE specialists, there was no obligation to correct imbalances. With full automation, the Japanese markets have been likened to the ECN with mandated order flow.

slide14
The

Nasdaq

Japan market model

Auction Market

Auction Model

Hybrid Market Model

Floor

-

based trading

combines advantages of

Specialist

enables complete

Acts as Agent*

various market models

view of orders

High levels of

SELL

SELL

BUY

BUY

transparency within

local market

Limited sources of

capital

Screen

-

based

Market Maker Model

trading enables

Market Market Specialist

Multiple Market Makers

complete view of

Act as Principals**

Screen

-

based trading

quotes

Screen

-

based trading

enables complete view of

SELL

BUY

enables complete view of

High levels of

orders and quotes

orders and quotes

transparency among

Competing market makers

multiple market

Competing market makers

yield narrower spreads

makers

yield narrower spreads

Multiple sources of capital

Multiple sources of

Multiple sources of capital

capital

Meets needs of retail,

Meets needs of retail,

Screen

-

based

institutional, and

institutional, and

trading enables

ECN Market Specialist

corporate investors

corporate investors

complete view of

Automated System

Acts as Agent

Enables anonymity

orders

Enables anonymity

SELL

BUY

High levels of

Continuous order flow; no

Continuous order flow; no

transparency within

need to stop for

need to stop for

global markets

imbalances

imbalances

Limited sources of

capital

slide15
Comparison of Japanese securities markets

TSE accounts for 70% of shares listed, 80% of trading value, and

90% of trading volume

Large/

Large/

Established

Established

TSE and

TSE and

TSE and

TSE and

OSE

OSE

OSE

OSE

Section 1

Section 1

Section 1

Section 1

Nasdaq

Nasdaq

Nasdaq

Nasdaq

Issuer Size

Issuer Size

Japan

Japan

Japan

Japan

& Maturity

& Maturity

TSE

TSE

TSE

TSE

and OSE

and OSE

and OSE

and OSE

Section 2

Section 2

Section 2

Section 2

Jasdaq

Jasdaq

Jasdaq

Jasdaq

OTC

OTC

OTC

OTC

TSE

TSE

TSE

TSE

Mothers

Mothers

Mothers

Mothers

Small/

Small/

Young

Young

Slow

Slow

Fast

Fast

20

20

-

-

25 years

25 years

3

3

-

-

5 years

5 years

Average Time to Public Offering

slide16
Nasdaq

Japan market entry strategy

June 19, 2000

Early 2002

???

Phase 1

Phase 2

Phase 3

Enter Quickly Using

Launch Hybrid

Link Global Pools

OSE Market Platform

Market Model

of Liquidity

slide17
The

Nasdaq

Japan market model

Business Concept:

Market Opportunity

Product and service offered

Competitive Dynamics

Strategy for capturing dominant position

Strategic options for evolving the business

slide18
The

Nasdaq

Japan market model

Market Opportunity? 1999

USA JAPAN Ratio

GDP 9.2T 4.5T 48.9%

Trade Vol 1994M 711.9M 35.7%

Turnover 78%(NYSE) 44%(TSE) 56%

# of Listings 8623 3185 36.9%

# of IPOs 545 20 3.6%

Market Value 17.64T 7.338T 41.6%

Avg Price/Share 43.77(NYSE) 6.79(TSE) 14.8%

slide20
Nasdaq

Japan financing history

Nasdaq U.S.

Nasdaq U.S.

Nasdaq U.S.

Nasdaq U.S.

Softbank

Softbank

Softbank

Softbank

Post

Post

Post

Post

-

-

-

-

Money % Ownership

Money % Ownership

Money % Ownership

Money % Ownership

Burn Rate:

Burn Rate:

Burn Rate:

Burn Rate:

December 2001

December 2001

2000

2000

2000

2000

-

-

-

-

2001: ¥1.9 billion

2001: ¥1.9 billion

2001: ¥1.9 billion

2001: ¥1.9 billion

Nasdaq U.S.

Nasdaq U.S.

Nasdaq U.S.

Nasdaq U.S.

42.9%

42.9%

42.9%

42.9%

www.

www.

www.

www.

nasdaq

nasdaq

nasdaq

nasdaq

.com

.com

.com

.com

Softbank

Softbank

Softbank

Softbank

42.9%

42.9%

42.9%

42.9%

www.

www.

www.

www.

softbank

softbank

softbank

softbank

.co.

.co.

.co.

.co.

jp

jp

jp

jp

2002: ¥24 million

2002: ¥24 million

2002: ¥24 million

2002: ¥24 million

Strategic

Strategic

Strategic

Strategic

2003: ¥12 million

2003: ¥12 million

2003: ¥12 million

2003: ¥12 million

Investors

Investors

Investors

Investors

13.8%

13.8%

Nasdaq Japan, Inc.

Nasdaq Japan, Inc.

Nasdaq Japan, Inc.

Nasdaq Japan, Inc.

June 2001 ¥ 937.5 million

June 2001 ¥ 937.5 million

June 2001 ¥ 937.5 million

June 2001 ¥ 937.5 million

June 1999 ¥ 300 million

June 1999 ¥ 300 million

June 1999 ¥ 300 million

June 1999 ¥ 300 million

Limited

Limited

Limited

Limited

Dec. 2001 ¥ 937.5 million

Dec. 2001 ¥ 937.5 million

Dec. 2001 ¥ 937.5 million

Dec. 2001 ¥ 937.5 million

Partners

Partners

Partners

Partners

0.4%

0.4%

October 2000 ¥5 billion

October 2000 ¥5 billion

October 2000 ¥800 million

October 2000 ¥800 million

October 2000 ¥5 billion

October 2000 ¥5 billion

October 2000 ¥800 million

October 2000 ¥800 million

www.

www.

www.

www.

nasdaq

nasdaq

nasdaq

nasdaq

-

-

-

-

japan

japan

japan

japan

.com

.com

.com

.com

Strategic Investors (¥500 million each)

Strategic Investors (¥500 million each)

Strategic Investors (¥500 million each)

Strategic Investors (¥500 million each)

Limited Partners

Limited Partners

Limited Partners

Limited Partners

slide21
Nasdaq

Japan Key Challenges

Nasdaq Japan is quickly running out of cash

Failure to attract high liquidity stocks from Nasdaq US

.

Competing interest of powerful stakeholders: widely

divergent and complex cultural norms has impacted

ability to launch and grow company

.

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