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Strategic Operations Management

The Emergence of Digital Marketplaces
Darius Vaskelis, VP of Strategic Operations Management (April 2000)

Do you remember when eCommerce was simple? There was B2C (Business-to-Consumer) and there was B2B (Business-to-Business), and never the twain shall meet. Each was characterized by distinct modes (and objectives) of the transaction. B2C businesses - being a prime example - were typified by a "virtual" retail experience with shopping carts and catalogs, offering real-time shopping and ordering. Customers selected their items, paid by credit card, and hopefully received their purchases in short order. One way to think of a B2C site is as a "Digital Storefront," a single retail location selling to multiple buyers.

By contrast, early B2B eCommerce was often EDI-type automated document exchanges between businesses, where purchase orders and invoices were directly integrated with existing ERP systems. These early B2B solutions, such as EDI Value Added Networks and their Internet brethren, were often batch-driven and can be thought of as the first real networks, or "webs," of buyers and sellers. One of the frequent examples of the rise of B2B on the Internet is Dell's Premier Pages Service, which sells pre-contracted and pre-approved computers to medium and large businesses, using a standard shopping-cart metaphor and a corporate purchasing card. Of course, if an employee purchases a computer for themselves on their personal credit card, taking advantage of his company's corporate discount, the transaction thereby becomes an example of B2C eCommerce.

And in a sense, this reveals that the distinction between B2C and B2C is quickly dissolving. For if we look closely at Amazon, we see that while it is indeed a B2C "Digital Storefront," its Internet and EDI fulfillment systems, linked to various merchandise distributors, also make it a model of B2B eCommerce.

Things that were clear suddenly aren't.
And perhaps that's all to the good.

Quite quickly, then, all of our once crystal clear notions about B2C vs. B2B are being pushed and pulled, with new definitions and distinctions being created weekly, and sometimes, daily. Using the "old" B2C vs. B2B definitions, (i.e., axioms accepted just a few months ago), how should we categorize Dell's Premier Pages Service? While the site is, in fact, targeted to medium and large businesses, making it a B2B site, its "Digital Storefront" user interface - featuring a catalog and shopping cart customized for each specific business customer - strongly emulates a B2C business. And how should we categorize eBay, with its Consumer-to-Consumer (C2C) model, but with a large number of businesses participating on both sides of the transactions?

In reality, the categorization of a site as B2C or B2B no longer tells us very much about the technology, strategic or financial models being deployed for the ultimate success of the business. Digital Storefront sites (also known as "eTail") such as Dell's Premier Pages or, today may well be targeting B2C, B2B, or both, but all have a similar paradigm in mind of a virtual retail storefront selling to many buyers. Sites such as these often completely blur the lines between B2C and B2B: customers have the option to use either a credit card or a purchase order, and the buyers themselves may be end-consumers or resellers. The result: the way has been paved for "traditional" B2C software providers, including BroadVision, Blue Martini, and Vignette to quickly become viable, strong B2B players. After all, the B2C and B2B processes in sell-side Digital Storefronts are not drastically different.

Introducing a new way of thinking about (and doing business) on the Internet: Digital Marketplaces
Having said that, there is another level in the evolution of eCommerce. And that has come in the form of "Digital Marketplaces." These sites may be sell-side, buy-side, or both. They may have B2C qualities, selling to end-consumers - such as eBay - or focus on B2B audiences (the Ariba Network, for example). However, what they have in common is their ability to optimize supply-chains, dramatically drive down transaction costs and greatly enhance the tangible benefits to end-buyers - whoever they may be - through lower prices.

By definition, Digital Marketplaces are electronic markets where many sellers and many buyers come together to conduct business. So, while some processes around Digital Marketplaces have some similarities to Digital Storefronts, they include a much stronger emphasis on market-making mechanisms to match supply and demand. Even private corporate exchanges and buy-side eProcurement systems, which connect one buyer-to-many suppliers, need to support both buy-side and sell-side processes. These market-making mechanisms may be driven by different models matching supply and demand, such as aggregation (concentration of catalogs), auctions (usually bidding on surplus goods), or exchanges (liquid spot markets with bid/ask models much like the stock market).

A challenge for businesses, an opportunity for eBusiness solution providers
With the B2B market-making focus of Digital Marketplaces, many software companies have responded with new technologies and strategies. Ariba moved the focus of its company from eProcurement by acquiring Tradex and TradingDynamics. i2 changed the focus of its company from its various RHYTHM software packages to various solutions. These solutions are targeted to address the more complex, critical requirements of Digital Marketplaces, including:
  • Market-making mechanisms to match buyers to suppliers, including supply or demand aggregation, auction, or exchange. By comparison, Digital Storefronts are typically managed by a retailer, dealer, or distributor selling merchandise using simpler, static priced transactions against inventory.
  • Broad internal and external catalog management on multiple levels (buying and selling) to allow for the broadest possible selection and pricing. By contrast, Digital Storefronts usually focus on stocked (although increasingly "virtually stocked") merchandise from a single retail catalog.
  • More complex communications of business transactions, through standards like EDI and XML, to allow integration into business systems. Digital Storefronts typically run on credit card transactions that require lighter integration.
  • Complex business transaction rules revolving around documents such as contracts, blanket orders, and RFQs, including authentication requirements. Digital Storefronts usually have a simpler shop-and-buy process.
  • Workflow processes integrated into the business transaction rules and approval chains. Digital Storefronts typically have no workflow (outside of the shop-and-buy process) requirements for buyers.
One area of overlap with sell-side Digital Storefront packages is in personalization and community capabilities. Just as Digital Storefront solutions often provide personalization centered on the management of content and digital branding, or the ability to build communities through discussion groups or job postings, Digital Marketplaces may also need these components in order to be successful. This is especially true of vertically-focused Digital Marketplaces, where end solutions may include a blending of Digital Marketplace and Digital Storefront components to provide an industry portal targeting a specific business community. Examples of these types of vertical online communities are those hosted by IndustryClick and VerticalNet.

Meeting (and solving) B2B2C and Fulfillment challenges
Digital Marketplaces also share another need with Digital Storefronts: a requirement to fulfill demand. The management of how an order actually gets translated into a good or service moving from seller to buyer can be a complex process, requiring coordination between multiple parties, from distributors to logistics providers. This, in turn, may involve critical decisions regarding availability, margin, or timeframe requirements. With this understanding of the supply-chain used to manage the fulfillment process, Digital Marketplace sites with Digital Storefront front-ends can, in a very real sense, be viewed as "B2B2C" solutions, linking suppliers to stores/markets to end consumers.

Today, fulfillment systems tend to be third-party applications that integrate with Digital Marketplace systems. These solutions may be focused on planning (distribution and inventory), logistics (transportation and returns), or transactional order processing (pick, pack, and ship). Sometimes these processes are supported by ERP packages for internal operations, but Digital Marketplaces increasingly have to coordinate these processes among multiple external third-parties. Especially for Digital Marketplaces, this fundamental management of the supply-chain has allowed vendors with supply-chain expertise to leverage their skills in providing fulfillment solutions, such as i2's Internet Fulfillment Server.

The lines may be blurred, but the future is clear
In the process of building Digital Marketplaces, traditional models of B2C and B2B are becoming blurred or torn down entirely. And, as is always the case, from the old emerges the new. And - until the next paradigm change -the B2B2C model is that future. Yet, while it is a new form of eCommerce, B2B2C represents a very natural evolution of EDI VANs, allowing the building of true eBusiness "value webs" of suppliers and buyers at a velocity and reach only possible through the Internet. And, over time, the complementary and overlapping technologies now available to provide Digital Storefronts and fulfillment systems to Digital Marketplaces can only further blur the B2C and B2B distinction, until perhaps someday those terms will hold little meaning in the realm of eCommerce.

And, when you consider that hundreds of Digital Marketplaces are up and running today, with tens of thousands coming in the near future, Digital Marketplaces hold the promise of becoming one of the key drivers in the new economy. top

For more information on Strategic Operations Management, contact Darius Vaskelis is the Vice President of Strategic Operations Management.