Control of B2B E-Commerce and the Impact on Industry Structure
First Monday

Control of B2B E-Commerce and the Impact on Industry Structure by Stephen S. Standifird and J. Christopher Sandvig

Abstract
Control of B2B E-Commerce and the Impact on Industry Structure by Stephen S. Standifird and J. Christopher Sandvig
A significant amount has been written concerning the transaction costs associated with B2B e-commerce. We take an alternative approach and explore the impact of increased use of B2B e-commerce on the structure and competitiveness of downstream industry activities.

We argue that the openness of an industry's B2B e-commerce systems will have a direct effect on the structure of downstream industry activities. Industries where the B2B e-commerce systems are largely open to participation should experience increased heterogeneity and competition in downstream industry activities. Industries where the B2B e-commerce systems are largely closed should experience increased homogeneity and decreased competition in downstream industry activities. We further argue that the openness of the B2B systems will depend on the type of B2B systems that develops within a specific industry. Correspondingly, much attention should be given to the type of B2B e-commerce systems that emerge.

Contents

Introduction
Discussion
Conclusion

 


 

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Introduction

Electronic commerce has emerged as a significant and rapidly growing component of U.S. economic exchange. Jupiter Communications forecasts that business-to-business (B2B) e-commerce will reach 6.3 trillion USD or nearly 42 percent of all B2B commerce by 2005 (Dembeck, 2000). The opportunities to reduce procurement costs through B2B e-commerce have motivated firms in many industries to band together to create electronic supply networks (Ansberry, 2000). While it will not be known for years who the winners and losers will be in this economic transformation, it is widely expected that B2B e-commerce will significantly alter the competitive landscape of many industries (Benjamin and Wigand, 1995).

A significant amount has been written concerning the transaction costs associated with B2B e-commerce (Tapscott et. al., 2000; Benjamin and Wigand, 1995). In addition, several authors have described the process of disintermediation and reintermediation that occurs as a result of the use of B2B e-commerce (Chircu and Kauffman, 1999; Jin and Robey, 1999; Bailey and Bakos, 1997; Sarkar et al., 1995). Far less attention has been given to the importance of B2B e-commerce in shaping downstream industry activities.

This paper explores the impact of increased use of B2B e-commerce on the structure and competitiveness of downstream industry activities. We begin our discussion with a brief overview of B2B e-commerce followed by a description of the economic advantages of electronically based B2B exchange. In doing so, we introduce the importance of value-chain analysis and argue that the use of an electronically based B2B exchange significantly reduces the costs of certain value chain activities. We then discuss how the reduction of costs in certain value chain activities is likely to effect downstream industry activities. We argue that the structural impact of electronically based B2B exchange on downstream industry activities will vary depending on the openness of the electronically based B2B systems. Moreover, we argue that the openness of the B2B systems will depend on the type of B2B e-commerce that emerges within a specific industry. We frame our discussion in the context of the four dominant types of electronically facilitated B2B exchange as discussed by Lucking-Reiley and Spulber (2000). We conclude with a discussion of the implications for both research and practice.

 

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Discussion

Electronically Based B2B Exchange

Business to business exchange generally refers to any business transaction occurring between two separate business entities. This includes the exchange of both products and service. Examples might include the selling of raw material inputs from one firm to another, the sale of capital equipment, the purchasing of commercial insurance or the contracting of one firm with another for the procurement of accounting services. Electronically based B2B exchange, more commonly and henceforth referred to as B2B e-commerce, refers to any type of B2B exchange that is primarily facilitated through the use of an electronic media.

The primary economic advantage of B2B e-commerce is perhaps best understood through the use of a value-chain analysis. The value chain model analyzes the production of a particular product or service as a series of "value-added" activities (Porter, 1985). In addition to the primary "value-added" activities associated with any production process, there also exists a variety of non-value-added activities or "support" services necessary for the operation of the primary value-added activities. For example, primary activities associated with the production of an automobile might involves activities such as the production of material inputs and the assembly of inputs into a final product. Support activities might include the development and use of human resource systems designed to manage the labor force and the development and use of procurement systems employed to facilitate the purchase and distribution of material inputs.

The primary economic advantage of B2B e-commerce is increased efficiency in the area of non-value-added activities. More specifically, B2B e-commerce streamlines the procurement process adding efficiency to this aspect of the overall production process. As suggested by Lucking-Reiley and Spulber (2000), B2B e-commerce "aims to reduce the cost of procurement before, during and after the transaction." B2B e-commerce lowers the cost of procurement before the transaction by reducing the searching costs associated with procuring inputs and by increasing the ease of price setting and product comparison. B2B e-commerce also reduces the cost of procurement during the transaction by reducing the level of interpersonal communication needed to facilitate the completion of the transaction. Finally, it can reduce the costs associated with monitoring contractual performance and confirming product or service delivery.

Dell Computer is a good example of a company that has realized tremendous cost savings by using B2B e-commerce for both its sales and procurement. The world's largest computer maker, Dell sells over 50 million USD per day via its e-commerce site, primarily to business and institutional customers. The company uses a proprietary procurement system called ValueChain.Dell.com to provide real-time information exchanges with its suppliers regarding inventory levels and product quality. Its efficient supply chain allows Dell to assemble its products within hours of receiving customer orders, while keeping only seven hours of inventory. Dell has procured over 26 billion USD of materials via ValueChain.Dell.com. (Lewis, 2001).

General Electric is another company that has aggressively pursued costs savings through B2B e-commerce. The company sold over seven billion USD of goods via B2B e-commerce in 2000 and conducted over 6 billion USD in online auctions. The company expects overall cost savings of 1.5 billion USD from its Internet initiatives in 2001, and expects even greater savings in the future. GE's Power Systems division predicts that it will realize 3 billion USD in benefits from its e-business initiatives in the year 2003 [1].

B2B E-commerce and the Impact on Industry Structure

The most obvious impact of B2B e-commerce concerns the impact on intermediary firms involved in the procurement activities within an industry. The ability to digitize many of the activities associated with procurement has fundamentally changed this aspect of many industries. This is not to suggest that online competitors are replacing traditional intermediary firms. In many cases, traditional intermediary firms are using electronic media as a way of optimizing their services. For example, Arrow Electronics, Avnet, Ingram Micro and Tech Data are all traditional electronics and computer intermediates that now conduct much of their activities via B2B e-commerce (Lucking-Reiley and Spulber, 2000). Still, the number of new competitors has increased substantially as a result of the advent of B2B e-commerce. As of mid-year 2000, more than 600 online trading exchanges had emerged, largely funded by new venture capital (Lehman, 2000). Moreover, there has been a significant increase in the number of B2B e-commerce systems established by downstream industry buyers. Roberti (2000) estimates that 60 buyer controlled B2B e-commerce systems including 278 member companies accounted for 3 trillion USD in annual purchasing by mid-year 2000. The online Web auction site Covisint, established by General Motors, Ford Motor, DaimlerCrysler AG, Renault SA and Nissan Motor company, handled 35 billion USD in transactions in the second quarter of 2001, up from 1 billion USD in the first quarter 2001 (Anonymous, 2001).

Clearly, the advent of B2B e-commerce has had and will continue to have a substantial impact on the intermediary procurement activities of industries. The potential impact on the intermediary aspects of industries is well documented in the academic literature. Chircu and Kauffman (2000) provide an excellent review of this literature. Discussion of the potential impact on downstream industry activities has been limited to estimating the potential cost savings within an industry. Yet, the potential impact on downstream activities is substantial. Moreover, the nature of the impact on downstream business activities depends largely on the design of the B2B e-commerce systems themselves.

When downstream firms are able to free themselves from the costly oversight associated with procurement activities, they can increasingly focus on the value-added aspects of their activities. The corresponding effect on industry structure and competition can be quite significant. The use of B2B e-commerce has the potential to significantly undermine the strategic position of certain industry participants while increasing the strategic competitiveness of others. Some large downstream firms, such as Wal-Mart and Albertson, have realized major costs savings from proprietary, closed network procurement systems. These firms are able to recoup the high cost of developing and maintaining these systems by the procurement savings on enormous purchasing volumes. These systems are a widely recognized source of significant competitive advantage to these firms. Smaller firms do not have the economies of scale and access to resources needed to develop proprietary electronic procurement networks [2]. Instead, they must rely upon relatively expensive distributors and wholesalers for their procurement. In some cases small retailers can purchase products less expensively at their local Wal-Mart then they can through their wholesale suppliers (Luhnow, 2001). The creation of open B2B e-commerce has the potential to allow all industry participants to benefit from the increased efficiency in procurement, thereby undermining the strategic position of large firms such as Wal-Mart and Albertson. An example of such of an exchange is the WorldWide Retail Exchange, established by eleven major retailers and open to all retailers. One of the objectives of the exchange is to counter the global expansion of Wal-Mart, whose 165 billion USD in annual sales give it tremendous purchasing advantages (Coleman and Beck, 2000).

The reduction in procurement costs associated with an industry wide B2B e-commerce system allows individual firms through an industry to focus on "other" distinctive competencies. Thus, an organization such as Haggen, a high-end grocery retailer based in the northwest U.S., can focus on providing high levels of service while benefiting from the lower cost distribution associated with B2B e-commerce (e.g., by tapping into systems such as the global net exchange and the worldwide retail exchange). The result is increased diversification and competition in downstream industry activities.

Of course, this holds if and only if an industry's B2B e-commerce systems are open to all potential industry participants. If an industry's B2B e-commerce systems are restricted to a handful of dominant players, the cost advantages conferred to those participating in the B2B e-commerce systems serves as a significant competitive advantage over those excluded. Those firms excluded from the B2B e-commerce systems will suddenly find themselves at a significant cost disadvantage. Competitive advantage will increasingly come from the inclusion in the B2B e-commerce systems, much like the competitive advantage Wal-Mart currently enjoys as a result of its highly efficient distribution system. The willingness and/or ability of firms to develop "other" distinctive competencies is greatly reduced as those included in the industry's B2B e-commerce systems obtain a significant advantage over those excluded, all other things being equal. For example, the ability of an organization such as Haggen to focus on service as its distinctive competency would be reduced significantly as a result of their disadvantages in the area of procurement costs should Haggen find itself excluded from the benefits of B2B e-commerce. Thus, openness of the industry's B2B e-commerce systems becomes an important determinant of industry structure and competition.

In summary, if an industry's electronically based B2B exchange is open to all downstream market participants, each market participant will benefit from the reduction of costs. Conversely, if an industry's electronically based B2B exchange is restricted to a handful of dominant players, those firms excluded from the electronically based B2B exchange will suddenly find themselves at a significant cost disadvantage. The ability of a firm to develop a distinctive competitive advantage will increasingly come from the inclusion in the electronically based B2B network. Thus, industries where the B2B e-commerce systems are largely open to participation should experience increased heterogeneity and competition in downstream industry activities, while industries where the B2B e-commerce systems are predominately closed to participation should experience increased homogeneity and decreased competition in downstream industry activities.

Brokers, Auctioneers, Dealers and Exchanges

The type of B2B e-commerce system itself will have a significant influence on the openness of B2B e-commerce. According to Lucking-Reiley and Spulber (2000), B2B e-commerce can be arranged into four dominant types of electronically facilitated exchange: brokers, auctioneers, exchanges, and dealers. Brokers function by providing a media designed to match buyers and sellers. Generally speaking, buyers are free to use the system whereas as sellers are charged a fee for access. Brokers merely facilitate the introduction of buyers and sellers leaving sellers responsible for completing the transaction. For example, iProcure (iProcure.com) provides a media for office suppliers to present their wares to potential buyers.

Auctioneers function in a similar fashion by providing a medium for the linking of buyers and sellers. Here, however, price is not predetermined as is the case in broker mediated transactions. Instead, an electronically mediated auction is used to set price. For example, eBay (eBay.com), the world's largest online auction site, provides a specific sub-domain, eBay Business Exchange, where businesses in the market can go to sell or buy a variety of business oriented products in an electronically mediated auction format. As with broker mediated exchange, completion of the auction mediated transaction is solely the responsibility of the buyers and sellers. The auctioneers merely provide a format for facilitating the transaction.

By nature of the system design, broker and auctioneer B2B e-commerce systems tend to be open to a wide variety of industry participants. Brokers and auctioneers function by providing a medium for the linking of buyers and sellers. Brokers and auctioneers profit by charging a small fee for each transaction completed using their services. As such, the financial viability of both brokers and auctioneers depends on the ability of the broker or auctioneer to successfully match a multitude of buyers and sellers in the marketplace. Correspondingly, both broker and auctioneer mediated transactions tend to result in fairly open systems where a large number of buyers and sellers are encouraged to participate. Openness in an industry's B2B e-commerce tends to result in increased diversification and competition in downstream activities.

Correspondingly,

Proposition One: The creation and use of broker and/or auction based B2B e-commerce systems will result in increased diversification and competition in downstream activities, all other things being equal.

Electronically established exchanges also perform the function of matching buyers and sellers. However, electronically established exchanges restrict participation to a select set of exchange members who have agreed to comply with a specific set of rules establish by the exchange. The constraint on membership facilitates centralized clearing, one of the primary benefits of electronically established exchanges. For example, EnronOnline, a division of Enron Corporation, provides an electronically mediated exchange for a variety of commodities, primarily energy products. EnronOnline's customer base consists almost exclusively of utility companies. Despite the limited scope of its products and a relatively small customer base, EnronOnline is the world's largest Web-based eCommerce system. During its first 18 months of operation, EnronOnline executed over one million transactions with a nominal value of over 590 billion USD [3].

Dealer media systems function by taking possession of certain materials and then selling those materials to interested buyers. Electronic media is used to facilitate the process of purchasing and selling goods. The overall function of dealers as intermediaries is not radically different that the traditional roles of B2B dealer intermediates. The difference comes in the efficiency associated with processing transactions electronically. The diversity of goods offered through dealer-mediated exchange is often less than that found in others electronically mediated systems due to the increased risk associated with the actual possession of goods. Corresponding, dealer-mediated transactions tend to involve a very limited set of participants.

In the most extreme case, a dealer will sell a single product line through its B2B e-commerce system. For example Cisco Systems conducts 90 percent of its sales online with an internally develop B2B e-commerce system, saving an estimated 60 million USD per year in transaction costs [4]. Cisco Systems serves as the exclusive "dealer" of its products and estimates that it saves 60 million USD per year using B2B e-commerce as its primary distribution mechanism [5].

Exchange and dealer mediated B2B systems tend to be less open than broker or auctioneer based B2B systems since these systems do not depend as heavily on the ability of the system to match a diversity of buyers and sellers. The increased risk associated with the actual possession of goods requires dealer based B2B e-commerce systems to focus on a specific set of goods and services.

Corresponding, dealer mediated B2B e-commerce tends to involve a very limited set of interested market participants. Dealers prosper by interacting repeatedly with a limited set of firms. Thus, the ability of dealer based B2B e-commerce systems to be dominated and controlled by a handful of industry participants is significantly increased. Electronically established exchanges intentionally restrict participation to a specific set of exchange members who have agreed to comply with a specific set of rules established by the exchange. This restriction in membership necessarily precludes certain downstream organization from obtaining the advantages of the exchange based B2B e-commerce system. The extent to which downstream firms are excluded depends on the specific design of the exchange based B2B e-commerce system.

Both dealer and exchange based B2B e-commerce systems tend to restrict participation as compared to broker and auction based B2B e-commerce systems. This reduction in openness has a direct impact on the structure of downstream industry activities. Correspondingly,

Proposition Two: Industries with dealer and exchange based B2B e-commerce systems will experience decreased diversification and competition in downstream activities as compared to industries with broker and auction based B2B e-commerce systems, all other things being equal.

Dealer and exchange based B2B e-commerce systems tend to restrict participation as compared to broker and auction based B2B e-commerce systems. Yet, the extent to which participation is restricted depends on the specific design of the exchange. Ownership and influence of downstream industry participants will likely have a significant influence on the openness of dealer and exchange based B2B e-commerce systems. If an industry's B2B e-commerce systems are restricted to a handful of dominant players, the cost advantages conferred to those participating in the B2B e-commerce systems serves as a competitive advantage over those excluded. Downstream firms capable of restricting participation based on ownership are likely to do so, resulting in a significant reduction in the openness of the dealer and exchange based B2B e-commerce systems. This reduction in openness has a direct impact on the structure of downstream industry activities. Firms excluded from the dealer or exchange based B2B e-commerce systems will suddenly find themselves at a significant cost disadvantage thereby inhibiting their ability to develop other distinctive competencies. Correspondingly,

Proposition Three: Industries where the dealer and exchange based B2B e-commerce systems are owned and operated by downstream industry participants will experience decreased diversification and competition in downstream activities compared to industries where dealer and exchange based B2B e-commerce systems are not owned and operated by downstream industry participants, all other things being equal.

Implications for Research

The most important research implication of the above discussion is the recognition that B2B e-commerce will not have a uniform effect on the structure of downstream industry activities. Instead, the effect will vary significantly depending on the openness of the B2B e-commerce systems that develops. The openness of the B2B e-commerce systems will vary significantly depending on the type of B2B e-commerce systems that evolve within a particular industry. Accordingly, much attention should be given to the type of B2B e-commerce systems that develop. What industry conditions lead to the development of broker and/or auction based systems as compared to dealer and/or exchange based systems? The ability to answer this and similar questions should increase significantly our ability to understand the impact of B2B e-commerce on the structure of an industry in general.

The above discussion also highlights the impact downstream industry organizations can have on the development of an industry B2B e-commerce activities. If an industry's B2B e-commerce systems are restricted to a handful of dominant players, the cost advantages conferred to those participating in B2B e-commerce serves as a huge competitive advantage over those excluded. Thus, downstream industry organizations have a strong incentive to co-opt upstream B2B e-commerce activities. There ability to do so will have a significant impact on both the nature of the B2B e-commerce within a particular industry and on the structure of the industry in general. Accordingly, much attention should be given to the ability of downstream firms to influence upstream B2B e-commerce activities. Under what conditions are downstream industry participants likely to take an equity interest in upstream B2B e-commerce activities? What mechanisms in addition to equity ownership will allow downstream industry participants to limit participation in upstream B2B e-commerce activities? The ability to answer these and similar questions should increase significantly our ability to understand the impact of B2B e-commerce on the structure of an industry in general.

Empirical analyses are needed to confirm or deny the propositions presented above. A detailed industry analysis is needed to determine whether or not the development of broker and auction based B2B e-commerce systems results in increased industry diversity and competition in downstream industry activities. For example, one might compare the level of diversity and competition among art and antiques retail businesses before and after the introduction of the eBay's auction based e-commerce system. Likewise, a detailed industry analysis is needed to determine whether or not the development of dealer and exchange based B2B e-commerce systems results in decreased industry diversity and competition in downstream industry activities. For example, one might compare the level of diversity and competition in the natural gas industry pre and post the introduction of EnronOnline's exchange based B2B e-commerce system. Finally, a detailed analysis is needed to determine whether or not significant ownership and control of upstream B2B activities by downstream industry participants results in decreased industry diversity and competition in downstream industry activities. For example, one might compare the level of diversity and competition in the automobile industry pre and post the introduction of the GM, Ford, DaimlerChrysler, Renault, and Nissan owned Covisint B2B e-commerce system.

Implications for Practice

Firms that currently obtain competitive advantage from efficiency in procurement (e.g., Wal-Mart) run of risk of losing their competitive advantage should public B2B e-commerce become widespread within their industry. Conversely, firms able to tap into the development of B2B e-commerce stand to benefit extensively from the cost savings associated with such activities. As such, the ability to control access to B2B e-commerce should be of great concern to firms within a particular industry.

From an individual firm perspective, the ideal would be to assure access to the B2B system exclusively, restricting access for other industry participants. This is essentially what Wal-Mart has achieved. Lacking the ability to exclusively co-opt the B2B activities within a particular industry, firms might be wise to form alliances that limit access to the industry's B2B e-commerce. Finally, those firms incapable of co-opting an industry's B2B e-commerce activities and unable to form alliances capable of restricting B2B e-commerce access should focus their attention on maintaining opened B2B e-commerce systems so that they can avoid the risk of being excluded from receiving the benefits of B2B e-commerce.

The type of B2B e-commerce that develops within a particular industry could have a dramatic effect on the openness of the industry's B2B e-commerce activities. The development of broker and/or auction based B2B e-commerce is likely to result in more opened B2B e-commerce whereas the development of dealer and/or exchange based B2B e-commerce is likely to result in less opened B2B e-commerce. Correspondingly, firms interested in assuring opened B2B e-commerce within a particular industry would be wise to promote the development of broker and/or auction based B2B e-commerce, whereas firms interested in restricting access to B2B e-commerce with in a particular industry would be wise to promote the development of dealer and/or exchange based B2B e-commerce.

Regulators too should pay great attention to the type of B2B e-commerce that develops within a specific industry. B2B e-commerce has the potentially to increase the level of competition within an industry significantly. Likewise, industry competition can be significantly reduced depending on the type of B2B e-commerce systems that develops and depending on the control of an industry's B2B e-commerce activities. The probability that a small subset of firms will be able to limit access to an industry's B2B e-commerce activities increases in an industry with a limited set of dominate industry participants. Thus, those industries where competition is already limited are more likely to see decreased competition as a result of B2B e-commerce. Regulators responsible for assuring a certain level of industry competition should pay close attention to the type of B2B e-commerce that develops within a specific industry, with particular attention to the ownership and control of B2B e-commerce activities.

 

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Conclusion

The purpose of this discussion was to explore the impact of increased B2B e-commerce on the structure of industries. We argue that the openness of an industry's B2B e-commerce systems will have a direct effect on the structure of downstream industry activities. Industries where the B2B e-commerce systems are largely open to participation should experience increased heterogeneity and competition in downstream industry activities. Conversely, industries where the B2B e-commerce systems are predominately closed to participation should experience increased homogeneity and decreased competition in downstream industry activities. Broker and/or auction based B2B e-commerce systems are likely to result in more opened B2B e-commerce whereas dealer and/or exchange based B2B e-commerce systems are likely to result in less opened B2B e-commerce. The ability of downstream industry participants to co-opt an industry's B2B e-commerce activities is likely to result in less opened B2B e-commerce. Correspondingly, the type and control of B2B e-commerce that develops within a particular industry should be of great interest to researchers, practitioners, and regulators alike. End of article

 

About the Authors

Stephen S. Standifird is Assistant Professor of Strategy at Western Washington University, has worked for Amoco Chemical Company and taught at the University of Oregon and the Academy of Entrepreneurship and Management in Warsaw, Poland. Research interests include institutional influences and organizational reputation, especially as related to e-commerce.
E-mail: stephen.standifird@wwu.edu

Chris Sandvig is an Assistant Professor of Management Information Systems at Western Washington University. Dr. Sandvig holds an MBA from UCLA and a Ph.D. from the University of Washington. Previously he taught at Bryant College and Indiana University. His current research interests include Web usability and the influence of the Internet on business strategy.
E-mail: csandvig@wwu.edu

 

Notes

1. General Electric 2000 annual report.

2. Tapscott, 1996, p. 55.

3. Enron Corporation press release, 23 May 2001.

4. Cisco 2000 annual report, p. 4.

5. Cisco 2000 annual report, p. 10.

 

References

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Editorial history

Paper received 13 September 2002; accepted 25 October 2002.


Contents Index

Copyright ©2002, First Monday

Copyright ©2002, Stephen S. Standifird

Copyright ©2002, J. Christopher Sandvig

Control of B2B E-Commerce and the Impact on Industry Structure by Stephen S. Standifird and J. Christopher Sandvig
First Monday, volume 7, number 11 (November 2002),
URL: http://firstmonday.org/issues/issue7_11/standifird/index.html





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