B2b Electronic Commerce Primer

Internet and the World Wide Web (WWW) have propelled the world into a new era. The change we are in can be as far-reaching as the Agricultural Revolution and as intense as the Industrial Revolution. Business conducted over the Internet (i.e., e-commerce) implicates not only business costs and productivity, but also world economics at large. New tools, new rules, and new relationships are emerging to face a new order of economy.

E-commerce can be separated into three major categories: B2C (business-to-customer or retail), B2B, and intra-organizational. Here, our focus is on B2B e-commerce.

B2B e-commerce, also called inter-organization e-commerce, stands for business-to-business electronic commerce. It is defined as intercompany buying and selling of goods and services where the final order is placed over the Internet. Besides business transaction, B2B also allows companies to manage customer and partner relationships over the Internet or an extranet (a network that provides pathways into a company's private network (i.e., intranet) for its partners). With e-commerce, companies can eliminate multiple layers of wasted effort from a vast array of transactions –ordering, purchase order preparation, pricing changes, billing, payment, and order tracking.

The market for B2B e-commerce is enormous. Goldman Sachs estimates that the value of transactions conducted on-line between companies could reach $1.5 trillion in the US by 2004, which dwarfed the B2C on-line commerce in the US, estimated by Forrester Research to be $108 billion by 2003. Not only is the B2B e-commerce larger than that for B2C e-commerce (about 10 times larger), it is also growing much more rapidly.

Vertical and Horizontal Procurement Opportunities

To understand B2B, it is useful to understand what businesses buy. What businesses buy can be classified into manufacturing inputs and operating inputs. Manufacturing inputs are raw materials and components that go directly into a product or a process, and are usually purchased from vertical, or industry-specific, suppliers and distributors. Usually, different industries have different needs and their needs do not overlap. Steel, electronics, chemicals, and agriculture are good examples of vertical markets. On the other hand, horizontal markets are markets for operating inputs or non-production goods, i.e. services or products for a wide range of industries that are not used as direct inputs in the manufacture of a company's products. Horizontal market opportunities exist where the same service can be provided across different industries. Maintenance, repair and operating (MRO) goods such as office supplies, airline tickets, logistic management, media, and etc., are good examples of horizontal markets.

Classification of B2B business models

Business model is simply the method of doing business by which a company can sustain itself, i.e. to be profitable. Based on the parties involved and the trading mechanism, B2B e-commerce business model can be classified into three major categories: buy-side, sell-side, and electronic hubs (also called Intermediaries, market makers, or electronic marketplaces).

Buy-side systems are simply Internet procurement systems hosted and administered by the buying organizations. This system generally automates the procurement process and to aggregate product information from the buyer's preapproved suppliers. It is a good system for buyers with high buying power. Normally, large companies that spend large amount of dollars on the procurement of goods and services will find the system beneficial.

Sell-side systems are installed by companies selling complex non-commodity products that enable the supplier to sell its products to other business over the Internet. Since the products are complex, the buyers find that it is best to have the task of updating the catalog data left to the supplier and sell-side systems.

Electronic hubs are Internet based intermediaries that host electronic marketplaces and mediate transactions among businesses. They are market making websites hosted by an independent third party that buyers and sellers can interact and engage in business. This system is attractive because it may be able to enjoy economic of scale by aggregating transaction volume, so that they can reap higher profit and invest more back in the system than a single company with smaller transaction volume. Another reason for its attractiveness is information custodianship since neither buyers nor sellers want their proprietary information known by others. Buyers may not want to engage in a sell-side system because the seller could analyze their buying pattern and extract more of the buyers' information. Sellers, on the other