B2 B Sc And Emarkets

Managing E-business: Business to Business E-business (B2B)

Ron Cenfetelli – January 9, 2008

These notes will span both Weeks 1 and 2

Before we get to B2B…

E-business changes businessSo, let’s look at how e-business influences a company’s overall strategy.

Three General Strategies

According to Porter (1980) there are three basic strategies for gaining an advantage over competitors…– Low cost leadership: faster, cheaper

• Best for commodities

– Differentiation: Making your company stand out by offering differences (e.g. really good service)

– Niche: Finding something no one else is doing

The Benefits of E-business for StrategyStrategy: Low Cost Leadership

Price advantage– Disintermediation: pass along savings from one less firm(s)

seeking margin in the supply chain

Reducing cost:– Operations

• Inbound logistics (more efficient procurement, lower material inventories, defects & errors)

• Manufacturing (lower WIP inventory)• Outbound logistics - distribution of product, service and

information (lower product inventory, efficient dispatching)

– Transaction costs– Reduced search costs, online ordering, B2B

coordination…– Get your customer to do your work for you!

– Less labour costs for sales & support – See "More Clicks in the Bricks“ on WebCT

Strategy: Product/Service DifferentiationImprove service:

– Choice (See “Anatomy of the Long Tail”)– Availability (24/7 all over the world)– Convenience– Responsiveness

– Transaction speed– Better internal processes, logistics, manufacturing, and

distribution

Improving Quality / Error reduction Service Functionality – the website augments a core offering whether online or offline (See Sat’s VanSun on CBC’s jPod TV series)

– We’ll revisit during B2C

The Benefits of E-business for Strategy

Strategy: Niche (Market Specialization)Customer Targeting & Segmentation – SEO, Web AnalyticsCustomization

Personalization (See Yahoo, Google, Amazon)Product Design (mass customization)

All strategiesIncrease reach (going global)Branding: create presenceCreate switching costs (lock-in customers) - maybeImprove relations with business partners

The Benefits of E-business for Strategy

Business Models are a Choice– The companies in many industries choose to

organize around highly similar business models -- with highly similar business results over the long term.

E-business and Business models

E-business Models? – E-business offers an opportunity to change the rules

of an industry by competing on the basis of new business models or vastly improving old ones.

E-business and Business models

E-Business model formulationNew or revised top line models– Auctions (Ebay)– A market for everything

• Prosper.com; dating websites; GHXC

– Infomediaries• Motionbased.com• http://www.samba.biz

– “Direct” merchants (Dell, Land’s End, Spud.ca)– Affiliates ($ for click through’s)

• Passive income taken to a new level (see http://www.amazon.com/affiliate)

– Web 2.0 Social/Community models• Facebook, etc.

– And more…Slaying ogres online

E-Business model formulationBottom line considerations– Less brick, less mortar, less people– But costs of establishing presence

• “One thing important to me as a manager is being able to find ways to get low cost, high potential leads to my website. Search engine advertising, partner engagements (listing - intelligently – our offerings on partner sites) etc”

– Mudit Mittal General Manager at NetCom Information Technology

– Being too successful• Gauging infrastructural needs• Mudit Mittal: “Sudden web success finds us delivering 4 - 5 times the

number of events on a weekly basis, than what we were used to. This is also something to watch out for. Not being operationally ready results in dissatisfied customers, who wouldn't want to come back.”

E-Business model formulationBottom line considerations– Bandwidth isn’t free!

• Youtube in mid-2006 was distributing 200TB/day (200,000 gigabytes)

• At $0.05/GB/Month: $1 million/month

E-Business model formulation

Caveat: Lower barriers to entry– But $, talent and effort still required

E-Business model formulation

Power law very applicable in the fluid online world– “Rich get richer”

Universal Power Law - “characteristic of winner takes all environments” (Barwise et al 2000)

Source: Adamic and Huberman (1999) - “The Nature of Markets in the WWW”. Analysis of 120,000 sites.

One more diversion before B2B

Before implementing B2B E-business, a company must have its own house in orderB2B solutions are weak at best, impossible at worst, if a company’s own internal systems aren’t as integrated as possibleLet’s talk briefly about a company’s needed technological infrastructure and systems integration

Technological Infrastructure & Integration

Business IT infrastructureEnterprise Application integration (EAI)Business process flow and EAIInter-organizational integration (EDI/XML)


Business IT infrastructureBusiness IT infrastructureEnterprise Application integration (EAI)Business process flow and EAIInter-organizational integration (EDI/XML)

Business Technological Infrastructure

Hardware

Software

• Servers for data & application

• Desktops

• Network infrastructure

Business Technological Infrastructure

Hardware (HW)

Software (SW)

Business Applications:

• Databases

• Application logic

• Middleware

• Interface


Business IT infrastructureEnterprise Application integration (EAI)Enterprise Application integration (EAI)Business process flow and EAIInter-organizational integration & EDI

Example: Simple Integration

Sharing data between Microsoft Word and ExcelMicrosoft Excel-Access integrationImporting/exporting text files to Excel

Motivation for EAI

Say we’re developing an online sales application for the BAIT513 Inc. <product> company:– How can we allow our <place> customers to view our

<product> inventory? – How could customers view the status of their order

after they have made the purchase?

(Let’s pretend) most of the required information is contained in legacy applications

Motivation for EAI

To answer these questions:– What existing applications contain the

information customers require?– What is involved in integrating the new

sales application with the legacy inventory and order tracking applications?

EAI – Even More MotivationSeptember 14, 2001

August 16, 2004

January 9, 2007

History of IntegrationTraditionally architectures suffered from a lack of connectivityDuring the 80s much effort on integrating legacy application with new client-server technology– Mostly point-to-point integration

Late 80s & 90s:– the emergence of a cross-enterprise applications (within a firm)– Middleware, wrappers, and EAI– Cross-organizational integration through EDI (across firms)

90s: new internet technology & enhanced customer requirements raised the need to integrate customer-facing applications with back-office applicationsToday: legacy systems, standalone departmental systems, enterprise applications, and internet-based systems all need to talk to each other, and many still do not!

The Evolution of Business IT

•Departmental applications (e.g. manufacturing)

•PC in the business: automation of a specific task; one user; simple interface

•Transaction based systems: one centralized application; dumb terminals; many users; simple interface

•Resource sharing

•Networks and client/server applications: automation of a business process; many users; graphic interface

•Business wide applications: (e.g. ERP)

•Internet technology

•Integration with suppliers, distributors,customers, and business partners (e.g. SCM, CRM)

Challenges

Why are large IT projects that require application integration so challenging?What additional difficulties (beyond the standard challenges of IT development) are associated with application integration?

Application Integration:Intra-Organizational

Technological issues:– Data integration

• Syntactic interoperability (LASTNAME NAME)• Semantic interoperability (Same words, different meanings;

different words, same meaning)

– Platform disparity (e.g. Mac, Wintel, Linux…)– Complexity of systems and constant flux

Process issues (exception handling):– What if only part of the order can be filled?– What if a customer wants a special option?

Application Integration:Intra-Organizational

Organizational issues– Senior management buy-in and commitment

• The “E-Logistics” system at Otis Elevator was a good example of this (way back in the Core days)

– Difficulties with deployment of integration – Support for, or resistance against, change

Data Integration Challenges & Solutions

Challenges:– Integration within software platforms – Integration across software platforms– Integration across hardware platforms

Solutions:– Strive to use fewer SW & HW platforms

• The beauty of the browser– Wrappers and middleware– Cross-functional “turn key” applications (e.g., ERP, CRM)

The above is what Enterprise Application Integration (EAI) is all about!– The unrestricted sharing of data and business processes throughout the networked applications

or data sources in an organization

EAI in perspective

“Implementing EAI boils down to moving information between applications.”– John Mann “Workflow and EAI”

“…a response to decades of creating distributed monolithic, single-purpose applications leveraging a hodgepodge of platforms and development approaches. EAI represents the solution to a problem that has existed since applications first moved from central processors. Put briefly, EAI is the unrestricted sharing of data and business processes among any connected applications and data sources in the enterprise.”– David S. Linthicum

EAI in perspective

“The reality is that integrating with legacy apps effectively and efficiently is the challenge with any new class of application. What I am implementing now for an enormous auto-supplier is a web-based financial budgeting and reporting tool. It is only as good as the data we can pull from the legacy apps. You know the old saying "Garbage In, Garbage Out". Joshua Dennis - Deloitte

EAI in perspective

http://news.zdnet.com/2424-9595_22-181807.html– “The demand for software that integrates data with applications is

expanding at a rapid pace. Industry analyst IDC expects the worldwide market for data integration and access software to grow to $2.9 billion by 2011. But packaged integration software is used to meet only a small portion of the overall need. Most integration projects today are still done with custom code.”

– “In 2008, … an unprecedented pace in the creation and evolution of applications with greater agility. … it will be necessary to efficiently move data into and out of multiple and disparate data stores. … you can expect data integration to be a top priority for many developers in 2008.”

– Business Intelligence (BI) applications absolutely require EAI

3JAN08


Business IT infrastructureEnterprise Application integration (EAI)Business process flow and EAIBusiness process flow and EAIInter-organizational integration & EDI

Business Process Flow and Integration

legacywrapper

decision support system

worker

accounting system

See “Workflow and EAI”Bottom line: when crafting your EAI strategy, you won’t just be integrating technology, you’ll be integrating processes (people, material, etc.)


Business IT infrastructureEnterprise Application integration (EAI)Business process flow and EAIInter-organizational integration & EDIInter-organizational integration & EDI– (now we(now we’’re talking B2B!)re talking B2B!)

Integrating Applications – Across Orgs

Early attempts include innovations such as electronic transfer of funds (EFT)– But limited to large corporations and a few daring

small businessesElectronic Data Interchange (EDI)– added other kinds of transaction processing beyond

funds transfer and extended the types of companies who could participate

Direct exchange of standardized business transaction “documents”– 2 or more organizations– independent application systems

created by the parties sharing– independent standards (formatting rules)

again created by the parties sharing– dedicated connections

EDI: Electronic Data Interchange

Invented in the 70’s

EDI StandardsSample Payment Transaction Set

ANSI X12 820, version 003.020 ST*820*0101

BPR*C*59400*C*SWT********02*BANKXX*DA*98765432 TRN*1*0101

DTM*007*0920515

ENT**0101 N1*PR*COMPANY A N1 *PE*COMPANY B

RMR*IV*101*PO*9900*10000*100

RMR*IV*102*PO*19800*20000

RMR*IV*103*PO*29700*30000*300 SE*11*0101

CONTENTS: Company A is paying Company B’s bank account (# 98765432) the sum of US $59,400 for three invoices in the amounts of $10K, $20K, and $30K; each invoice amount is discounted by 1 percent.

From EDI to XML

Along comes the Internet– HTML: Hypertext Markup Language (~1990)– The founding language of Internet communication

XML: eXtensible Mark-up Language–Developed in the 90’s –Same underlying technology as HTML

From EDI to XML

A specification developed especially for Web documents. It allows designers to create their own customized tags, enabling the definition, transmission, validation, and interpretation of data between applications and between organizations. www.wmo.ch/web/www/WDM/Guides/Internet-glossary.html

XML example

<?xml version="1.0"?><!DOCTYPE PARTS SYSTEM "parts.dtd"><?xml-stylesheet type="text/css" href="xmlpartsstyle.css"?><PARTS> <TITLE>Computer Parts</TITLE><PART> <ITEM>Video Card</ITEM> <MANUFACTURER>ATI</MANUFACTURER> <MODEL>All-in-Wonder Pro</MODEL> <COST> 160.00</COST> </PART>

From EDI to XMLBenefits of moving to XML– More human readable and common sense

• Price can be noted as <price>19.99 </price>– Web servers rather than dedicated EDI server– Cheap ubiquitous Internet vs. expensive private 1:1 networks– EDI is typically 1:1, XML is M:M– One standard for many buyers/suppliers– Platform/System independent– Common language for business transactions– XML is a major tool to achieve EAI within an organization!– XML is becoming the backbone of many online applications (e.g.,

Google Earth) and protocols (e.g. RSS, AJAX)

EDI: Why should I care?

EDI is still an important technology:– 95% of Fortune 1000 still use EDI– Most transactions still done via EDI

Lessons from the EDI past, about the future– Illustrates the importance of communications

standards for B2B E-business– Demonstrates that adoption of B2B is NOT just a

technology issue

Technological Infrastructure & IntegrationSummary

Rarely do IT applications stand unconnected– For e-business, this isn’t even an option– The e-business challenge is trying to keep the old linked

with the new

To develop new e-business applications we need to understand:– the business process and workflows involved– What information is required, and what other applications

contain that data

Technological Infrastructure & Integration Summary

You are no longer just developing systems for internal use. – Multiple stakeholders (customers, suppliers, etc.)

Integration with other applications poses major technological and organizational challenges

Business to Business E-business: Supply Chain Management, Buy/Sell Applications and e-Markets

B2B E-Business

B2B interactions include:– Selling (to other firms)

• B2B is different from B2C– Buying (from other firms)

Internet technology can support both types of interactions

B2B

Supply Chain Management (SCM) and B2BB2B Applications:– Buy Side– Sell Side– Exchanges or e-markets

B2B

Supply Chain Management (SCM) and B2B

B2B Applications:– Buy Side– Sell Side– Exchanges

SCM & B2B

Before understanding B2B & SCM, let’s review what the supply chain is:The supply chain is a series of links and shared processes that exist between suppliers and customers.– Link and processes – all activities from the

acquisition of raw materials to the delivery of finished goods to the the end consumer.

• “Supply Chain Management Primer,” www.clarkstongroup.com

Supply Chain – More DefinitionsThe facilities for acquisition, distribution, storage and movement of raw materials, intermediate products, non-production physical resources, and finished goods.The supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage, through to the end user as well as the associated information flows. Supply chain management is the integration of these activities through improved supply chain relationships, to achieve a competitive advantage.– Robert B. Hanfield, Introduction to Supply Chain Management,

Prentice Hall

SC and Inventory

SC’s operate heavily around inventory– Inventory is the “currency” of a SC

Inventory = goods that are either available for sale or in the process of being converted from raw materials into saleable goodsInventory is a necessary evil– It’s a useful buffer for service, production, etc.– But inventory entails lots of costs…

Types of Inventory CostsTypes of Inventory CostsMany are not easy to quantifyMany are not easy to quantify

Holding (or carrying) costs– Warehouse, taxes, insurance…

Ordering (per order) costsShortage/Stock Out costsMaintenance costs– Cycle counts, loss, “shrinkage”

Transportation costs – lead time, ordering, shipping

The “Butterfly Effect” of Inventory(usually referred to as “bullwhip”, etc. ala “beer game”)

Describes how small perturbations in demand are amplified as orders pass up the supply chain through distributors, manufacturers, and suppliers.Causes: Inaccurate forecasts, order batching, shipping rates, price speculation, poorly managed promotional campaignsConsequences: Channel inefficiencies through stock-outs or excess inventory, higher costs, delivery delays, customer dissatisfaction, etc.The Real Root Cause: All of this chaos is a direct result of a lack of information and knowledge on the part of one party in the SC regarding other parties up/down stream in the chain.If all parties in the SC knew exactly what was going on in all other parts of the SC, inventory could be greatly reduced or even eliminated

The big attraction – An Internet-based supply chain lets companies

monitor all parts of the chain simultaneously -- instead of having to collect information from one link and then pass it to the next, and then the next, like a giant game of “ghost”.

The goal – To react more quickly to changing markets and make

fewer mistakes in the process.

SCM – the Role of E-business

SCM – the Role of E-business

Use information to – Reduce uncertainties– Create visibility of entire supply chain– Enforce supplier compliance

Requires:– Fast, real-time information flow to all links– Inter-enterprise coordination (between companies)– Fast response– Flexibility in production – Sharing knowledge about production plans– Trust: reliable information, reliable fulfillment

SCM Benefits

Efficiency– Reduced inventory costs– Increased capacity utilization

Effectiveness – increased customer satisfaction (thus more sales)

SCM - Critical Issues

Managing relationships with suppliers and customers– How tightly should firms be bound together?

• To what extent can a firm trust its partner?• What kind of a commitment can a firm make?

– How much data to share?– Who gets the biggest share of the “soft $3”?

• The additional value created though SCM efficiencies

SCM - Conflicts

The buyer wants:– “Just in time” but no backorders– The exact type, brand, specification– $ Cheap!

The seller wants:– Low finished goods inventory– Smoothed production and delivery channel– $ Full revenue!

Traditionally: maintaining an inventory was the way of de-linking these conflicting objectives

4 Stages/degrees of SCM Development

Traditional Supply Chain – Each company in the chain thinks of itself as an island and there is

little info sharing between companies or even within corporation

Integrated Supply Chain– There is info sharing within business functions of a company, but not

between companies

Collaborative Supply Chain– Broader sharing of info with customers and suppliers. Transparency

and collaboration lead to better responsiveness

Synchronized Supply Chain– Distinguishes itself from collaborative supply chain by even greater

dependence. Not just the sharing of information, but synchronizing operations. Boundaries between companies in chain is blurred with greater info sharing, seamless transfer of products and information

Krishnamurthy, p192

B2B

B2B

E

DI

M

edie

val

SCM & B2B – Summary

Definitions of Supply Chain (SC), Supply Chain Management, (SCM), InventorySCM is very complex; IT can help streamline information and integrate business processes Most SC interactions are B2B; interactions in B2B are significantly different from B2CB2B IT:– Traditional – EDI– Current – internet-based (+benefits)

B2B Buy/Sell Applications & e-Markets

B2B Applications: Collaborative Commerce

The internet is used for collaboration and cooperation between business partnersInformation to be shared:– Buyer -> Seller

• Product specifications and drawings (products design collaboration)• Purchase forecasts (product planning collaboration)• Purchase orders• Point-of-sale information

– Seller -> Buyer:• Inventories• Production plans and expected delivery dates• Shipping notice• Production log

B2B Applications

How can a firm utilize the internet to interact with other businesses?

Seller Side – an added channel to reach your customersBuyer Side – an added channel for your procurementElectronic Markets – where both buyers and sellers meet

B2B Applications – Seller Side EC

Seller Side ECBuyer Side ECElectronic Markets

Seller Side – 1:1

Interacting directly with one buyerWhen is this appropriate?– One (or few) buyers– The buyer is strategic and the tight integration is

worthwhile

XML and web services are not very different from EDI, except based on internet technology

Seller Side – 1:Many

Selling:– Web storefront– Integration with buyer’s systems – Auctions

Support & Service– Online catalogue– Customer service

Seller-Side Example: CISCO

Seller-Side 1:Many -Example: CISCO

Functionality:– Online Ordering— Internet Product Center builds virtually all its

products to order– Finding Order Status— gives the customers tools to find

answers to order status inquiries by themselves– Customer Service— Cisco Connection online

Includes a web storefront, integration with supplier’s systems and customer serviceBenefits— saves the company $363 million per year from technical support, human resources, software distribution and marketing material98% of sales through the internet

A Local Example: BuildDirect

Mini Case Study: BuildDirect

Founded in 1999 by Jeff Booth and Robert Banks. Located at 1900-570 Granville Street. 38 employeesA pure B2B e-business that sells building materials online (yes; big, heavy, pallet-loads of building materials)Estimated 2006 sales: >$60 MM (???)


Building materials (one order may be 5 tons)A typical building materials supply chain:

What BD does:

WholesalerMfg Distributor Retailer Contractor Customer

Mfg BD

Wholesaler

Distributor

Retailer

Contractor

Customer


BD eats it way up the supply chain– Sometimes it’s a retailer, sometimes a wholesaler

• Depends on volume– In some cases completely moves so far up the chain that it takes

over the Mfg’s sales channel!The “Dell” of building materials– Payment up front! (and 30 to 90 days A/P, nice float)– No inventory!

One source of competitive advantage lies in its proprietary algorithms that manage long, complex, multi-party shipping processes.

Seller Side B2B EC – Summary

Benefits: – Increase customer satisfaction– Increase sales– Reduce selling expenditures & administrative costs– Increase delivery speed– Outsource work to your customer!

B2B Applications – Buyer Side

Seller side Buyer sideExchange

Buyer-Side B2B E-Commerce

Procurement: How can a firm utilize the internet to buy more efficiently?– Purchasing (actual buying related activities – from RFQ to

purchase order)– Transportation– Warehousing– Inbound receiving

Typically used by powerful, large buyers (e.g. GE, GM, et al)

B2B Buyer-Side Example: GMhttp://www.gmsupplypower.com

Buyer Side B2B EC – Summary

Benefits to e-procurement : Reducing cycle timeReducing procurement cost (increased productivity)Eliminating errorsLowering prices:– Product standardization– Consolidation of purchases– Access to more suppliers

B2B Applications - Summary

Seller Side EC Buyer Side ECElectronic Markets

B2B E-Markets

Also known as exchanges or e-hubsBring together buyers and sellers to transact electronicallyMany-to-many interactionsBuyer-centric vs. Seller-centric vs. Neutral

But not without challenges… (Economist May 15, 2004)

E-Market Example: WWRE

Founded in 2000 by a group of retailers including J.C. Penney, and Gap (now >60 members)

Standardized processes for tendering and bidding

Helps retailers find more efficient suppliers and better prices

Auctions that factor in transportation costs, different currencies

Alibaba.com

The Topic of Next Week’s Case

E-Marketplace Resources

Good listings of B2B marketplaces at… – http://www.dmoz.org/Business/E-Commerce/Marketplaces/– http://www.alexa.com/browse/general/?

&CategoryID=327478&mode=general&Start=1&SortBy=Popularity

– http://www.bocat.com/

Functions of an E-Market

Content/catalogue creation, access, managementCommunity & CommunicationPrice Discovery Mechanisms:– Posted Price, Auction, Reverse Auction– Continuous markets (bid/ask)

TransactionFulfilment, Settlement

E-Markets Provide Knowledge

Transaction Knowledge– Sales orders (by product, customer, over time, etc)– Ratings and comments (think Ebay)

Market Knowledge– Best selling products and product categories, trends– Customer profiling and demographics– Collaborative filtering (think Amazon)– New sellers in the markets– Average prices and ranges

Courtesy of Dr. Jai-Yeol Son, UBC

E-Market: Thinking Critically

As a seller, why would I want to join an e-market? How much would I be willing to pay for it?As a buyer, why would I want to join an e-market? How much would I be willing to pay for it?Why would I want to own the e-market?

These are good questions to consider for next week’s GHXC business case

E-Markets: Sellers

Motivation for a seller to join an e-market?– Access to more customers

• Or else lose markets to the competition– Reduced transaction costs

What’s the downside?– High competition (often based on prices)– May shift from a relational to transactional interaction with your buyers– Difficult to differentiate products– IT infrastructure costs

– “The old way works just fine”

E-Markets: Buyers

Motivation for a buyer to join an e-market?– More selection (suppliers and products)– Reduced prices– Reduced transaction costs

What’s the downside?– Competing for the same resources (no exclusive sources)– IT infrastructure costs– Dealing with lots of unknown suppliers

• Possible preference for stable longer-term relations with a limited number of suppliers. – Added costs: Paying middlemen to facilitate B2B trade– More general online exchanges available, including eBay– “The old way works just fine”

E-Markets: Market Owners – The Market as a Business

E-market owned by a “neutral” third partyValue provided by the exchange– Aggregation (cut transaction costs for both buyers/sellers)– Matching buyers and sellers

Motivation for a market maker to open an e-market?– Commissions– Software– Support and services– See GHXC Case next week!

B2B E-business – Major Summary

B2B is not new, but the advent of the Internet has made a significant impact– Links to many more other businesses– More consistent standards– Creation of “virtual” companies that can outsource non-core

aspects to othersSupply Chain and Supply Chain Management– All about communication and visibility– Avoiding the “bullwhip” effect and the dreaded evil of excess

inventory

B2B Applications – for buyers or sellers– Buy Side applications for procurement– Sell Side applications for an additional customer channel

E-markets as a business in and of itself (infomediary)– More on this with GHXC

B2B E-business – Major Summary

B2B: The Future

B2B e-business has huge potential, but some fundamental challenges still have to be addressed:– Business models still fluid– Further development of standards to support B2B transactions– Security– Legal issues: enforceability, international differences, taxation

Questions? Comments?