My chief executive has committed the organisation to being involved in an electronic marketplace, along with a number of our competitors. As e-commerce strategy director, I am having to deliver the key elements of this alongside the IT director, and the business units. There appears to have been little movement so far on this, other than the initial announcement that we were joining the marketplace.
How do the IT director, myself and key managers progress our involvement in this marketplace, and what critical questions do we have to ask ourselves - and the board - in order to make real progress?
Make a business case
Peter De Groot
There has been an avalanche of announcements in the press recently about electronic marketplaces being set up in various industries, and the challenge now is to turn this "announcement ware" into real marketplaces that create value for the participants. Having stated your intent to join an electronic marketplace, the most critical question that you need to answer with your fellow competitors is how to achieve critical mass for it.
Critical mass will encourage other market participants, be they buyers or sellers, to join that market, so creating a virtuous circle where each new participant makes it more attractive for the next participant to join. So it is important that enough "big name" participants are signed up early to kick-start the marketplace and make it viable.
The next issue you will need to address is the governance of the marketplace, and this is essentially about resolving the inherent conflict between competition and co-operation, and the level of independence that the marketplace has in relation to the participants. Finally you must ask yourself why you are joining an electronic marketplace, other than as a "me too" response to the general trends. The answers to this question should be translated into a business case that determines the actions that you will have to take to realise the value of joining the marketplace.
Due diligence is necessary
According to recent research, there are currently over 1,000 Net marketplaces covering everything from chemicals to poultry and yes, even e-business services. Whilst this number is growing weekly, only a finite number will be sustainable, so before you jump in, some due diligence is necessary.
If you feel there is scope for another marketplace, you need to ask whether or not the venture makes financial sense. Building a typical Net marketplace is far more complex than building a typical consumer-facing site. For the B2C site, the buyer interacts with a single user interface you build and integrate with your own internal systems. With a Net marketplace, you frequently have to integrate the buyers' systems with the sellers' systems. Buyers will have their own procurement systems that they will expect to be supported. And for each buyer there will be a different set of buying procedures. These also have to be supported.
Sellers will have their own order processing systems. Guess what? These have to be supported and yes; they are going to be different! This greatly increases the complexity of building a fully automated Net marketplace and remember, where there's great complexity, great cost is never too far behind. We've looked briefly at the costs; you also need to look carefully at the revenues. You may operate in a market that is worth trillions, but if the commission you can charge on each transaction (by far the most common revenue model) is only a few basis points, you are going to need a very large market share to even recoup costs.
In assessing your potential market's worth, consider the typical commission charge multiplied by market size; don't look at market size in isolation. The most lucrative markets are unsurprisingly those that have the greatest friction and so support the greatest commissions. How frictionless is the market you operate in? If you have come this far, you need to ask where your competition might come from.
If you are in a market dominated by a few very large players, then it may be difficult to defend against them starting their own rival marketplaces, unless they are going to be joining you in this venture. In that case, move carefully to avoid creating what looks like a cartel. Even if you successfully avoid this, you can be sure that the buyers in the marketplace will be asking themselves if they can trust a trader to run the market - how will you gain their trust? A bunch of traders without anyone shopping is no marketplace, no matter how loudly they shout.
Managing information is key
A crucial aspect of information security is not simply the issue of technical security - which is in most people's opinion paramount - but also the question of the information itself. Within an electronic marketplace, trading is so fluid and so easily effected that great care has to be taken in the transmission of data. Rumours must be controlled from within discussion groups and bulletin board; care must be taken that information is not inadvertently bled from one area to another; and maintenance of the system becomes paramount.
The key point to make is therefore this: don't ignore the key information security and security management issues implicit in such a set up.
Creating a Net marketplace could be a fantastic strategy for your company. If there is a lot of friction in your market place, you concentrate on gaining the trust of your buyers (who will like the word independent') and gain a critical mass of other sellers you could be sitting on top of a gold mine. But as with most gold mines, getting the gold out isn't going to be easy.
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