Rayport and Sviokla (1995) introduced the term electronic marketspace and suggested the Internet created a new environment which had significant implications for the way in which business trade. The speed of development of computer, network and Internet technologies played a key role in the rapid expansion of the marketspace and subsequently the commercial practice of electronic trading. It should be remembered, however, that electronic trading per se is not a new phenomenon; commercial exchanges have been taken place using electronic data interchange (EDI) and dedicated data links between organisations for several decades. Nevertheless, what is new is Internet technologies. Communication standards and protocols create a virtual trading environment where any organisation with a computer and access to the internet has the potential to trade in global markets.
Many innovative marketplace models have developed, although the usage of marketplaces has not been as widespread as was predicted when the idea came to prominence in the late 1990s. For example, in the industrial market e-auctions are used by General Electric (GE) to trade with both established and non-established suppliers. The model is a web-based electronic bidding mechanism that operates in a similar way to those held in traditional auction rooms and tendering process. The downward movement of prices is sometimes referred to as a ‘reverse auction’ as opposed to a bidding situation where prices are driver upwards. GE purchasing managers do not always select the lowest bid as they will assess the potential risks associated with the supplier: say, the ability to fulfil the order, quality and requirements for after-sales service issues, rejection rates and quality of goods. An emergent benefit of this model is that e-auctions allow companies to monitor competitive pricing, which helps the organisation reduce total costs.
While e-auctions focus on the sales side of purchasing, e-fulfilment focuses on the delivery of goods in a timely and appropriate fashion and is central to the re-engineering of the supply chain. According to a survey, ‘fulfilment’ will be an area of significant growth for businesses operating online. However, over 80% of organisations cannot fulfil international orders of tangible goods because of the complexities of shipping, although there are some geographical locations (e.g. parts of Europe and Asia) that are better served by local warehouse support networks than others. Time will inevitably establish the validity of the proposition that online purchasing practices are sustainable business models.
Many different types of e-marketplaces emerged as a result of being based on different business models. Perhaps the most straightforward way to classify e-marketplaces is by type of user for example:
B2B independent e-marketplace – an online platform operated by a third party which is open to buyers or sellers in a particular industry. By registering on an independent e-marketplace, members can access classified advertisements and request for quotations or buds in a particular industrial sector. For example: in Alibaba.com members will typically pay a fee or make some form of payment.
Buyer-oriented e-marketplace – an example of a portal which is normally run by a consortium of buyers in order to establish an efficient purchasing environment. Joining as buyer, this type of marketplace can help lower, say, administrative coats or improve bargaining power with suppliers. As a supplier, an organisation can use a buyer-oriented e-marketplace to advertise and this can prove to be highly effective as the buyers will tend to be from a particular target segment.
Supplier-oriented e-marketplace – sometimes known as a supplier directory, this is established and operated by a group of suppliers who are seeking to establish an efficient sales channel via the Internet to a large number of buyers. They are usually searchable by product or service being offered. Supplier directories benefit buyers by providing information about suppliers for markets and regions they may not be familiar with. Sellers can use these types of marketplaces to find new leads.
Vertical and horizontal e-marketplaces provide online access to businesses vertically up and down every segment of a particular industry sector such as automotive, chemical, construction or textiles. Buying and selling using a vertical e-marketplace can increase operating efficiency and help decrease supply chain costs, inventories and cycle time. A horizontal e-marketplace connects buyers and sellers across different industries or regions. You can use a horizontal e-marketplace to purchase indirect products such as office equipment or stationary.
In addition to e-marketplaces there are online exchanges or trading hubs, which are websites where buyers and sellers trade goods and services online and vary according to the size and number of companies using them and the type of commodity traded. There are already successful exchanges in markets as diverse as energy, textiles and logistics. Like online auctions, online exchanges allow trading between B2B organisations. Key growth factors for this type of trading environment are that large companies can bid collectively to earn volume discounts or to jointly deliver a large contract. The operational procedures can vary – for example, in some online exchanges, where the price of a standardised commodity such as energy or telecoms bandwidth continuously changes as a result of changes in supply and demand. There are some important considerations for managers thinking about entering online exchanges:
- Are all the required major suppliers already signed up to the exchange?
- Does the exchange operate a comprehensive list of products and services to facilitate price comparison?
- Could belonging to an exchange destabilise existing customer / supplier relationships?
- Does our organisation have adequate systems in place to support order fulfilment?
- What will be the effect of making information about prices and stock levels available to competitors, as well as potential customers?
- What are the cost of comparison between operating through an online exchange and existing sales and procurement systems?
An example of a trading hub is World Retail Exchange which is part of Global Sources (globalsources.com). Global sources is an e-business solution and service within the global retail industry helping facilitate transactions with Asian suppliers through a range of tools varying from identifying and qualifying potential suppliers, to achieving agreement on product specifications, pricing and terms for purchase. This special programme provides an advantage to WWRE members in their Asian sourcing business processes.
Reasons for limited adoption of e-marketplace
Johnson (2009) has investigated the reasons for limited adoption of online marketplaces. Based on interviews with purchasing managers in a range of sectors, he believes the most significant are potentially misguided perceptions of the benefits, risks and trust in partners. He gives one example of a marketplace servicing the aerospace and defence industry where it couldn’t recruit sufficient small suppliers because the e-market charged the same fee to all suppliers regardless their size. The e-market charged suppliers 4K USD per year to use its catalogue software tool to create their own electronic catalogues, and a yearly subscription fee of 390 USD. Although most small suppliers could afford the subscription, many could not afford to pay 4K USD per year in order to create electronic catalogues on the e-market.
Chaffey, D. and Ellis-Chadwick, F., 2012. Digital marketing: strategy, implementation and practice (Vol. 5). Harlow: Pearson.