Evolution in Business-to-Business Networks - Case Study Example

Place holder for title page) Evolution in Business-to-Business Networks Introduction A business-to-business (B2B) marketplace is defined as an Internet-based meeting point that creates a trading network among manufacturers, suppliers, and sellers in a supply chain. (Zhu, 2004) B2B networks are often discussed in terms of the larger concept of e-commerce, which describes the activity of buying, selling, or exchanging products and services via the Internet. B2B networks enjoyed explosive growth between 1999 and 2001, but declined just as rapidly, mirroring the collapse of the ‘dot-com’ bubble beginning in 2000. (White, Daniel, Ward, & Wilson, 2007) There are several reasons for the rapid decline of B2B networks after 2000. To some degree, the same ‘survival of the fittest’ mechanisms that rid the world of thousands of ill-conceived and unsustainable ‘dot-com’ businesses were at work in B2B networks as well; some simply folded when their membership went out of business. Another more significant factor was the lack of understanding of how e-commerce could work with fundamental supply chain and operations management practices. (Krastev, 2008, and Liviu & Emil, 2008) The ones that survived did so because the participants were fundamentally sound businesses, and the networks diversified to expand their coverage. The new B2B networks show promise, because of technology and information security improvements, and a willingness to look at networks as an evolving concept, which is redefining collaboration and competition. This paper will summarise the history of B2B networks before and after the year 2000, and examine the reasons for their rapid growth and decline. In particular, the shortcomings of traditional ideas of supply chain management, distribution, and pricing that were revealed when they were applied to e-commerce will be looked at closely. Finally, some of the new concepts in B2B networks will be discussed, to develop a description of what a future successful B2B network might be. 1. The Growth of B2B Networks The Internet market directory eMarket Services gives a very specific definition of what a B2B network is and is not. A B2B network, which the website calls an “e-Marketplace”, is one that must comprise several buyers and sellers, and is strictly a trading platform, that is, does not itself engage in buying or selling. Accordingly, a B2B e-market is not a website of a single company selling their own products, a distributor of other companies’ products, a trading platform between consumers (like eBay), or primarily concerned with non-trading activities. (eMarket Services, 2009) There are three types of B2B networks: third-party, which are independent networks; consortium, which are networks formed by companies within a particular industry, such as auto manufacturers; and vertical, which are networks formed by a single company to integrate its own suppliers and distributors. Auto manufacturers Volkswagen and BMW are two of the better-known companies with vertical networks. (White, Daniel, Ward, & Wilson, 2007) Based on the eMarket Services definition the number of B2B e-marketplaces grew from about 30 in January 1999 to more than 1,400 in 2,001. (Siems, 2001) The figure was estimated to be as high as 2,200, but not all of those might have fit the ‘B2B’ definition. (White, Daniel, Ward, & Wilson, 2007) Even at that time, the decline of B2B networks was being forecast, with one research group predicting that the number would shrink to fewer than 200 by 2004. (Siems, 2001) While the number of e-markets did decline, they were apparently a little more robust than earlier observers believed; eMarket Services listed 750 active e-markets in mid-2006 (White, Daniel, Ward, & Wilson, 2007), and a recent check of their website (February 14), shows 604 e-markets in their directory. (eMarket Services, 2009) Despite the reduction in the number of B2B networks, the amount of money moving through these systems has increased since 2001, from $226 billion a year to over two trillion dollars annually by 2006. (Raisinghani & Hanebeck, 2002) B2B networks expanded so rapidly because of the advantages the concept offered, particularly to a new wave of businesses that were largely or entirely Internet-based. B2B networks allowed businesses to reduce the amount of resources – in time and effort as well as money – spent finding customers, since all a business would have to do is look in one place. The same was true of customers seeking suppliers as well. From the point of view of technology and security, B2B networks offered advantages of providing a secure “intranet” between network participants, and a common platform for transactions regardless of what sort of systems each were using. (Siems, 2001) B2B networks also expanded linear supply chains into more efficient multi-channel systems. (Shah, 2006, and Krastev, 2008) For example, a supplier of parts for auto manufacturers could use the network to arrange for parts to be shipped directly from the parts manufacturers to the auto builders, rather than the old method of receiving them into a warehouse for distribution. This would result in considerable cost savings, speed up the supply chain, and lower the price of the parts. Because of B2B networks, a large, international business could literally consist of one person and a computer, moving vast amounts of products (and money) through cyberspace. 2. Decline and Realignment of B2B Networks after 2000 The collapse of the so-called ‘Internet bubble’ occurred between February and May 2000; during that brief period, U.S. Internet companies’ stocks lost about 45% of their value. (Demers & Lev, 2000) B2B networks suffered heavily in the collapse, not only losing their own value, but having the effect magnified by the carnage among their networks’ members. This might have been avoided, or at least mitigated, if the B2B networks had been adopted by more companies. (White, Daniel, Ward, & Wilson, 2007) B2B networks at first glance appear to be a good idea; they allow companies to expand their capabilities without expanding physically, and are proven to reduce information and transactional costs. But the most glaring concern, and the one that apparently prevents more companies from participating in B2B networks, is the way they change the nature of business competition. B2B networks, because of their transparency of information, are naturally anti-competitive. (OECD, 2001, and Pressey & Ashton, 2007) All suppliers’ bids and prices are openly posted for the benefit of customers which means that all the other suppliers can see them, too. This creates an unusual price pressure and rearranges companies’ priorities from managing costs first in order to develop competitive pricing, to matching competitors’ prices first and then trying to find ways to reduce costs. (Demers & Lev, 2000, and Zhu, 2004) This issue affected third-party networks worse than it did in consortium or vertical networks, because in the latter business relationships had been established to some significant degree before the formation of the networks. (Pressey & Ashton, 2007) In third-party networks, businesses that were direct competitors with no cooperative relationship at all were forced into open price wars, and often could not meet their costs. As suppliers found their margins falling they dropped out of the networks, and as suppliers disappeared so did customers, since a network of all buyers and no sellers is not of much use. This highlighted another shortcoming of all B2B networks, and third-party networks in particular: the model of a network based solely on procurement processes (‘purchase-to-pay’ processes) did not accurately reflect supply chain management processes otherwise used by participants. (White, Daniel, Ward, & Wilson, 2007) In other words, businesses in these kinds of networks could take advantage of a new supply paradigm, but other functions such as inventory management, demand planning, and new product development were still outside the network. It is little wonder then that some networks, such as Instill, eSkye, and SciQuest, which focus on the food service, alcoholic beverage, and laboratory and research supplies businesses respectively, have shifted their focus from B2B network hosting to selling supply chain management and procurement software. (Johnson & Whang, 2002) 3. The Future of B2B Networks: Specialisation and Collaboration Of the 604 e-markets in the eMarket Services directory, fewer than 200 are multiple-industry or multiple-product networks. Of the 52 ‘significant’ global networks listed in a separate report by eMarket, 17 are multiple-industry sites primarily intended to benefit particular geographical areas. Overall, a little more than half of all the networks listed are true third-party networks operated by companies independent from the industries they service, with the majority of these being in the multiple-industry category. (Zällh, 2005, and eMarket Services, 2009) The third-party, multiple-industry networks are generally quite large, with memberships from several thousand to several million. The makeup of these listings of B2B networks leads one to a couple conclusions about what makes a present-day B2B network successful. First, there is a preference for specialisation. Networks either cater to a particular industry or industry segment, or to a particular region, or both in some cases. Second, there is a preference for collaboration among industry players in forming networks. Networks that were formed as a result of a cooperative effort outnumber true third-party networks about two to one, and even among third-party networks, about half of those were started by firms spun off from larger companies. And finally, if specialisation is not possible or not preferred, size is the substitute; multiple-industry networks, which eMarket calls ‘general opportunity’ sites, tend to be quite large. Among many researchers and commentators on B2B networks, the collaborative model is seen as the most effective and sustainable form. Pithadia and Gunasekaran (2005) name the process “e-collaboration” and define as including information transfer and integration, as well as resource, process, and decision sharing. What they are describing is clarified by Liviu and Emil (2008) as an Adaptive Business Network, rather than a linear paradigm for supply chain management. Using Internet technologies in an established network allows for “exception management”, a key attribute of integrated supply chain management which relies on co-ordinated, near real-time data. (Raisinghani & Hanebeck, 2002) A very simple example of exception management through a network is used regularly in the automotive industry, where local dealers of the same brand share information on parts inventories, so that one dealer whose warehouse does not have a part needed for a repair can quickly locate it at another nearby shop. From a practical standpoint, the collaborative model also has the advantage of bringing each member’s already-established relationships with suppliers and customers to the new network, making it much more likely to be sustainable. (White, Daniel, Ward, & Wilson, 2007) This counters one of the problems of earlier third-party B2B networks, which had trouble attracting users due to the ability of large companies to simply rely on their own supplier and customer connections. An intriguing alternative to the collaborative model which may hold promise in the open-Internet Business Service Network, described in detail by Tenenbaum and Khare of CommerceNet (2005). Rather than forming or joining a specific network, companies instead deploy business solution systems and software that meets a certain level of general compatibility. By connecting with similarly-equipped companies via regular Internet channels, these companies can form ad hoc networks, quite literally on a transaction-to-transaction basis if they so choose. Thus, a retailer of computer hardware, for example, can manage his entire business from a single terminal, routing an order to a manufacturer, a shipping request to a freight company, and payment details to a bank, all without being part of a formal network. (Tenenbaum & Khare, 2005) It should be noted that CommerceNet as a developer of Business Service Network software takes a particularly optimistic view of the concept; nonetheless, it is still an idea with some merit. Conclusion This paper has briefly summarised the evolutionary timeline of B2B networks, from their meteoric growth in 1999-2000, to the much-diminished yet stable state they are in now. Through the course of the development of B2B networks, it has become clear that the key to their success and longevity is the application of fundamental principles of supply chain management, modified but not replaced by the technological advances offered by the Internet. The trend in recent years has been towards more specialised and collaborative B2B networks; in that sense, the idea of the B2B network as a “marketplace” seems to be fading in favour of the concept of the network as a management tool. That seems to be the most reasonable way in which to regard B2B networks, and the fashion in which they will continue to develop and expand. Works Cited Committee on Competition Law and Policy, Directorate for Financial, Fiscal and Enterprise Affairs, Organisation for Economic Co-operation and Development (OECD). (2001) Competition Issues in Electronic Commerce. [Internet] 23 January 2001. Available from [10 February 2009]. Demers, Elizabeth, and Lev, Baruch. (2000) A Rude Awakening: Internet Shakeout in 2000. [Internet] University of Rochester/SSRN Database, September 2000. Available from [10 February 2009]. eMarket Services. (2009) eMarket Services [Internet]. Oslo: Innovation Norway. Available from: [14 February 2009]. Johnson, M. Eric, and Seungjin Whang. (2002) ‘E-business and supply chain management: an overview and framework’. Production and Operations Management, 11(4): 413-23. Krastev, Momtchil. (2008) Supply Chain Management and e-Business. 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