Value-Chain Report -- Framework For B2B Marketplace Success

Dec. 21, 2004
Like any successful business, a B2B marketplace needs proper management and profit goals.

It is undeniable that B2B marketplaces are changing the way that industries operate. Traditional linear supply chains are being replaced by intricate value webs that are built on relationships with suppliers, channel partners, customers, alliances, and other trading partners. The winning company of the future will be a connected company with a collaborative network. Many firms are acknowledging this reality and creating or participating in public and private B2B marketplaces to gain benefits through:

  • Improved supply chain product visibility and reduced inventory costs.
  • Reduced procurement costs, as a result of fewer ordering errors, streamlined approval process, etc.
  • Improved asset utilization, as a result of better capacity planning and utilization, higher labor productivity, and increased economies of scale.
  • Increased customer loyalty, as a result of increased responsiveness, higher customer service levels, and product customization.
  • Reduced marketing and sales costs, as a result of lower costs to reach and serve customers.
  • Reduced product development cycles. While these benefits are achievable, astute business leaders are becoming more cautious about launching or participating in B2B marketplaces, especially in the current economic environment. Current focus has shifted to choosing marketplaces that are perceived as viable and capable of providing immediate value. As a result, the definition of success for a marketplace is changing. Marketplace Success Is Defined By Profitability Marketplace success in the past typically implied being a first-mover and generating a significant level of industry awareness, or "buzz". Success in the present, however, means getting back to business fundamentals and demonstrating a competitive advantage. Although the specific definition of success for a marketplace can depend on where it is in its business cycle, successful marketplaces are either profitable or have a clear path to profitability. A marketplace's overall path to profitability is primarily driven by the strength of its strategy and its execution excellence. Strategy Strength The strength of a marketplace's strategy is ultimately determined by the degree to which it can:
  • Generate value for its members.
  • Make money.
  • Create a sustainable competitive advantage. Strength of strategy is measured by the marketplace's overall performance. Key performance indicators may include:
  • Revenue magnitude, growth, and mix.
  • Profit margin and growth.
  • Market share of transactions.
  • Operating indicators, such as member acquisition costs, inventory turns, days sales outstanding, and similar metrics. Execution Excellence Cap Gemini Ernst & Young has developed a success framework that provides an objective means to evaluate a marketplace's ability to execute. This framework is comprised of key elements that impact a B2B marketplace's likelihood for profitability and success. These elements and some initial diagnostic questions are outlined below:
    • Strategy Alignment: To what degree is the marketplace's business model, process, organization, and systems aligned to its strategy? To what extent is the marketplace strategy in line with the current market and financial realities?
    • Governance and Organization: Is the ownership and governance model appropriate? What is the strength of the leadership team? To what extent is the organization and culture geared toward speed, flexibility, customers, liquidity, and profitability?
    • Next Generation Solutions: How good is the marketplace in identifying and creating compelling, "killer" apps for its target market? To what extent is the marketplace's solution development process conducive to member buy-in and speed?
    • Business Development: To what extent is a marketplace aggressively expanding its membership scope? How strong is the marketplace's ability to attract, retain, and extend its member relationships?
    • Globalization: To what extent has the marketplace defined its globalization strategy and presence? How effective is the marketplace's deployment approach for globalization?
    • Technology How strong is the marketplace's technology environment in terms of scalability, flexibility, reliability, availability, and security? To what extent can the marketplace's technology environment support new services and/or modify existing ones?
    • Marketplace Economics: What is the breadth and depth of a marketplace's revenue sources? How good is the marketplace in optimizing its pricing strategies?
    • Member Connections: What are the marketplace's connectivity options for all tiers of members? Has the marketplace leveraged other service providers to offer simple, rapid, complete, and low cost solutions?
    Based on a survey of marketplaces, Cap Gemini Ernst & Young published a white paper, B2B Marketplaces: Lessons Learned from the Early Movers, that discusses key marketplace challenges and critical success factors. "Companies most often underestimate the difficulty of creating a B2B marketplace," the report states. "Technology and integration are major complicating factors, but the complexity goes much deeper. The marketplace breaks years of established business processes, relationships, infrastructure, and organization. The resistance to change is frequently underestimated. In short, a B2B marketplace changes the way a whole industry operates; it is an eBusiness solution, not merely an eTechnology solution. B2B marketplaces must overcome a variety of obstacles. Defining and understanding these challenges is key to a successful entry for both founders and trading partners." In short, the Internet offers unprecedented opportunities for companies of all sizes to connect via B2B marketplaces, to create transaction efficiencies, and to manage the entire supply chain. Success, however, requires a significant commitment of people, capital, and time. A B2B exchange can offer a powerful value proposition. However, the exchange that focuses on speed or technology alone is not likely to succeed. B2B marketplaces are not about rapid introduction of new technology, but about changing the way an industry operates. A B2B marketplace must be successful as a business -- with capable management, clear profit models, and operational efficiency. For a copy of B2B Marketplaces: Lessons Learned from the Early Movers, send your request via e-mail to [email protected]. Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.
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