B2B Electronic Commerce
The benefits of business-to-business e-commerce, according to
Turban, involve the potential contributions of ". . . lower purchase costs,
reduced inventory, enhanced efficiency of logistics, as well as to increased
sales and lowered sales and marketing costs." (p. 201). Turban also notes
that "In the 1990s business managers have come to recognize that management and
control of the upstream and downstream activities - which involve relationships
with partners who are technically outside the enterprise - are as important as
the internal activities involved in the actual production of products." (p.
201).
A B2B e-commerce solution can help to redefine the supply chain,
creating new business entities to take advantage of new opportunities in the
marketplace, or speeding the demise of organizations whose business model may
not be able to adjust to shifts in technology and other market factors. In
marketing and business management we refer to "vertical-" and
"horizontal-integration" to describe the process of adjusting an organization's
internal structure to accommodate strategic market plans and management of the
company's intermediaries. That integration can be accomplished through either
external acquisition of another business entity, or by developing and
redeploying the necessary resources from those available within the
corporation.
Risk Management
There is a core concept which underlies these incentives to
change the organization, or the nature of its relationships with other business
entities, and it is known as risk management. Practically everyone has insurance
policies of one form or another, and those policies are a type of risk
management instrument. Turban (p. 313) cites the work of M. Parker (1996) in
identifying financial values, business risks, and uncertainty, from the
perspective of information technology management. Risk management applies not
only to IT management, but to all other areas of the organization as well.
Risk management has rapidly matured with the help of
electronic communications, with a well-known example being Enron, Inc.
(Hammonds, p. 93). The trading of derivatives, options, and other
financial instruments, all of which are basically contracts of one sort or
another, has seen an explosive growth thanks to technological advances in
communications and information transfer. A similar growth took place in the
stock market in the 1970's with the development of stock options trading.
Options trading in the stock market brought about terminology to
describe the various ways these financial instruments could be assembled so as
to minimize risk or uncertainty and maximize potential value. Those terms, such
as "puts", "calls", "straddles", "splits", and so on, described the contracts or
combinations of contracts that could be structured to afford the buyer a
position of minimum financial risk or exposure, while at the same time providing
for highly leveraged potential financial gains. An older terminology
familiar to everyone is "hedging", and of course the cliché statement
"Don't keep all of your eggs in one basket".
One example I can cite is of a friend of mine who owned and
operated an electronics manufacturing company in the late 1960's and early
1970's. His largest customer was based in Europe, and payments for goods were
made in gold bullion. Unexpectedly, the U.S. government made it illegal for my
friend to accept payments in gold bullion, and because the contract with the
European company specified that payment could only be made in gold, the business
went bankrupt for lack of revenue. It also cost quite a bit on the accounts
receivable side of the books too, as components had been shipped but were
never paid for. In this case the risk was actually the domestic government
action.
Depending upon which side of the contract you are on, you may
benefit if events go in one direction, or you may lose if they go in another
direction. The game, in this case, is to put your organization into the contract
position that will allow it to even the playing field (hedging) so that the
potential economic losses to the firm are minimized, or so that the potential
economic gains are maximized. There are, of course, inherent risks in the
contract position structure too.
Online Auctions
The online auction is bringing about significant changes to the
economic playing field for both the individual consumer as well as businesses.
In the e-commerce arena, the auctions represent a democratic marketplace in
which everyone is able to apply risk management decisions to seek greater
financial returns or hedge against economic uncertainty. The nature of auctions
allows all organizations and individuals access to information in a
more-or-less equal manner. As I mentioned Enron earlier, I will state that
Enron's problems did not stem from the nature of auctions and risk management
instruments, but rather with internal corporate controls. While the market
information may not be absolutely perfect through-out the auction, it is a vast
improvement over traditional methods and implementations of financial markets,
simply because of the volume of data available to all participants.
These same auction models have been applied in many industries
to create new opportunities for intermediaries that did not formerly even exist.
One example is in the field of law. In the year 2000, a number of firms were
created to exchange legal services and allow ". . . corporations to auction off
work to the lowest bidder." (Boncompagni, p. 16). Those firms included:
www.FreeMarkets.com ;
and,
www.lawvertical.com (formerly
iBidlaw.com)
When this article was written in June, 2001, the
author was asking if there was ". . . room for yet another online service. . .
.", and the answer appears to be yes. All four firms have active web
sites and appear to be successful in their endeavors. The Law Vertical site
deserves mention on the subject of consumer behavior. As noted, it began as
iBidlaw.com, but the company changed the name because ". . . (lawyers didn't
react well to the word "bid", says the company)" (Boncompagni, p. 16).
Risk Management Rules
Hammonds cites nine rules on how to manage business risk (2002,
pp. 83-93) which include:
I. Strategy - "The future is discontinuous and, therefore, risky
by definition. By speeding the flow of information, technology has concentrated
that risk even more." (p. 83).
II. Playing It Safe, Part 1 - The God gamble - "If one outcome
seems overwhelmingly preferable, take it - even if it is not certain." (p.
84)
III. Marketing - "To not take a risk is to risk being ignored"
(p. 85)
IV. Playing It Safe, Part 2 - How much fuel is enough? "The
problem: How much is just enough?" when figuring the fuel loads for jet
passenger aircraft. (p. 86).
V. Leadership - He quotes Yoram "Jerry" Wind of the University
of Pennsylvania Wharton School of Business "'Wealth is created during periods of
uncertainty,' Wind says. 'You can go back to Frank Knight, who said in 1921
that the only risk that leads to profit is unique uncertainty. Making money
depends on identifying opportunities in a turbulent marketplace.'" (p.
87).
VI. Customers - "People are more open-minded than we give them
credit for." (p. 90). He relates how automobile manufacturers have quit
conducting car design with focus groups, and now present concept vehicles
at autoshows "where people are tuned to think with an open mind." (p. 90).
VII. Innovation - Hammonds notes the example of the California
Institute of Technology (Caltech) in its method of focusing ". . . more on the
science itself than on the ensuing commercial opportunity." (p. 91)
VIII. Past Company - "The greatest business risk ever taken."
(p. 92). This rule examines IBM's bold move in 1964 to introduce the System/360
mainframe computer, "a bold gamble that would change everything - not just at
IBM itself, but throughout the computer industry - for decades to come." (p.
92).
IX. Playing It Safe, Part 3 - "It's like a big chess game." (p.
93). This rule examines weather hedges, and most notably ". . . those products
have also been made possible by the Web, which allows rapid access to the
historical data needed to create models." (p. 93).
Economics, Global and Other Issues in
e-Commerce
The online auction, in its myriad forms, has the promise to
bring a major change in global economics and economic development. The
strongest influence of the auction is the role it may play in the
democratization of the world marketplace, subject to the impacts of national
regulations and laws that may interfere with its pure execution. We will examine
the impacts of treaties brought about by such organizations as the World
Intellectual Property Organization (
www.wipo.org) in both the domestic and global
marketplaces in Week Six.
As a market researcher, I admit that I am partial to maps
as a very useful planning tool, and I want to bring to your attention two
articles and a web site of particular interest. The first article is by Yao
Yongling, who describes how he went about creating a business geography model to
analyze how competing commercial centers affect each other's trade areas in
Beijing, China (p. 40-43).
The second is by David Rumsey who is the owner of the David
Rumsey Collection, which includes more than 150,000 items and is one of the
largest historical map archives in the U.S. Historical maps can tell a great
story and give us great insight into the how and why of economic development.
Portions of the collection are now on his web site at
www.davidrumsey.com
Summary
In e-commerce we must analyze our situation in the marketplace
and prepare the organization for new opportunities as well as potential
disasters. The information revolution, with the technological innovations that
have made it possible, has created both opportunity and new pitfalls that we
must prepare for through our strategic planning efforts. While the future
is uncertain and perhaps unknowable in certain circumstances, we can protect
ourselves by staying aware of the current conditions and organizing ourselves so
as to be able to move quickly to take advantage of an opportunity or to dodge
a risk.
Workshop Six will examine Public Policy issues in
e-Commerce. Please be sure to read Chapter 10 in your Electronic
Commerce text.
Also, please be reminded to submit your written assignments and
responses to the weekly discussion questions as per the schedule published
in the course syllabus.
Works Cited
Boncompagni, Tatiana (2001, June) Four's a Crowd? Yet another entrant hopes
to score in online legal services. Corporate Counsel, 16-17.
Hammonds, Keith H. (2002, April) No Risk, No Reward, A Rule Book for Risk
Takers: Why playing it safe isn't necessarily playing it smart - even in
cautious times. Fast Company, 81-93.
Parker, M. (1996) Strategic Transformation and Information
Technology. Upper Saddle River, NJ: Prentice Hall.
Rumsey, David (2002, April) From Parchment to Ether: fusing historical maps
with web GIS. Geospatial Solutions, 34-39.
Turban, Efraim, Lee, J., King, D., & Chung, H. M. (2000) Electronic
commerce – A managerial perspective. Upper Saddle River, NJ: Prentice
Hall.
Yongling, Yao (2002, April) Beijing Downtown: Mapping customer reach in an
urban core. Geospatial Solutions, 40-43.
--
Michael E. Ewing
April 28, 2002