Unlike consumers excited by the Internet's newshopping opportunities, companies have beenbuying and selling electronically for years. Despite that experience, the Internet is still reinventing business relationships and creatingnew trading partners, argues Doug Harned, aprincipal at McKinsey & Co. and leader ofthe firm's E-commerce practice in Stamford,Conn. Speaking at a series of lectures onelectronic commerce at Wharton, Harnedsaid that while every item has not beenreduced to a commodity, it is getting easierfor companies to sell through multiplechannels. This complicates the landscape ofwho is the buyer, seller and distributor.

Thanks to Internet trading, real-timetransactions and lower-cost public links arereplacing older, more expensive privatenetworks and proprietary Electronic DataInterchange, or EDI, systems deployed bylarge corporations. Now, suppliers can fightback and distributors are fighting for theirlives, Harned says. Small, wired companiesare working with their peers, industryassociations or new Internet intermediariesto serve global markets. Corporateconsumers, in turn, are seeing theadvantages in cutting out margin andmiddlemen to run their procurementoperations more efficiently. Companies thatcan't keep pace or delay their move intoonline trade are finding themselves at anincreasing disadvantage.

Companies are moving from facilitatingdeals to executing sales online, Harnedsays. Estimates of business-to-businesssales are currently $130 billion andprojected at $1 trillion by the year 2003.These figures dwarf sales of $20 billion toconsumers."We're only just beginning tosee the dramatically new business modelsthat we saw in the business-to-consumersegment," Harned says. "Manufacturers inthe graphic arts industry give up anywherefrom 15% to 25% in margins to theirdealers and have poor access to customerinformation. In chemicals, between $5billion and $10 billion in costs could be cutfrom marketing, order fulfillment and otherexpenses."

Models for these new players are stillevolving, with no clear sign of which oneswill be most successful, he says. SomeInternet sites will be set up by tradeassociations, some by second-tier industryplayers seeking growth, still others byprivate companies seeking to becomeinfomediaries, a new high-tech brand ofmiddleman. Examples already operatinginclude Chemdex for sale of specialtychemicals, VerticalNet for industry-specificnews or Metalsite, a marketplace of steeland metal products.

"But it's not just matching buyer and seller,or making an online purchase," Harnedwarns. "The big money is in the reducedpurchase price and the company working tomake sure the purchasing process gainsmaximum value. Time and again, it's theoffline activity that makes the difference."

He points to Freemarkets Online, whichsaves users time and effort by prequalifyingsuppliers before letting them bid online.And the jury is still out on whetherhigh-value, low-volume purchases will yielda greater profit than lower-margin, repeatpurchases, Harned says. So far, profitmargins for these new sites range from afraction of a percentage point to 10%,depending on the services offered.

Another difference betweenbusiness-to-business E-commerce andcustomer E-commerce lies in sharedinterests that run across industry. Forexample, consumers may read the samebooks or share reviews of cars and movies,but business people are more likely to havecommon interests with their peers in otherindustries. For example, executives runninga call center for a travel company may shareinformation with other call center managersrather than seeking out other travel-relatedsites. This allows such executives to shareinformation and knowledge across industryborders.

In this fluid new system, larger corporationswith tight, rigid distribution agreementsmay not be able to keep up with smallerrivals who employ a combination ofsalespeople, online sales and othertechnologies, Harned says. A fast-movingcompany, which uses its Web site creatively,can exert greater leverage on its industrythan a larger competitor. For example,Weirton Steel in West Virginia has a Website that offers lots of online services, suchas allowing customers to check the statusof their orders as they are being processed.Such companies have a decisive advantageover giants like Bethlehem Steel, which mayoffer lower prices, larger inventory oranother physical asset.

It will be critical for infomediaries tointeract smoothly with large corporatecomputer networks and enterprise-widesoftware to attract repeat visitors. Butease of use and attractive Web sites are notnearly as important to corporate users asthey were in consumer online sites."Margins are being pushed down and thefirst-mover advantage is less critical in thebusiness-to-business realm," Harned adds."You've got to keep delivering value, andnobody has this locked up yet. The winnerswill leverage the assets of incumbentcompanies with new electronicintermediaries."

All materials copyright © 1999 The Wharton School of the University of Pennsylvania.


Published on: Oct 13, 1999