Unlike consumers excited by the Internet’s new shopping opportunities, companies have been buying and selling electronically for years. Despite that experience, the Internet is still reinventing business relationships and creating new trading partners, argues Doug Harned, a principal at McKinsey & Co. and leader of the firm’s e-commerce practice in Stamford, Conn. Speaking at a series of lectures on electronic commerce at Wharton, Harned said that while every item has not been reduced to a commodity, it is getting easier for companies to sell through multiple channels. This complicates the landscape of who is the buyer, seller and distributor.
Thanks to Internet trading, real-time transactions and lower-cost public links are replacing older, more expensive private networks and proprietary Electronic Data Interchange, or EDI, systems deployed by large corporations. Now, suppliers can fight back and distributors are fighting for their lives, Harned says. Small, wired companies are working with their peers, industry associations or new Internet intermediaries to serve global markets. Corporate consumers, in turn, are seeing the advantages in cutting out margin and middlemen to run their procurement operations more efficiently. Companies that can’t keep pace or delay their move into online trade are finding themselves at an increasing disadvantage.
Companies are moving from facilitating deals to executing sales online, Harned says. Estimates of business-to-business sales are currently $130 billion and projected at $1 trillion by the year 2003. These figures dwarf sales of $20 billion to consumers."We’re only just beginning to see the dramatically new business models that we saw in the business-to-consumer segment," Harned says. "Manufacturers in the graphic arts industry give up anywhere from 15% to 25% in margins to their dealers and have poor access to customer information. In chemicals, between $5 billion and $10 billion in costs could be cut from marketing, order fulfillment and other expenses."
Models for these new players are still evolving, with no clear sign of which ones will be most successful, he says. Some Internet sites will be set up by trade associations, some by second-tier industry players seeking growth, still others by private companies seeking to become infomediaries, a new high-tech brand of middleman. Examples already operating include Chemdex for sale of specialty chemicals, VerticalNet for industry-specific news or Metalsite, a marketplace of steel and metal products.
"But it’s not just matching buyer and seller, or making an online purchase," Harned warns. "The big money is in the reduced purchase price and the company working to make sure the purchasing process gains maximum value. Time and again, it’s the offline activity that makes the difference."
He points to Freemarkets Online, which saves users time and effort by prequalifying suppliers before letting them bid online. And the jury is still out on whether high-value, low-volume purchases will yield a greater profit than lower margin, repeat purchases, Harned says. So far, profit margins for these new sites range from a fraction of a percentage point to 10%, depending on the services offered.
Another difference between business-to-business e-commerce and customer e-commerce lies in shared interests that run across industry. For example, consumers may read the same books or share reviews of cars and movies, but business people are more likely to have common interests with their peers in other industries. For example, executives running a call center for a travel company may share information with other call center managers rather than seeking out other travel-related sites. This allows such executives to share information and knowledge across industry borders.
In this fluid new system, larger corporations with tight, rigid distribution agreements may not be able to keep up with smaller rivals who employ a combination of salespeople, online sales and other technologies, Harned says. A fast-moving company, which uses its website creatively, can exert greater leverage on its industry than a larger competitor. For example, Weirton Steel in West Virginia has a web site that offers lots of online services, such as allowing customers to check the status of their orders as they are being processed. Such companies have a decisive advantage over giants like Bethlehem Steel, which may offer lower prices, larger inventory or another physical asset.
It will be critical for infomediaries to interact smoothly with large corporate computer networks and enterprise-wide software to attract repeat visitors. But ease-of-use and attractive websites are not nearly as important to corporate users as they were in consumer online sites. "Margins are being pushed down and the first mover advantage is less critical in the business-to-business realm," Harned adds. "You’ve got to keep delivering value and nobody has this locked up yet. The winners will leverage the assets of incumbent companies with new electronic intermediaries."