Categories: Uncategorized

The B2B Debate: Private vs. Public

ERRNIE DAVENPORT, CEO of Eastman Chemical, had an important business decision to make last spring. His $5 billion company was being courted by some of its biggest rivals in the chemicals industry to join them in forming a huge, business-to-business e-marketplace.

Davenport had already given the preliminary green light to join the new venture, dubbed Envera, but at the last minute, Davenport changed his mind and Eastman withdrew its support. Instead, the Kingsport, TN, chemical producer decided to invest even more aggressively in its own e-commerce efforts.

Eastman, in essence, would go it alone, building its own private Internet marketplace to link with customers and suppliers. Today, the company is widely regarded as one of the most Internet-savvy businesses in the chemicals industry.

Mike Brown, CEO of $5 billion hard disc-drive maker Quantum Corp., of Milpitas, CA, faced a similar decision. Last April, Brown received a phone call from Carly Fiorina, the CEO of Hewlett-Packard. Fiorina was working with Compaq Computer CEO Michael Capellas to solicit support in the high-tech and electronics industry to build their own online B2B trading exchange.

Fiorina believed this new open e-marketplace would do no less than revolutionize the way the industry conducted business, and she wanted Brown to join the effort.

Brown thought about the offer, and quickly agreed. After all, H-P and Compaq were two of Quantum’s largest and most important customers. The opportunity to join them, and about a dozen other big players in the high tech manufacturing industry to form what is now known as eHitex, was too good to pass up.

Two different CEOs, two different decisions. This process is being repeated in corporate boardrooms across the country, and around the globe. The question is not whether a company should or should not take the B2B plunge-only the most shortsighted companies are sitting on the e-business sidelines today. Rather, the debate raging today concerns just what flavor of B2B to embrace. Should a company join one or more of the large, public online marketplaces being set up to serve just about every industry imaginable? Or, does a company go it alone, building its own, private marketplace or trading exchange?

In many ways, the choice is akin to taking two different routes to the same destination. The challenge for today’s CEO today is figuring out which path is the shortest, containing the least number of detours.

At this early stage in the B2B game, there’s no easy answer. But simply put, advocates of public B2B marketplaces, especially those set up by consortiums of industry players, believe there’s strength in numbers. These public marketplaces can use the tremendous transactional liquidity of their participants and sprinkle on a healthy dose of Internet magic to wring billions of dollars in costs out of their industries. These savings, of course, are then moved to their collective bottom lines.

Private exchanges? Too small, too insular, say public marketplace advocates. Going it alone eliminates the possibility of bringing about industry-wide change, and puts a damper on the possibility of even greater savings or sales by expanding your universe of buyers and sellers.

But not so fast, say boosters of private exchanges. Public marketplaces can be a bear to set up and control. There are governance issues and anti-trust problems to hurdle. And why would you want to sit on the same side of the table as your competitor? How can a company be sure that its most mission-critical relationships with suppliers or customers won’t be co-opted by a rival?

Better to set up a private marketplace, or Internet-enabled supply chain, to use another popular descriptor. Private exchanges are more manageable, you don’t have to reach consensus with dozens of other participants, and, perhaps most importantly, your suppliers will appreciate you even more. After all, many of the costs savings created by public marketplaces are wrestled out of your suppliers’ margins, which leaves a lot of bad blood on the table.

Quantum’s Brown is as bullish on public marketplaces as executives get these days. That’s why Quantum is a founding member of eHitex, along with H-P, Agilent, Solectron, and Advanced Micro Devices, among others. “Should a company join a public exchange? Yes, it’s a no-brainer,” he says. “The more people and companies come together, the more critical mass you’ll gain, and the better results you’ll achieve.”

While Brown believes this simple rule applies across all industries, it should be noted that high-tech manufacturing is set up particularly well to benefit from a B2B marketplace. That’s because high-tech companies like his are on a neverending quest to reduce inventory costs and improve the responsiveness and efficiencies of their supply chains. When a company like Quantum miscalculates demand for its disk drives or other data storage products, the results can be disastrous.

“eHitex will allow us to respond to customers instantaneously, instead of taking days or weeks,” says Brown. “By having a view into each other’s supply chains and demand forecasts, we can adjust our own supply chains so we don’t have excess product in our system. And in our business, excess product costs us money.”

But what about the criticism leveled at public marketplaces? That intercompany bickering will result in gridlock, and that selfish interests and security concerns will shackle longterm success?

By and large, these hurdles have not materialized. A recent study conducted by Jupiter Communications of 58 industry-sponsored marketplaces that launched in 2000 found that a full 41 percent have passed these tests. And another 33 percent were expected to reach the same level of performance by the end of the year.

“Thanks to their corporate sponsors, [industry-sponsored marketplaces] are gifted with money, talent, and transaction liquidity,” the report states. “In fact, most have surpassed initial expectations and have already begun online operations or expect to do so by year’s end.”

That’s certainly the case at Transora, a B2B marketplace for the consumer products industry backed by more than 50 of its biggest players, including Coca-Cola, Pepsi, Procter & Gamble, Kraft Foods, and Gillette. “When we got together to plan Transora, it was remarkable to see how people checked their individual company identities at the door,” says Betsy Cohen, vice president and futurist at Ralston Purina, a $5 billion maker of pet food and pet supplies, and a founding member of Transora.

Transora, like eHitex, aims to radically change the way the consumer products industry conducts business, so it’s in the best interest of all companies to participate and take advantage of any cost savings and efficiencies that may result, she says. But at the same time, Transora will not extinguish the competitive fire that exists between rivals like Coke and Pepsi. “At the end of the day, companies win or lose based on their relationships with customers,” says Cohen. “Transora is the most efficient means to leverage technology and build tools that will lower costs and streamline business processes. By taking advantage of these tools, companies can spend more time focusing on the needs of their customers.”

The arguments in favor of joining a public marketplace are convincing, but they only tell one half of the B2B story. That’s because much of what public marketplace boosters talk about is still a long way from becoming reality. Nearly all of the marketplaces in operation today allow participants to purchase indirect goods, such as office supplies, or to run simple auctions. But none has yet made much headway in bringing online supply chain integration, collaborative design, or any other truly strategic business processes.

And there are still serious questions as to whether companies even want to push their most strategic relationships through a public marketplace. A study conducted during the spring by AMR Research found that as much as 65percent of direct procurement transactions were likely to flow through private exchanges. In fact, many companies have indicated a desire to utilize both public and private marketplaces.

That’s the direction in which Eastman Chemical is heading. CEO Davenport acknowledges that the company may eventually participate in public marketplaces targeting the chemicals industry, but for now, the company is going it alone. “The cornerstone of our B2B efforts, and the thing that drives all our Internet strategies, is making it easier for our customers to do business with us,” says Davenport. “At this point, there isn’t a clear value proposition for our customers, or our suppliers, in these online marketplaces.”

So, Eastman opened a Web store where customers can order, purchase, and track the shipment of products. The company expects to funnel between 15 percent and 20 percent of all sales through its e-commerce channels by the end of 2000. For Eastman, that’s about $1 billion in sales per year.

The company is also setting up its own online auctions, through which it has been able to achieve between 8 percent and 10 percent cost savings on raw materials. And the company is building Internet-based supply chains to connect electronically with its most strategic suppliers and buyers. These connections not only strengthen the ties with its business partners, but help to achieve significant cost savings through lower inventory levels and more efficient manufacturing processes.

Other companies are following suit, eschewing well-hyped public marketplaces in their industries to invest in their own B2B activities. In recent months, Volkswagen, Siemens, and Caterpillar have all announced that they will build private exchanges, using supply chain software from i2 Technologies. Retail giant Wal-Mart has rebuffed courtship from the public marketplaces like the WorldWide Retail Exchange, choosing to build its own private marketplace to transact electronically with its global supplier network.

And maybe most telling of all, perennial high-tech powerhouses like Dell and Cisco-both renowned for their supply chain expertise-have stayed far away from high-tech B2B marketplaces like eHitex and its main rival, e2open. “When you have the ability to use technology for a competitive advantage, why would you want to share that with your competitor? It doesn’t make any sense,” says Earl Mason, president and CEO of Deerfield, IL-based Alliant Exchange, a $6 billion foodservice distributor.

Last February, Alliant restructured its business, creating a technology subsidiary charged with building a B2B e-commerce system to link its warehouses and truck fleets directly with customers-mainly restaurant chains, hospitals and other large food-service accounts. Buyers who order through Alliantlink can not only see whether the products they need are in stock, but they can schedule and track shipments.

On an annualized basis, Alliant has been able to push about $1 billion in revenue through its private B2B marketplace. The goal is to grow online transaction volume to reach $3 billion by the end of 2001. And of course, Mason would love to see Alliant topple foodservice giant Sysco from the top of the heap. At this point, Alliant is ranked No. 3, with about a 4 percent share of the market. Sysco has an 11 percent share. “We’ve spent a lot of time and money on building our e-commerce system, and it’s a lot better than anything our competitors offer, including Sysco,” says Mason. “This has become our competitive advantage, so it would be foolish of me to sit down with my competitors and say, `Let’s share this technology for the good of the industry.’ “

It’s too early in the game to determine which type of B2B marketplace-public or private-will ultimately garner the most success. Companies will likely explore private marketplaces first, mainly because the risks are lower and the returns more immediate. But if public marketplaces reach their potential, companies sitting on the outside looking in will be hard-pressed to remain on the sidelines for long, especially as their competition benefits from the strength-in-numbers approach.


ADAM FEUERSTEIN is a senior writer at UpsideToday.com, the online news arm of Upside Media, where he covers B2B e-commerce


Chief Executive

Chief Executive magazine (published since 1977) is the definitive source that CEOs turn to for insight and ideas that help increase their effectiveness and grow their business. Chief Executive Group also produces e-newsletters and online content at chiefexecutive.net and manages Chief Executive Network and other executive peer groups, as well as conferences and roundtables that enable top corporate officers to discuss key subjects and share their experiences within a community of peers. Chief Executive facilitates the annual “CEO of the Year,” a prestigious honor bestowed upon an outstanding corporate leader, nominated and selected by a group of peers, and is known throughout the U.S. and elsewhere for its annual ranking of Best & Worst States for Business. Visit www.chiefexecutive.net for more information.

Share
Published by
Chief Executive

Recent Posts

Rachel Barger, Cisco’s Senior Vice President of the Americas, Encourages Us to Always Keep an Open Door

In this edition of our Corporate Competitor Podcast, leadership speaker and storytelling expert Don Yaeger…

2 days ago

Boards May Need To Reevaluate Their Idea Of Acceptable Risk

Boards are being held to a higher standard regarding risk. A more thorough strategy may…

6 days ago

CEOs Can Become Afflicted With ‘Boreout’ Too

If you're experiencing burnout not because you're overworked, but because you're underinspired, it might be…

6 days ago

Why CIOs Should Report Directly To The CEO

When companies elevate the role, they reap significant benefits. Here are five critical ways it…

7 days ago

New-Era Koppers Keeps Staying Ahead Of The Game

CEO Ball has led early decoupling from China and diversification that ties into today’s infrastructure…

7 days ago

Cyberattacks: Not If, But When

You can’t be bulletproof, but you can be armed for battle.

1 week ago