Question: What are the main strategic reasons to support supplier oriented market or intermediary oriented marketplace strategies in B2B? Discuss making use of examples in your answer.

[FC]

Framework:

·         Supplier oriented marketplace

o   Dell

o   Bias, investment, reducing transaction cost

o   Purpose and obstacles

§  May not attract large powerful buyers – may participate in the intermediary oriented marketplace – find similar products and suppliers

§  Makes it easier for buyers to find the product

·         Intermediary

o   Alibaba

o   Bias, investment, reducing t.c

o   Purpose and obstacles

§  Reduce transaction cost for buyers and sellers (earn a fee from the matching – brokerage effect)

§  Agent Principal

§  Price transparency

§  Critical mass of buyers and sellers

A: The main strategic reasons for setting up a B2B marketplace such as the intermediary oriented or supplier oriented would be firstly to lower their transaction costs so that they can gain competitive advantage over their competitors. Secondly, it would be for buyers to find the products of the seller and to transact more easily on the ICT platform. We will discuss this in detail in the next paragraph.

A supplier oriented marketplace is where the suppliers (normally large and powerful suppliers) invest in the ICT platform to reduce their transaction cost. Hence it is bias towards the supplier. Suppliers set up the platform to make it easier for the potential buyers to search for their products and find them. The platform is only sustainable when the supplier does not distort too much information from the marketplace and when the benefits (reducing more transaction cost for the suppliers) are more than the cost of maintaining the ICT platform.

An example of a supplier oriented marketplace would be Dell. Dell set up the ICT platform to reduce their search, contracting and control and regulation cost. Search cost for Dell would be making their products and services available online for potential customers to find and read them. Contracting cost for Dell would be providing online tools (reviews, ratings, feedbacks, forums) for previous buyers to comment and feedbacks. This information could help potential buyers of Dell to evaluate Dell. Control and regulation cost for Dell would be the monitoring and enforcement cost (delivery, payment, after sales service – warranty and refunds).

In terms of search cost, Dell can put up information on their products (different types of laptops, monitor and computers) and company profile on their website. This allows buyers to reduce their bounded rationality and uncertainty, thereby reducing their search cost. In terms of contracting cost, Dell may put up detailed product information such as model number, specifications, price, images, videos and weight of the product to help reduce the uncertainty of the buyers. Also, the reviews, feedbacks and ratings provided by Dell can also help the buyers to reduce their uncertainty when evaluating Dell. Next, Dell provides a pair to pair comparison on their website to allow buyers to compare the different models when making the purchase, hence it helps to improve the symmetry of information and reduce the bounded rationality of the buyer.

As for control and regulation cost, Dell uses a SSL encryption to protect the online transaction of the buyers, hence it reduces the opportunistic behavior of the seller. Dell also makes sure of a reputable third party logistic to help them with their delivery hence it improve the symmetry of the delivery process and hence reduces the buyer’s control and regulation cost.

However, having discuss the benefits of supplier oriented marketplace, there are also obstacles to it. Dell may not be able to attract large buyers such as Gebiz.gov.sg to use their B2B platform as the buyer (Gebiz.gov.sg) will then have difficulty in integrating their B2B platform with their other internal system (electronic integration effect), hence Dell may have to spend more marketing effort to reach out to buyers. Secondly, large buyers may not want to participate in Dell (as it is bias towards Dell), hence they may choose to participate in a more neutral marketplace such as the intermediary oriented marketplace (where there are large numbers of suppliers selling the similar products).

Now, we will take a look at intermediary oriented marketplace. An intermediary oriented marketplace is where a third party invest in the marketplace hence it is neutral to both buyers and sellers. In an intermediary oriented marketplace, there must be a critical number of sellers and buyers in order for the ICT platform to be sustainable (network effect). The purpose of setting up a ICT platform is to match make the buyers and sellers (electronic brokerage effect) in return for a transaction fee, hence the platform is only justifiable when the benefits exceeds the costs of maintaining.

An intermediary oriented marketplace would be Alibaba. Alibaba set up the intermediary oriented marketplace for buyers and sellers to transact and in return Alibaba will collect a fee for every transaction made between the buyer and sellers (electronic brokerage effect). Alibaba is a third party thus it is neutral towards both the buyers and sellers thus it help both the buyer and sellers reduces their transaction cost.

Firstly, for the search cost, Alibaba has a critical numbers of sellers using their platform; hence the buyers can easily find the products that they need on Alibaba’s website. The huge number of suppliers on Alibaba offers buyers a wide range of choices thus it reduces the bounded rationality of the buyers. As for the sellers, Alibaba also helps them to reduce their search cost. Alibaba has an AliSourcePro which helps to notify the sellers that they have a buyer’s request thus it reduces the transaction cost for the seller.

For contracting cost, Alibaba provides detailed information such as packaging details, product name, delivery details, images, size guide. These information helps the buyer to reduce the information asymmetry and thus reducing the time taken for the buyer to evaluate the product. Alibaba also display the other sellers that are selling the similar products (recommended for you) and this helps to reduce the bounded rationality of the buyer. Sellers are also certified on Alibaba with the Gold Supplier tag (e.g 5 years, 10 years, 15 years etc) and shows the number of transaction the sellers has transacted. This helps to reduce the uncertainty of the buyer.  For sellers, Alibaba has this “Business Identity” for buyers to prove who they claim to be, thus it reduces the uncertainty of the seller.

For control and regulation cost, Alibaba - Alipay only releases the payment to the seller when the buyer has received their products, this reduces the uncertainty of the buyer. Trade Assurance guarantee offers refunds to any late/non delivery made by the seller, this reduces the buyer’s uncertainty as well.

As we can see from the discussion above, the main reasons to set up a B2B platform is to reduce the transaction cost and to allow buyers and sellers to transact easily on the ICT platform. 

[William Toh]

Thank you for your framework.  You clearly understand what are supplier-centric and intermediary-centric markets, and you have carefully discussed how each of these markets impact transaction costs.  However, you are likely only going to achieve at most a high B if your essay is entirely based on your framework.

Why?  While you are accurately explained that main strategic reason for businesses to invest in B2B markets is the reduction of transaction costs, you have focused on the wrong issue.  Companies invest in biased B2B markets primarily to distort the market in their favour so that the markets can help them reduce even more transaction costs than their counterparts who deal with them in those markets.  Buyers invest in buyer-centric markets to increase the competition for their procurement needs.  This helps buyers reduce their search and contracting costs much more than sellers.  Sellers invest in seller-centric markets to lock in their buyers.  This reduces their search and contracting costs more than the buyers, who now have to face increased switching costs when they become addicted to the convenience offered by the sellers.  Moreover, biased markets require the owners to already have market power before they set up their markets, otherwise these markets will not reduce transaction costs for anyone!

Neutral markets reduce transaction-costs equitably for both buyers and sellers, but are subject to agency theory.  Also neutral markets can only be sustained by network economics.

The above are the key points that you should be focusing on.  These are the "critical thinking" points that UK wants students to discuss and illustrate.

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