Pant, Somendra

Ravichandran, T.

English

AIS Electronic Library (AISeL)

Association for Information SystemsAIS Electronic Library (AISeL)AMCIS 2001 Proceedings Americas Conference on Information Systems(AMCIS)December 2001Structure and Liquidity of B2B Hubs: An IndustrialOrganization Economics Theoretic FrameworkT. RavichandranRensselaer Polytechnic InstituteSomendra PantClarkson UniversityFollow this and additional works at: http://aisel.aisnet.org/amcis2001This material is brought to you by the Americas Conference on Information Systems (AMCIS) at AIS Electronic Library (AISeL). It has been acceptedfor inclusion in AMCIS 2001 Proceedings by an authorized administrator of AIS Electronic Library (AISeL). For more information, please contactelibrary@aisnet.org.Recommended CitationRavichandran, T. and Pant, Somendra, "Structure and Liquidity of B2B Hubs: An Industrial Organization Economics TheoreticFramework" (2001). AMCIS 2001 Proceedings. 119.http://aisel.aisnet.org/amcis2001/119598 2001  Seventh Americas Conference on Information SystemsSTRUCTURE AND LIQUIDITY OF B2B HUBS: AN INDUSTRIALORGANIZATION ECONOMICS THEORETIC FRAMEWORKT. RavichandranLally School of Management & TechnologyRensselaer Polytechnic Instituteravit@rpi.eduSomendra PantSchool of BusinessClarkson Universitypants@clarkson.eduAbstractB2B exchanges are expected to play an important role in the digital economy. While these exchanges arethought to add value by reducing inefficiencies in industrial procurement, it is unclear the additional value thatcould be created by them and more importantly, who is likely to appropriate the created value. Drawing fromthe industrial organization economics perspective of strategy, key forces that are likely to impact the evolutionand success of B2B exchanges are identified and a framework to classify B2B hubs based on their neutralityand ownership is proposed. We postulate how the traditional industry structure variables are likely to influencethe structure and liquidity of B2B hubs. The hypotheses put forth will be tested using data collected fromexchanges in a variety of industries. IntroductionIn the last few years, the Internet has emerged as an important medium of commerce. The global reach and interconnectivity ofthe Internet has spawned new business models and radically transformed existing ones. While the initial use of the network wasto sell goods and services to consumers (B2C), in the last two years, automated business-business transactions over the Internethave become an important phenomenon (B2B). Organizations are exploiting the ubiquity and scalability of the web-basedapplications to automate inter-organizational business processes such as procurement, inventory management, invoicing and manyothers. Estimates suggest that B2B commerce is likely to grow exponentially, from $43 billion in 1998 to over $1.3 trillion by2003 (Forrester Research, 1998).A major segment of this revenue however will be absorbed not by the end suppliers of products and services, but by the new breedof company, called an information intermediary or infomediary. Infomediaries are electronic commerce companies that leveragethe Internet to unite buyers and suppliers into a single, efficient virtual marketplace. The lower costs of web-based transactionshave generally encouraged organizations to explore market-based procurement for goods and services that had traditionally beentransacted through closed buyer-supplier relationships. This has fawned a variety of market making models and technologyplatforms to support these models. Collectively, these virtual marketplaces called exchanges or hubs enable any-to-anytransactions between buyers and sellers, aggregate demand and supply and enable price determination through a variety ofmechanism such as auctions and reverse auctions. For the buyers, these exchanges are expected to lower purchasing costs, whileenabling them to reach new suppliers. For suppliers, they are expected to lower sales cost and create new market opportunities(Goldman Sachs, 1999, Sculley, 2000).These potential benefits have fuelled the proliferation of B2B exchanges in the last few years. Estimates suggest that as of 2001,there are over 1500 exchanges and the number is expected to continue to grow in the near future (Goldman Sachs, 1999, Sculley,2000). Industry hubs, which are vertical exchanges set up to cater to the procurement needs of specific industries have sprung upin almost every industry. Prominent examples include those in the steel, energy, plastics and paper industries. These hubs typicallydeal with direct materials that are bought and sold in large volumes within a specific industry. In contrast, horizontal hubs caterto indirect goods and services that are likely to be used by organizations across industries. A number of commodity/productcategory specific horizontal hubs have also been established in the last few years. In addition, meta-hubs that link industryverticals with horizontal hubs to provide a single gateway for buyers have also emerged. Ravichandran & Pant/Structure and Liquidity of B2B Hubs2001  Seventh Americas Conference on Information Systems 599While these exchanges are expected to reduce inefficiencies in industrial procurement, it is unclear the additional value that couldbe created by them and more importantly, who is likely to appropriate the created value. For this reason, both buyers and suppliershave been cautious in using these exchanges and refrained from becoming active members of these exchanges. Moreover, themultitude of exchanges in each industry as well as the number of intra-industry exchanges that have emerged poses buyers andsuppliers a bewildering array of choices. However, the structures and the business models of these exchanges are still evolvingand it is yet unclear which ones are likely to be successful. Given their novelty, very limited systematic research has been doneon the structure and liquidity of B2B exchanges and the forces that shape them, resulting in a paucity of theoretical knowledgeand guidelines for buyers and suppliers regarding how to choose the hubs to participate in.This study is one step in addressing this void. We draw from the industrial organization economics perspective of strategy toidentify key forces that are likely to impact the evolution and success of B2B exchanges. We propose a framework to classify B2Bhubs based on their neutrality and ownership. We move on the postulate how the traditional industry structure variables are likelyto influence the structure and liquidity of the exchanges. The hypotheses put forth will be tested using data collected fromexchanges in a variety of industries. Theoretical FrameworkThe industrial organization economics (IO) model of strategy originally proposed by Mason (1939) and Bain (1956) and laterelaborated by Porter (1984) posits that the performance of a firm in an industry is dependent on the structure of the industry.Industry structure described by the five forces model (Porter, 1984) includes factors such as the bargaining power of buyers,bargaining power of suppliers, threat of new entrants, substitutes, and the performance of the rivals in an industry. The five forcesframework maps out the forces that are driving an industry, specifically looking at suppliers, buyers, substitutes, new entrants andindustry competitors. As the relative power and industry contributions of these actors are studied, it is often possible to identifythe most probable winners and losers within the industry. The industry-level focus of the IO paradigm is particularly well suitedfor analyzing the structure and liquidity of B2B hubs because they could alter the relative bargaining power of the customers andsuppliers in an industry as well as alter the cost structure of an industry.We posit that the structure and liquidity of an industry hub is likely to be influenced by the structure of the industry. For example,it is likely that in industries with significant buyer power, the exchanges are likely to be owned or controlled by the buyers. It isalso likely that in order to attain liquidity, exchanges in such industries are likely to be buyer-oriented, at least initially. Similarly,in highly fragmented industries, it is possible for outside players to establish a hub. However, whether the hub is neutral or alignedwith the buyers or the suppliers is likely to be influenced by the relative bargaining power of the buyers and suppliers. Similarly,the likelihood of the cooperative ownership of industry hubs will depend upon  the extent of rivalry among dominant industryplayers. In industries with fierce competition, it is possible that multiple exchanges emerge. In addition to these and other possibledirect effects of the five forces on the structure and liquidity of the B2B hubs, the interactions between these forces define moreclearly the industry context in which the hubs have to operate. Hence, it is important to examine how the industry structurevariable interact to determine the structure and the market making models of B2B hubs. In order to systematically examine these the effects of the industry structure on the nature of vertical hubs, we developed aframework to classify the vertical hubs in terms of their ownership and neutrality (Table 1). The vertical axis depicts the neutralityof the vertical hubs. Hubs could be either buyer aligned, supplier aligned or neutral. The horizontal axis depicts that an industryhub could be owned by 1) a supplier, 2) a buyer, or 3) a third party that does not have any prior affiliation with the industry. Theshaded cells indicate structures that are unlikely. As depicted in the framework, the other seven structures are feasible ones. Weposit that the specific structure of a hub will be influenced by the five forces that define the structure of an industry and, theinteractions between the five forces. Research PlanThe large number of hubs that have already been established and the wide range of industries they are affiliated with provide anopportunity to collect meaningful data to allow statistical analysis and testing of the research hypotheses posited in  this study.We propose to collect data necessary for our analysis from secondary sources. These data include the industry structure variablesand the ownership and neutrality of the vertical hubs in each industry. In addition, descriptive data about the hubs in terms of theservices provided as well as the financial performance of the hubs will be collected. It should be pointed out that a large body ofresearch exists in the strategy literature that has operationalized the industry structure variables using secondary data. Thesestandard measures will be used in our research as well. We have commenced the data collection and expect to complete the sameby August 2001. Data coding and analysis will be conducted soon after that, followed by statistical analysis.Electronic Commerce600 2001  Seventh Americas Conference on Information SystemsTable 1.  Classification Framework for Vertical HubsNeutralitySeller AlignedNeutralBuyer AlignedBuyer owned orBuyer CooperativesSupplier owned orSupplierCooperativesOutsiderOwnershipReferencesBain, J.S. Barriers to New Competition, Cambridge, Massachusetts: Harvard University Press, 1959.E-Commerce/ Internet  B2B: 2B or Not 2B? , Goldman Sachs Investment Research, November 12, 1999.Mason, E. “Price and Production Policies of Large-Scale Enterprise,” American Economic Review, Suppl. 29, pp. 61-74, 1939.Porter, M.E. Competitive Advantage, Free Press, 1984.Resizing On-line Business Trade, Forrester Research Inc. Report, November 1998. Robinson, K. C. and McDougal, P. P. “The Impact of Alternative Operationalization of Industry Structural Elements on Measuresof Performance for Entrepreneurial Manufacturing Ventures,” Strategic Management Journal(19), 1998, pp. 1079-1100.Sculley, B. A. and Woods, W.W.A. B2B Exchanges : The Killer Application in the Business-to-Business Internet Revolution, ISIPublications Limited: Hamilton, Bermuda, 2000.

Structure and Liquidity of B2B Hubs: An Industrial Organization Economics Theoretic Framework

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Structure and Liquidity of B2B Hubs: An Industrial Organization Economics Theoretic Framework

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