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A Question ofValue

Mod IV, 2004

Professor David Dilts

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The Fundamental Theory Issue

As interaction costs decrease,

- the value of bundling the firmdecreases,

- which increases the value of outsourcing- and forces a redefinition of the business.

Transaction Cost:The resources expended in the

formal exchange of goods and services betweenorganizations or customers

Interaction Cost: Transaction costs + costs forexchanging ideas & information

Resources: time, money, effort, people

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Conventional Thinking AboutInternet & Effective Markets

Internet reduces transaction cost

Namely: searching, seeking, shopping, negotiating

Internet reduces perceived complexity of products

i.e., more and easier to interpret information is available

Internet reduces asset specificity

Allows products to be quickly & easily adapted

Internet increase free flow of information E.g., cyberspace marketplaces

Source: Grover, Varun and Pradipkumar Ramanlal, (1999) Six Myths of Information and Markets, MIS

Quarterly, 23(4): 465-495.d

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Some other not-so-generaltenets

Unit IT costs will decreasebut not at the same rate forbuyers & sellers

IT capitalization is asymmetrical among buyers & suppliers

E.g., bigger firms can capitalize more

An effective market is not to every players enlightened self-interest

Information can be used to clarifyanddistort perceptions

Information is valued differently by different buyers &sellers

Market structure is an evolving, not a a priori state

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Is There A Best Way ToAchieve Value?

No, value depends upon:

What the buyers value

And who is the buyer anyway? What seller sells (or does not sell)

Pain Points

The Value of Being First Micro and Macro Perspectives

Buyers & Sellers

Market Disciplines

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Value Creation in B2CAmit & Zott, 2001

ValueEfficiency Lock-in

Search Costs Selection Range

Information Symmetry

Simplicity

Speed

Scale

Etc.

New transaction structures

New content

New participants,

Etc.

Switching Costs

Loyalty programs

Dominate design

Trust

Customization

Positive Network

ExternalitiesDirect

Indirect

Novelty

Complementarities

Between products & Services

(i.e., vertical or horizontal

Between on-line & off-line assets

Between technologies

Between activities

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But what creates Value in B2B? First, look at the characteristics of B2B v. B2C

Next, identify the type of organizations,

Then, identify the pain points & how to cure them

Next, look at the value to each party Remembering: Critical mass & First mover

disadvantages

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Characteristics of B2B Markets(continued)

Inelastic Demand

Less-price sensitive than consumers, on one hand but

Will only buy from the lowest bidder on the other

Typically, B2B is less of an impulse decision than with consumerpurchasing

Fluctuating Demand

More volatility than consumer demand (remember the beer game)

Derived Demand

Demand is driven both from the ultimate consumer and from the

business intermediary.

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Market Disciplines

Infrastructure/Operationally Excellence (economics of scale)

Lead the industry in terms of price and convenience

Build and manage capabilities for high-volume, repetitive operational tasksfor the lowest possible cost products

examples: Dell Computers, Cisco Systems

Product / Technology Leadership (-- economics of speed)

Lead or dominate the world in terms of product leadership or technology

Force the clockspeed of the industry

examples: Microsoft, Intel

Customer Intimacy (--economics of scope) Tailor and shape products and services to fit an increasingly fine definition

of the customer

Build a long-term relationship

Never loose a customer

examples: Andersen Consulting, KPMG

Source: Hagel III, John and Marc Singer (1999), Unbundling the Corporation,HBR, 77(2): 133-141

Source: Treacy and Wiersema, (1993) Customer Intimacy and Other Value DisciplinesHBR, 71(1): 84-93.

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Key Success Factors for Infrastructure(Operational Excellent) Business

Management of customer expectations

Because 'variety kills efficiency', provide a limitednumber of product or service options, and managecustomer expectations accordingly

Dedication to measurement systems Monitor & measure everything to ensure rigorous quality and cost

control, dedicated to monitoring and measuring all processes,continually searching for ways to reduce cost, and improve serviceand quality

Efficient management of people employees are trained in the most efficient and lowest cost way of

doing things

Management of efficient transactions

JIT delivery, lowest possible cost of transaction processing

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Key Success Factors for ProductInnovation (Leadership) Business

Encouragement of innovation

Use small ad hoc working groups, an 'experimentation is good'mind-set, and compensation systems that reward success,

constant product innovation is encouraged

Risk-oriented management style Focus on innovators, which requires a recognition that there are

risks (as well as rewards) inherent in new ventures

Talented designers are key to current and future success but

Project management is critical to success; delivery dates andfeature-based modules are vital

Recognition of the need to educate and lead the market

Lead products are frequently misunderstood so how-to-use andbenefits need to be highlighted to customers

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Developing Deep Customer Insights

Understanding what customers value: Build a customer value model, which are data-

driven representations of the worth of what the

supplier is doing or could do for the customer

Expressing Value: In monetary terms (What are utils anyway?)

Showing net benefits Within some context

Example: Caterpillars Yards-of-dirt-moved

Source: Anderson, James and James Narus, (1998) Business Marketing: Understand what customers value, HBR, 76(6): 53-61+

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What Are B2B Examples ofEach Kind of Business ?

Operationally Excellent

Product Leadership/Innovation

Customer Relationship/Intimacy

A f i i

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A Formal Method of BuildingValue Models1. Initial field assessment

What is possible & what is not

2. Select right market segment

3. Identify key information needed from customers

4. Generate a list of value elements

5. Gather field data or use focus groups

6. Cross validate with other data7. Understand the variability of results and value

drains, things that harm value

8. Create value-based sales tools

Source: Anderson, James and James Narus,(1998) Business Marketing: Understand what customers value, HBR, 76(6): 53-61+

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Why useany B2B Hub?

Dealing with pain points

P i P i diff f

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Pain Points, a different way oflooking at value

What hurts in current methods?

P i P i diff f

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Pain Points, a different way oflooking at value

What hurts in current procurement methods?

Inefficient business process transactions

Mainly paper-based systems

Inefficient trading partner search processes

Too many search channels

Qualifying vendors and customers

Inefficient product information search processes

Heterogeneous RFQ information in:

Pricing / product details / availability / delivery date & methods /

status information / additional services (maintenance, etc.) Inefficient supply chains

Use of brokers as matchmakers

Multiplier effect of multiple inefficiencies

Particular problem internationally

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Value Propositions in B2B

Buyers value benefits

Sellers value benefits Intermediators value benefits

(revenue streams)

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INTERMED

IATOR

BuyersValue BenefitsSelling Organization Buying Organization

Reduced procurement process costs Reduced inventory costs

Reduced rogue purchases

More choices, bidders & better pricing

Reduced lead times

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Buy-Side Relationship

What are my critical pain points?

Cost is important but there may be other benefits that are

more important.

Remember Dell Webpages

What are the down-sides of buying on cost?

Does the supplier understand the needs of the buyer?

Example: GE Medical Devices

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SellersValue BenefitsSelling Organization Buying Organization

Reduced cost associated with sales

corollary: new sales opportunities Reach to new customers

Reduce processing costs of order management

Increased standardization of terms and processing

Better future need information

INTERMED

IATOR

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Sell-Side Supply Chain Issues

What is the value added by retailers &

distributors?

Repackager

Example: Alliance Entertainment

Customizer

Intra-company postponement

Example: Harley Customizer

What is the business of the manufacturer?

Problem: do the manufacturers know enough about

local customers?

What information should be shared & when?

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IntermediatorsValue BenefitsBuying OrganizationSelling Organization

Percent of gross transaction value

Product listing fees Advertising revenue

Membership fees

Sponsorships

Referrals

INTERMED

IATOR

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Common Characteristics for B2BSuccess

Information intensity

Multiple of buyers and sellers

Highly fragmented markets

Market inefficiencies

High search, comparison, and workflow costs

Low switching costs between suppliers

Management domain expertise

Critical mass

First mover advantages that outweigh first moverdisadvantages

O f th K I f O

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One of the Key Issue for OpenHubs: Critical Mass

In order to be successful, any open B2B hub needsa critical mass: In physics:

the minimum amount of fissionable material required to sustain a

chain reaction In a software product:

a condition such that fixing one bug introduces one plus epsilon bugs.When software achieves critical mass, it can never be fixed; it can onlybe discarded and rewritten.

In business: A size at which some fundamental change takes place in the operations

of a business. For example, the business achieves increasing returns toscale, with growth beginning to feed itself (like an avalanche.)

The value of a network goes up the the square ofthe number of nodes on the network

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First Mover AdvantagesCreation of Barriers to Entry

Technology Leadership (setting the future)

Advantages of the learning curve

Ability to mold the cost structure of customers

Success in patent races (preemptive patenting; Amazon.coms strategy)

Preemption of scarce resources (capturing the resources)

Controlling input factors

Controlling geographic and product characteristic space

Preemptive investment in plant and equipment

Switching costs & buyer choice under uncertainty (risk reduction)

Switching costs: late entrants must offer something extra

Buyer risk adverse once an acceptable choice found

Positive feedback gains (bigger is better)

Buyers want to buy from the most popular and

Creators what to create for the most popular

Source: Lieberman, Marvin and David Montgomery, (1988) First-Mover Advantages, Strategic Management Journal,

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First MoverDisadvantages

Free-rider effects

In R&D, in buyer education, and infrastructure development

The Tasters Choice Effect

Resolution of technological or market uncertainty Taking advantage of first-mover mistakes

Shifts in technology or customer needs

Speed of change leads no one to be the first mover

Customers expectations (needs) change too rapidly

Focusing on the wrong customers (disruptive technologies

Incumbent inertia

Inability or unwillingness of incumbents to change

Fords black Model T & No one ever got fired for buying IBM

Source: Lieberman, Marvin and David Montgomery, (1988) First-Mover Advantages, Strategic Management Journal,

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Stickiness

"Stickiness refers to a companys ability to retain users

and drive them further into a site" (Wired News, 1999)

"Stickiness: The name of the game is to create highswitching costs so that customers who use your portal astheir entry to the rest of the Web wont bother to stray."(Business 2.0, December 1998)

Stickiness: a weak surrogate measure for customerretention & loyalty

Note: Internet people love to create new words.

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Critical Value Ideas The value of e-commerce is not

common sense

Understand why customers do/wantwhat they do/want

Do not assume you know what a customers

value proposition is

Speed can kill

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A Final Comment

Remember to identify the source of value

for:

The buyerThe seller

And the B2B firm

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Extra Slides

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The Fundamental Business Issue

The only reason youre doing e-business is to create greatervalue for your customers or to reach customers to whom youcould not deliver your products or value to before. Companiesmust consider the value proposition above all else.

Does it get me to customers I couldnt reach because ofeconomic considerations?

One of the big traps to avoid in e-business is, if its notadding value to the customer, if the customer does not see anincremental improvement every three months from yourcompany, then you are probably working on the wrongproject.

John Roth, CEO, Nortel Networks, 2001

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Who is the customer?

A GE Information Services Quote:

Our solutions meet application-to-application (A2A), business-to-business (B2B) and business-to-consumer (B2C) EAIrequirements. Our solutions connect disparate applications usingEnterprise Resource Planning (ERP) certification adapters, File

Transfer Protocol (FTP), and conversational Application ProgramInterface (API) as well as offer extensive electronic datainterchange (EDI) value-added network (VAN) connectivity, EDIand extensible markup language (XML) standards support andweb access components.

GE Information Services: http://www.geis.com/geiscom/template.jsp?page=10&id=1#1

And the value is what???

One Example: Information

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One Example: InformationTechnology (IT) Outsourcing

Source: Butler, Steven (2003) IT outsourcing Gains Momentum, eMarketer,

http://www.emarketer.com/news/article.php?1002116&c=newsltr&n=lead&t=ad