What is a business market? In its most basic form, a business market is anetwork of transactions and relationshipsamong buyers and sellers

What is a business market?

In its most basic form, a business market is a network of

transactions and relationshipsamong buyers and sellers.

Questions to consider when designing a market

1. Which activities should we perform ourselves and which should wesource from the outside?

2. How should we relate to outside parties, including customers, suppliers, distributors, partners, and others?

Which activities should we perform ourselves and which should we source from others?

Options Description

Vertical Integration

Locate all but the most routine, transaction -oriented activities inside the firm.

Selective Sourcing

Source selected activities from the outside. Traditionally, sourced activities were controlled through short term contracts.

Virtual Integration

Become part of a network of highly specialized, independent parties that work together to perform, coordinate, and control value chain activities.

How should we relate to outside parties?Transaction Contract Partnership

Basis of Interaction

Discrete exchange of goods, services, and payments; e.g., simple buyer/seller exchange

Duration of Interaction

Immediate

Level of Business Integration

Low

Coordination and Control

Supply and demand (market)

Information Flow

Primarily one way;Limited in scope and amount; Low level of customization

Prior agreement governs exchange; e.g., service contract, lease, purchase agreement

Usually short-term and defined by the contract

Low to Moderate

Terms of contract define procedures, monitoring, and reporting

One or two way; Scope & amount are usually defined in the contract

Shared goals and processes for achieving them; e.g., collaborative product development

Usually long term and defined by the relationship

High

Inter-organizationalstructures, processes, and systems; Mutual adjustment

Two-way (interactive); Extensive exchange of rich, detailed information; Dynamically changing; Customizable

Relationships

TransactionsContractsPartnerships

Str

uctu

re

Virtual Integration

Selective Sourcing

Vertical Integration

A framework for analyzing market structure and relationships

How will markets organize in the Network Economy?

Emerging networked market models

Components of a Business Model

Components of a Business Model (continued)

What is it? How will we? An organization's business concept defines its

strategy. The concept is based on analysis of: Market opportunity Product and services offered Competitive dynamics Strategy for capturing a dominant position Strategic options for evolving the business

Attract a large and loyal community? Deliver value to all community members? Price our product to achieve rapid adoption? Become #1 or #2? Erect barriers to entry? Evolve the business to "cash in on strategic options"? Generate multiple revenue streams? Manage risk and growth?

An organization's capabilities define resources needed to execute strategy. Capabilities are built and delivered through its: People and partners Organization and culture Operations Marketing/sales Leadership/Management process Business development/Innovation process Infrastructure/Asset efficiency

Achieve best-in-class operating performance? Develop modular, scalable, and flexible infrastructure? Build and manage strong partnerships with employees

and the community? Increase the lifetime value of all members of the

community? Build, nurture, and exploit knowledge assets? Make informed decisions and take actions that increase

value? Organize for action and agility?

A high -performing organization returns value to all stakeholders. This value is measured by: Benefits returned to all stakeholders Benefits returned to the firm and its owners Market share and performance Brand and reputation Financial performance

Deliver value to all stakeholders? Claim value from stakeholder relationships and

transactions? Increase market share and drive new revenues off

existing customers? Increase brand value and reputation? Generate confidence and trust? Ensure strong growth in earnings? Generate positive equity cash flow? Increase stock price and market value?

Stocks are traded on a physical trading floor using the open-outcry auction method. Until recently, investors placed orders through stockbrokers who then communicate those orders to floor brokers who completed the trades at the booth of a specialist. In 2000, 30% of orders were transmitted electronically directly to the specialist at his/her booth on the physical trading floor. Specialists are members of the NYSE who act as auctioneers for their assigned stocks. Each stock is assigned to one specialist.

New York Stock Exchange market model in 12/2000

• Screen-based trading enables complete view of orders

• High levels of transparency within global markets

• Limited sources of capital

• Floor-based trading of over 3025 securities

• Specialists maintain a central order book – order-driven system

• Average daily trading volume was 1.0 billion shares per day and the # of listings was 2,862

• Average market value was $US 12.4 trillion

-

SpecialistActs as Agent

BUY SELL

Auction Market Model

Unlike the NYSE where trading was driven by the flow of orders received by specialists, trading on the NASDAQ was driven by quotes from multiple market makers that commit their own capital to establish a buy and sell position in each stock that they wish to trade. The position reflects the price they would be willing to buy (bid) and sell (offer) a stock. The pricing window between the best bid and offer is called the “inside spread.”

Nasdaq Securities Exchange market model in 12/2000




• Screen-based trading of over 4734 securities

• Computer displays buy and sell quotes from multiple market makers – quote-driven system

• In 2000, the Nasdaq market united

over 500 market making firms

• On average, each stock was traded by 10 different market makers, which encouraged competition among market makers driving prices down

• Average daily trading volume was 1.8 billion shares per day and the # of listings was 4,734

• Average market value was $US 3.6 trillion

Multiple Market Makers act as Principals

Market Maker Model

BUY SELL

ECN market model in 12/2000




• Screen-based automated trading

• Computer acts as a specialist attempting to match orders from individuals and market makers –order-driven system

• In 2001, the oldest and largest ECN, Instinet, had over 21,000 subscribers and accounted for over 12% of Nasdaq daily volume

• Unlike exchanges, ECNs were not required to divulge the identity of individuals and firms trading on its network and could charge a subscription fee of its members

• In 2001, ECNs charged $2-$5 per trade vs $50-$60 per trade by a human broker

Computer System acts as Agent

Automated Trading Market Model

BUY SELL

Like the NYSE, Electronic Communication Network (ECN) trading was driven by the continuous flow of buy and sell orders, rather than by the competitive quote-driven trading as seen on the Nasdaq. But, unlike the NYSE, orders traded without the human intervention of a specialist. When a buyer or seller submitted an order to an ECN, the computer first attempted to match the order within the ECN market; in 2001 ECNs were able to match about 50% of their orders internally. If the order did not match within seconds, the ECN assumed the role of a Nasdaq market maker and the order was submitted to Nasdaq. In 2Q2001, ECNs accounted for 29% of Nasdaq market volume, up from less than 3% in 2Q 1998.

Until the late 1990s, stocks were traded on a physical floor using open outcry auction. The “itoyose” process was used to set opening price, and the “zaraba” process was used to price continuous order flow. “Saitori” (“nakadashi” at OSE) execute trades but, unlike NYSE specialists, there was no obligation to correct imbalances. With full automation, the Japanese markets have been likened to the ECN with mandated order flow.




ECN Market SpecialistAutomated System

Acts as AgentBUY SELL

• Screen-based trading of over 1400 securities (TSE) and over 1200 (OSE)

• Automated central order book (limit and market orders)

• OSE turnover is 9% vs. 18% on TSE, 88% on NYSE, and over 100% on Nasdaq

• In 2001, OSE had 88 domestic and 20 foreign broker/dealer members

Auction Market ModelAutomated systemacts as an agent

BUY SELL

The TSE/OSE market model (mandated order flow)

The Nasdaq Japan market model




• Screen-based trading enables complete view of orders and quotes

• Competing market makers yield narrower spreads

• Multiple sources of capital

• Meets needs of retail, institutional, and corporate investors

• Enables anonymity

• Continuous order flow; no need to stop for imbalances

• Screen-based trading enables complete view of orders and quotes

• Competing market makers yield narrower spreads


• Meets needs of retail, institutional, and corporate investors

• Enables anonymity

• Continuous order flow; no need to stop for imbalances

Hybrid Market Model combines advantages of various market models

ECN Market SpecialistAutomated System

Acts as AgentBUY SELL

Auction Market• Floor-based trading

enables complete view of orders

• High levels of transparency within local market


Market Market Specialist

BUY SELL

SpecialistActs as Agent*

BUY SELL

• Screen-based trading enables complete view of quotes

• High levels of transparency among multiple market makers


Multiple Market MakersAct as Principals**

BUY SELL

Market Maker Model

Auction Model

Nasdaq Japan

Nasdaq JapanIssuer Size

& Maturity

TSE and OSE

Section 1

TSE and OSE

Section 1

JasdaqOTC

JasdaqOTC

TSEMothers

TSEMothers

Slow20 - 25 years

Fast3 - 5 years

Small/Young

Large/Established

TSEand OSESection 2

TSEand OSESection 2

Nasdaq Japan

Nasdaq JapanIssuer Size

& Maturity

Average Time to Public Offering

TSE and OSE

Section 1

TSE and OSE

Section 1

JasdaqOTC

JasdaqOTC

TSEMothers

TSEMothers

Slow20 - 25 years

Fast3 - 5 years

Small/Young

Large/Established

TSEand OSESection 2

TSEand OSESection 2

Comparison of Japanese securities markets

TSE accounts for 70% of shares listed, 80% of trading value, and 90% of trading volume

Nasdaq Japan market entry strategy

June 19, 2000

Phase 1

Enter Quickly Using OSE Market Platform

Early 2002

Phase 2

Launch Hybrid Market Model

???

Phase 3

Link Global Pools of Liquidity


Business Concept:

Market Opportunity

Product and service offered

Competitive Dynamics

Strategy for capturing dominant position

Strategic options for evolving the business


GDP 9.2T 4.5T 48.9%

Trade Vol 1994M 711.9M 35.7%

Turnover78%(NYSE) 44%(TSE) 56%

# of Listings 8623 3185 36.9%

# of IPOs 545 20 3.6%

Market Value 17.64T 7.338T 41.6%

Avg Price/Share 43.77(NYSE) 6.79(TSE) 14.8%

USA JAPAN Ratio

Market Opportunity? 1999

Competitive Dynamics

NasdaqJapan financing history

Softbank

www.softbank.co.jp

Nasdaq Japan, Inc.

www.nasdaq-japan.com

Nasdaq U.S.

www.nasdaq.com

Strategic Investors (¥500 million each) Limited Partners

October 2000 ¥800 millionOctober 2000 ¥5 billion

June 2001 ¥ 937.5 million June 2001 ¥ 937.5 million

Burn Rate:

2000-2001: ¥1.9 billion

2002: ¥24 million

2003: ¥12 million

Softbank

www.softbank.co.jp

Nasdaq Japan, Inc.


Nasdaq U.S.

www.nasdaq.com



June 1999 ¥ 300 million June 1999 ¥ 300 million

Burn Rate:

2000-2001: ¥1.9 billion

2002: ¥24 million

2003: ¥12 million

Dec. 2001 ¥ 937.5 million Dec. 2001 ¥ 937.5 million

Post-Money % Ownership

Nasdaq U.S. 42.9%Softbank 42.9%

StrategicInvestors

LimitedPartners



StrategicInvestors

LimitedPartners

13.8%

0.4%

December 2001

Softbank

www.softbank.co.jp

Nasdaq Japan, Inc.


Nasdaq U.S.

www.nasdaq.com



June 2001 ¥ 937.5 million June 2001 ¥ 937.5 million

Burn Rate:

2000-2001: ¥1.9 billion

2002: ¥24 million

2003: ¥12 million

Softbank

www.softbank.co.jp

Nasdaq Japan, Inc.


Nasdaq U.S.

www.nasdaq.com



June 1999 ¥ 300 million June 1999 ¥ 300 million

Burn Rate:

2000-2001: ¥1.9 billion

2002: ¥24 million

2003: ¥12 million

Dec. 2001 ¥ 937.5 million Dec. 2001 ¥ 937.5 million



StrategicInvestors

LimitedPartners



StrategicInvestors

LimitedPartners

13.8%

0.4%

December 2001

Nasdaq Japan Key Challenges

Nasdaq Japan is quickly running out of cash

.

.

Failure to attract high liquidity stocks from Nasdaq US

Competing interest of powerful stakeholders: widelydivergent and complex cultural norms has impactedability to launch and grow company

Documents

What is a business market? In its most basic form, a business market is anetwork of transactions and relationshipsamong buyers and sellers