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 / Fourth Quarter 2002 / Issue 29(originally published by Booz & Company)


E-Marketplace Survival Strategies

Business model innovation is overrated. Customizing conventional services online offers the surer path.

Illustration by Lars Leetaru
Internet visionaries prophesied a frictionless electronic marketplace where companies would communicate directly with customers and suppliers around the globe. The superheated capital markets then made the dream reality, financing the creation of business-to-business Web exchanges in industry after industry. When the Internet bubble burst in 2001, what had seemed a dream became, for most such e-Marketplaces, a hallucination — or at best a fantasy yet to be realized.

In early 2001, we began studying B2B e-Marketplaces, eventually profiling 1,802 existing and announced exchanges. Our research documented six basic service offerings across 24 traditional industry segments, and three different ownership models, as a first step toward uncovering the common ingredients of success and the conditions that lead to failure. This task was — and remains — daunting. Even with our extensive database, which captures a variety of critical variables, it’s difficult to distinguish long-term survivors from those barely hanging on and to discern a pattern in the failures at the macro level. Only a detailed look at the survivors along many simultaneous dimensions offers any insight into drivers of success. Despite a staggering 45 percent failure rate overall, hundreds of e-Marketplaces continue to operate — and a few even thrive.

Investigating survivors and victims alike, we have concluded that the surest path to e-Marketplace endurance follows a rather traditional route. The clearest successes appear to have taken a traditional business in a fragmented industry — for example, custom printing — and offered it to targeted customers via the Internet.

Other sites have succeeded by abandoning many of their marketplace functions and transforming into Application Service Providers (ASPs), which sell exchange-facilitation software. Finally, a small number of successful e-Marketplaces remain true to the original vision: serving as intermediaries in the vast network of B2B transactions. It now appears clear that most of the entities succeeding with this original model will be backed by some sort of consortium.

Where We Started
Booz Allen Hamilton began compiling a global list of B2B e-Marketplaces in early 2001. Our research was based upon press releases, published reports, and simple Web surfing. Our initial results, published last year as “B2B Benchmark: The State of Electronic Exchanges” (s+b, Fourth Quarter 2001; Click here for the full article), examined more than 1,800 B2B e-Marketplaces. That initial report remains the most comprehensive baseline study of online B2B commerce. The hard statistics demonstrated that the U.S. and Europe had spawned the vast majority of B2B e-Marketplaces. It also documented the existence of three ownership models. While the most prevalent was independent entities funded by venture capitalists, our study highlighted an emerging group, e-Marketplace consortia — collectives of erstwhile competitors aiming to cash in on the B2B frenzy in the capital markets. Our research also found numerous private e-Marketplaces, operated by individual companies seeking revenue growth and/or efficiency rather than IPO riches.

“B2B Benchmark” also documented six services offered, singly or in combination, by e-Marketplaces. These are information exchange, digital catalogs, online auctions, logistics services, supply chain planning, and design collaboration. Our cluster analysis further segmented the e-Marketplaces according to the mix of services provided. Total Procurement was the largest segment, covering 32 percent of the entities and encompassing companies that offered both digital catalogs and online auctions, and, occasionally, logistics services, but not such services as collaborative supply chain planning and design collaboration. Twenty-seven percent were classified as Catalog Buying operations that did not offer online auctions. Conversely, 19 percent were identified as Auction Houses, which focused on auctions and eschewed fixed-price digital catalogs. Collaboration Facilitators (making up roughly 3 percent of the entities) focused on supply chain planning and design collaboration, and Full Service exchanges, which offered all the core services, represented another 5 percent. A final segment, Specialty Services (14 percent), offered none of the core services and was dropped from this year’s second phase of analysis.

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