Business applications 1: business-to-business (B2B) commerce - Business Environment

Features of B2B
Business-to-business (B2B) transactions account for, in terms of value, about 80percent of all Internet transactions. Both the buyer and seller are business organisations. The technological and legal aspects of B2B commerce tend to be more complex than business-to-consumer (B2C) commerce, and it often requires sophisticated software. It can be arranged through either inter-organisational systems(IOS) or electronic markets.B2B commerce is characterized by a number of key features, many of which differentiate it from B2C commerce. Turban and colleagues2 suggest that the following are some of its salient aspects:

  • an automated trading process;
  • high volumes of goods traded;
  • high net value of goods traded;
  • multiple forms of electronic payment and funds transfer are permitted, unlike B2C commerce, which tends to be restricted to credit cards and smart cards;
  • high level of information exchange, including shared databases, between the different trading partners. This often involves the use of extranets;
  • prior agreements or contracts between the business partners requiring a higherlevel of documentation;
  • different types of legal and taxation regimes depending on where the two parties are based, and what type of goods or services are the subject of the transaction; multiple levels of authorization of purchases, each level having its own limits on expenditure or types of goods.

Benefits of B2B
On examination there appear to be a number of potential benefits and drivers of B2B commerce. The first of these is that it encourages the adoption of an Internet electronic data interchange (EDI) system to improve the efficiency of business processes. The DTI describes EDI as ‘the computer-to-computer exchange of structured data, sent in a form that allows for automatic processing with no manual intervention. This is usually carried out over specialist EDI networks'.Using EDI to streamline business processes has a number of discernible benefits.
These would include the following:

  • A safe, secure and verifiable electronic environment that allows manufacturers or retailers to link their stock databases directly to suppliers. This reduces lead times by reducing the time taken in placing and receiving orders.
  • Lower costs in creating, processing, distributing, storing, retrieving and destroying paper-based information; fewer errors in data entry; improved inventory control, and reduced staff time involved in the process.
  • Improved warehouse logistics, and improved co-ordination for moving goods to the appropriate place, at the defined time and in the correct quantities.
  • Better and more efficient integration of support functions such as human resources, inventory control, order processing, accounting and payment processing.
  • More efficient strategic alliances and partnering with suppliers, customers and competitors. For instance, in the motor industry, leading firms such as General Motors, Ford and Chrysler have set up a joint extra net with suppliers.

It should be recognized that EDI has been around since the 1960s, but before the development of an integrated Internet EDI system, it was seen to have some serious shortcomings that undermined the potential benefits. Two in particular are worth noting:

  • It required an expensive private dedicated network connection between two established trading partners. According to Forrester Research only 100 000 of the 2 million companies in the USA employing 10 or more employees chose to deploy traditional EDI. The rest felt that it was too expensive, was not interactive enough, and did not enable them to access or negotiate with their suppliers and other partners.
  • The lack of agreed international standards for document formats meant that early EDI was based on proprietary technologies such as value added networks(VANs). Each EDI tended to be set up specifically for a single buyer and supplier, and consequently became heavily embedded deep within the organisation’s IT systems. This served to inhibit change within the organisation, making it difficult and expensive to change suppliers because of the difficulties of switching the existing system to a new supplier. It also meant that where a firm was multi-sourcing, a separate EDI might be needed for each supplier However, Internet-based EDI overcomes most of these shortcomings. Rather than using proprietary technology (VANs) it makes use of the public Internet. Therefore, InternetEDI, unlike traditional EDI, is ubiquitous, global, cheap, easy to use, and readily available and accessible both within (intranet) and outside (extranet) the company.

In addition, Internet EDI standards are becoming increasingly compatible with eXtensible Mark-up Language (XML). XML is already the key international standard for transferring structured data, and has wide acceptance, having been championed by organisations such as Microsoft, Netscape and Sun Microsystems, as well as by the World Wide Web consortium. The wide spread adoption of XML means that most companies are now able to use Internet-based EDI to exchange documents cheaply and quickly. The International Data Corporation (IDC) reported that Internet EDI’s share of EDI revenues has risen from 12 per cent to 41 per cent over the period 1999–2003, with this trend likely to continue into the future.A further potential benefit and driver of B2B commerce is that it provides for expansion from a local or national market to a global electronic market (e-market).For a relatively minimal capital outlay, a business can access a wider range of (betterand/or cheaper) suppliers, and contact a larger potential customer base.B2B activities vary from firm to firm, and industry to industry, but as well as global electronic markets, where many buyers and sellers meet for the purposes of trading electronically together, other common types of markets include a sell-side marketplace (where one company does all the selling), and a buy-side marketplace(where one company does all the buying).Other benefits and drivers of B2B commerce include the following:

  • That it provides an opportunity to market, sell and distribute goods and services to other businesses for 24 hours a day, 365 days a year, the so-called ‘martini effect’.
  • That it can sometimes significantly reduce fixed costs, perhaps through savings on premises, where a website has effectively become the organisation’s showroom.
  • That it also has the potential to improve pull-type supply chain management, such as JIT manufacture and delivery, based on integrated and fully-automatic supplychain management (SCM) and demand chain management (DCM) systems.
  • That it can encourage organisations to adopt a more customer-centric approach, in which the business tracks consumers’ preferences and re-engineers itself quickly to meet consumer needs. This might involve developing a mass customization business model such as that adopted by Dell Computers, and discussed in the case study below.
  • That it can facilitate the development of an integrated electronic customer relationship management (eCRM) system, based on customer information gathering, data warehousing and other market intelligence.
  • That it may improve knowledge management systems within the organisation as employees use the company intranet system to access organisation-wide know-how.

Many of these potential advantages of B2B can be illustrated by looking at the following case study, based on Dell Computers. To facilitate your understanding of the issues discussed in the text an extended case study has been used in this chapter rather than two mini cases and there are additional questions at the end of the case study which you might like to attempt.

Potential problems and limitations of B2B
As we have illustrated, there are a number of significant advantages to the wide spread adoption of B2B commerce. However, it should be noted that there are also some potential limitations or barriers that may serve to delay or hamper the growth in B2B commerce. These include:

  • Internet technology is continually developing, encouraging some organisations to postpone investment in the short term;
  • technical limitations such as lack of system security, reliability and protocols there are also currently some problems with telecommunications bandwidth and speed;
  • the cost and difficulty of integrating existing (legacy) IT applications and databases with Internet and related software;
  • the slow progress made in achieving universal international standards for the electronic transfer of information documentation;
  • many legal, taxation and regulatory issues remain unresolved.

Even successful companies such as Dell face challenges as the e-business market matures. In August 2005, Dell announced a slowdown on quarterly sales to percent, and saw its share price immediately fall by nearly 10 per cent as investors worried that it was running out of opportunities for further growth and was starting to face increasing competition from low-cost rivals such as the Asian company Lenovo, the Chinese manufacturer that recently acquired IBM.Nevertheless, on balance the clear benefits of B2B commerce are likely to outweigh the disadvantages, and we should expect to see continued dynamic growth in this area for some years to come.

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