Strategic Management for Online Marketplaces

By 2003, online marketplaces must be managed strategically as part of the selling channel mix. Short-term, stopgap tactics will not suffice when the new breed of Net markets, sophisticated networks of online marketplaces, mature and achieve scale. In fact, organizations participating in online marketplaces that lack a clear role or value proposition will find themselves quickly marginalized by market forces.

IMT Strategies predicts that best-in-class organizations will embrace three winning strategies over the long term:

Strategy 1: Incorporate Online Marketplaces into Hybrid Selling Systems

Online marketplaces are properly viewed as a potentially powerful new selling channel augmenting the existing channel mix (e.g., direct sales, telechannel, distributor). As such, online marketplaces must be integrated into, and managed in concert with, organizations’ hybrid selling systems. This will require resegmenting the market to better align online marketplace channels with product and customer segments by redrawing your existing market coverage models, defining a new pattern of optimal coverage that includes online marketplaces.

Strategy 2: Define Clear Roles and Business Objectives

Organizations must develop clear business objectives to guide their participation in online marketplaces. In the near term, businesses may be driven largely by competitive necessity or the lure of lucrative low-hanging opportunities. In the long term, however, sales and marketing leadership must articulate a strong, defensible set of objectives that both justify and govern its selling activities in online marketplaces. These include:

  • Expanding market coverage
  • Accessing new markets
  • Acquiring new customers at lower cost
  • Gaining market share against weaker competitors
  • Leveraging expertise or market power
  • Defining new markets and devices

Organizations must also establish a clear role within online marketplaces, as buyer, seller, or exchange maker. Some brick-and-mortar organizations are currently profiting from playing an ambiguous role building industry-sponsored exchanges where efficiency is sacrificed to corporate value.

This type of “fox running the henhouse” approach will not work to the advantage of selling organizations over the long term. As a case in point, Brandwise, a buying service that claims to provide objective advice to guide consumers’ appliance purchases, is, in fact, funded by Whirlpool (a major appliance manufacturer). This corporate sponsorship is dubious at best, and the Brandwise site has recently been taken down.

Strategy 3: Focus on the Endgame Value-Added Services and Information

Short-term tactics, such as discriminatory pricing and arbitrage that rely on confusion and imperfect information, may deliver margins and revenue in an immature exchange. Over the long term, these tactics are untenable because markets will evolve toward greater efficiency, and value, not cunning, will be rewarded.

Specifically, online marketplaces create value in four primary ways:

  1. Transactions (matching buyers and sellers and reducing transaction inefficiencies)

  2. Value-added information (providing predictability and risk mitigation)

  3. Value-added services (enabling simplicity and ease of doing business)

  4. Collaboration (facilitating a dialogue among supply-chain partners to enable and/or enhance commerce)

Ultimately, it will be difficult for online marketplaces to survive on the value derived from transactions alone. To preserve competitive differentiation and maximize margins, online marketplaces must deliver alternate sources of value that participants accrue in the form of top- and bottom-line impact. In particular, selling organizations participating in or managing online marketplaces must focus on strategies to offer third-party value-added services, leverage value-added information, and participate in supply chain collaboration. Each of these is detailed below.

Value-added services: A variety of services that create value for sellers by generating new high-margin income streams while making it easier for buyers to do business. Examples include:

  • Settlement
  • Inspection and appraisal
  • Quality assurance
  • Escrow
  • Customer service
  • Shipping validation
  • Logistics support

For example, semifinished and MRO goods exchange FreeMarkets maintains a multilingual call center that provides support and service in more than 30 languages to its global network of 4,000 suppliers in more than 50 countries.

Value-added information: Information generated as a byproduct of the online marketplace that creates value by improving predictability and mitigating risk. This may encompass:

  • Industry performance benchmarks
  • Forecasts of consumer demand
  • Futures and forward contracts
  • Aggregated industry catalogs

For instance, the auto industry exchange Covisint plans to offer suppliers an information portal where they can retrieve real-time plant production schedules as well as consumer demand forecasts indicating which makes and models will be popular.

Collaboration: Creates value through increased buyer-seller communication and the integration of many partners in complex supply chains. For example, in the construction industry, exchanges such as Buzzsaw.com and Cephren enable a general contractor to manage and coordinate the many suppliers, subcontractors, architects, and engineers necessary to complete a project.

Over the long term, organizations that rely on ambiguity and market confusion will lose. Instead, businesses must devise winning strategies that focus on contributing value-added services, leveraging value-added information, and facilitating supply-chain collaboration. Best-in-class organizations will recognize this activity of value creation and capture as the endgame the only sustainable way to “decommodify” products, maximize margins, and retain customers in an online marketplace.

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