e-marketplaces:: crafting a winning strategy

European Management Journal Vol. 20, No. 3, pp. 286–298, 2002 2002 Elsevier Science Ltd. All rights reserved.Pergamon

Printed in Great Britain0263-2373/02 $22.00 + 0.00PII: S0263-2373(02)00045-2

e-Marketplaces:Crafting A WinningStrategyPETER BRUNN, Technical University of Denmark, DenmarkMARTIN JENSEN, Boston Consulting Group, DenmarkJAKOB SKOVGAARD, McKinsey and Co., Denmark

Very little theoretical work has been done that trulyhelps e-marketplace managers understand and craftstrategy. To help fill this gap the Temple Frame-work, which is introduced in this article, has beendeveloped. This theoretical framework explainshow e-marketplaces, in order to achieve success,must create a powerful setup (thus creating a strongstrategic position) and meet the challenge of build-ing liquidity and capturing value. It also suggestsways to meet this challenge as well as it explainsthe considerations that must go into designing eachelement of the setup.

The Temple Framework has been extensively testedduring the roll out of gatetrade.net, an ambitious e-marketplace founded by influential Danish compa-nies with a European and international presence. Inthis article, gatetrade.net provides valuable insightson some of the lessons learned while working withthe Temple Framework. 2002 Elsevier ScienceLtd. All rights reserved.

Keywords: e-Marketplace, Liquidity, BusinessModel, Temple Framework, Revenue Model, Col-laboration, Business-to-Business, e-Commerce, e-Business

Introduction

Lately there have been many articles in business per-iodicals and financial newspapers about e-commerceand the new e-marketplaces that have started to popup. Strategies of value creation in e-commerce havealso been dealt with in this journal (e.g. Zott et al.,2000) focusing on efficiency and ‘stickiness’ of e-com-merce business models and illustrating this by ‘bestpractices’ in Europe. e-Marketplaces can be said torepresent a second wave in the e-commerce propa-

European Management Journal Vol. 20, No. 3, pp. 286–298, June 2002286

gation and extending the Business and Consumercombinations (B2C, C2B and C2C) into the prosper-ous Business-to-Business (B2B) area. In our under-standing e-marketplaces can be defined as interactivebusiness communities providing a central marketspace where multiple companies can engage in B2Be-commerce and/or other e-business activities(Jensen and Skovgaard, 2001).

A few years back only a small percentage of these e-marketplaces existed, but now the rapidly increasingadoption of the Internet by companies world-widehas changed everything. The explosive increase inreach and the significant decrease in transaction coststhat have followed in the wake of the Internet pen-etration have made the e-marketplace businessmodel feasible and attractive. As a consequence wehave seen the establishment of quite a few e-market-places in various settings, public as well as private.

During the few years they have been around we havewitnessed both successes and failures among the e-marketplaces. However, the failures far outnumberthe successes. A general experience seems to havebeen that it is very difficult to establish as a publice-marketplace. Examples are Chemdex, Dell Market-place and Junebox. Typically the public e-market-place has high initial investments and also high oper-ational costs, which can only be covered by asubstantial, often unrealistic, market share. Addingto the difficulties may also be that the e-marketplaceshave required their users to change their way ofdoing business, which is at best a slow process. Onereason for this may be that buyers and sellers havein fact not been ready to change their way of doingbusiness. Furthermore, participating in a public e-marketplace often means having to accept being out-side the control of the e-marketplace. Together these

E-MARKETPLACES: CRAFTING A WINNING STRATEGY

circumstances have caused the failure of many publice-marketplace initiatives.

In contrast, private e-marketplaces seem to have beenmore successful, e.g. Cisco Connection. A possibleexplanation is that in contrast to the public model it isthe e-marketplace that must change the way of doingbusiness. Another factor may be that integrationissues regarding existing ERP systems tend to be sim-pler to solve for private e-marketplaces – a fact whichwas often not appreciated fully by many of the failingpublic e-marketplaces.

A general lesson seems to be that investments to cre-ate e-marketplaces are very high, and that the tech-nology is often not mature. Many e-marketplacesbuilt during the past few years have been foundedon optimism and hope rather than on attractive valuepropositions and solid strategies. We therefore see aneed for taking a closer look at what considerationsshould go into crafting a strategy for an e-market-place.

A Holistic Approach

Due to the recent conception of the e-marketplacebusiness model there has been relatively littleresearch conducted on the topic so far. Furthermore,most of the research that has been conducted hasapplied very specific viewpoints (e.g. looking at e-marketplaces from a technological viewpoint, as aninvestment opportunity, or from the viewpoint of aspecific industry or a specific geographic market).Little research has been conducted aiming atdeveloping models that can aid e-marketplace man-agers in understanding the e-marketplace businessmodel and crafting strategy by providing a holisticviewpoint.

For this reason the goal of our study on e-market-places has been to develop and test a holistic theoreti-cal framework for e-marketplace strategy that canhelp bridge the gap between existing but fragmentedtheory and the needs of e-marketplace managers. Bythis we hope to cast light on the question highest onthe agenda of e-marketplace managers: how to crafta winning e-marketplace strategy?

Understanding e-Marketplaces

Crafting a winning e-marketplace strategy starts withan understanding of the e-marketplace businessmodel. Without a deep understanding of how e-mar-ketplaces create value the chances of crafting a strat-egy that will lead to sustainable competitive advan-tage are slim.

The core service of e-marketplaces is to provide acentral market space, where e-commerce can be con-ducted. However, although e-commerce is a very

European Management Journal Vol. 20, No. 3, pp. 286–298, June 2002 287

important aspect of e-marketplaces, it is important tounderstand that e-marketplaces are not limited tofacilitate e-commerce, nor is e-commerce necessarilythe most important aspect of a given e-marketplace.Other e-business activities that are just as valuablefor the participants often take place (see Figure 1).For example, e-marketplaces can extend e-commercewith the functionality of electronic catalogues andauctions and by providing order fulfilment servicessuch as tracing, financing and logistics. Anotherpossibility is for the e-marketplace to play the roleof organiser of various forms of collaboration for theparticipants of the e-marketplace, e.g. demand fore-casting and inventory management.

These types of activities allow e-marketplaces tobuild their value proposition upon three fundamen-tal elements. In order of rising complexity they are(1) increased market efficiencies, (2) increased supplychain efficiencies, and (3) new value creation.

With respect to market efficiency it is a fact that fewreal markets are truly efficient as predicted bymicroeconomic theory. Opaqueness, large transactioncosts, regulation etc. are all conditions that make thereal-life situation look a whole lot different than thetheory. e-Marketplaces have the potential to makereal-life work more like theory predicts, as they cansignificantly increase market efficiency. The intensi-fied competition and the increased transparency ofthe Internet go hand in hand with the emergence ofe-marketplaces and push prices closer to the theoreti-cal equilibrium. This is because the e-marketplacesfacilitate a way to increase transparency and bringtogether buyers and sellers and match their needs atmuch lower costs than before. Also supply chains havea vast potential for better efficiency. For the purposeof optimising business processes across supplychains, Supply Chain Management (SCM) has beenstudied and practised intensely in the 1990s. Success-ful e-marketplaces build on the same thoughts asthey bring a standard for collaboration and interac-tion between companies. By providing users withgood collaboration tools such as demand forecasting,inventory management and production planning, e-marketplaces help provide increased visibility acrossseveral tiers of the supply chain. Furthermore,because the way to collaborate is standardised, e-marketplaces also allow for a much more dynamicchoice of sourcing partners (Means and Schneider,2000). In essence e-marketplaces are positioned tobring a new era of synchronised supply chains thatare dynamic and therefore can be continuouslyimproved. On top of the increased efficiencies in themarket, and in the supply chain, e-marketplaces alsobring fundamental changes to the way business isconducted in the B2B market space. Hence numerousopportunities on how to create value-adding activitiesexist (Berryman et al., 2000) – many of them as yetunexplored. The foundation for innovative servicescreating new value is information. The vast amountof information about product offerings and trans-


Figure 1 The e-Marketplace Business Model

actions of the participating companies now availablefrom one single source becomes more transparent.Building on that information base new value can becreated by bringing more radical and transform-ational changes to the supply chain yieldingefficiency at a level not at all possible before theemergence of e-marketplaces. Furthermore, value canbe created from new ideas having a fundamentalimpact on the business scope of both the e-market-places themselves and the participating companies.

These observations regarding the value creation ofe-marketplaces apply broadly to all e-marketplaces.However, it is useful to distinguish between twotypes of e-marketplaces: horizontal e-marketplacesand vertical e-marketplaces. The horizontal e-market-places are based on functions and/or products com-mon across industries (i.e. the operating input), whilethe vertical e-marketplaces are those that are basedon a specific industry tied together by the manufac-turing input. The core value proposition of horizontale-marketplaces is usually that of lower transactioncosts in the purchasing process while a lower priceis also often the result for buyers. However, becauseof the diversity of customers it is hard for horizontale-marketplaces to introduce effective collaborativetools with an effect on overall supply chain efficiency.In contrast facilitation of collaboration is usually thecore value proposition of vertical e-marketplaces asthey are well positioned to cater for special needs,wants and customs attached to each industry.

The Temple Framework

Understanding the basics of the e-marketplace busi-ness model however, is not enough. For e-market-place managers the question remains: how to craft awinning strategy?

To provide managers with an overall perspective one-marketplace strategy we have developed a compre-hensive framework (see Figure 2) called the TempleFramework. It identifies the main challenge of achiev-ing e-marketplace success (building liquidity andcapturing value), provides detailed analysis of thischallenge, and suggests ways by which it can be


overcome. Furthermore, it identifies and clearlyexplains the considerations that should go into decid-ing how to set up the strategy of an e-marketplace,and the implications.

The theoretical background for this framework is oursynthesis of contemporary research and literature onthe topic of e-marketplaces (mainly the works ofSculley and Woods, 2000; Ramsdell, 2000; Means andSchneider, 2000; Skinner, 2000; Goolsbee, 2000 andAndrew et al., 2000).

Empirically, the Temple Framework is supportedbroadly by numerous observations and examplesfrom existing e-marketplaces as well as by the sparsestatistical material part of the works mentionedabove. Most noticeably however, the empirical inputsto our research originate from an in-depth case studyconducted with the Danish e-marketplace gate-trade.net. The case study at gatetrade.net has enabledus to refine the framework as well as to validate itsvalue to e-marketplace managers.

The Temple Framework has three main parts, asillustrated in: The Objective, The Challenge, and TheSetup. While the objective is largely self-explanatory,the setup and challenge parts and their elementsrequire a more detailed and thorough description,which is given in the following sections. However,before going into detail a few pointers on our inten-tion with the Temple Framework are appropriate.First of all, it is important to understand that theTemple Framework is based on one central hypoth-esis that clearly describes how the framework shouldbe interpreted: In order to achieve the objective of e-marketplace success one must create a powerful setup(thus creating a strong strategic position) and meetthe challenge of building liquidity and capturingvalue. Second, it should be noted that the TempleFramework refers to e-marketplace success as seenstrictly from the perspective of the e-marketplace asan independent entity, i.e. an e-marketplace is suc-cessful only if it is profitable. This is important, asincumbents that launch a private e-marketplace ortake equity in a public e-marketplace are likely todefine the initiative as a success as long as it providesthem with significant value (for example defending


Figure 2 The Temple Framework

market share or through cost savings), even if the e-marketplace itself does not make a profit. By havingdefined success in this way we wish to make it clearthat the primary concern of the Temple Frameworkis public e-marketplaces. However, the TempleFramework is also valuable for private e-market-places, as it is useful for understanding and analysingtheir strategic issues as long as their special traits arekept in mind when using the framework. Third, withrespect to the word ‘setup’ it should be stressed thatnothing static is implied. The setup is actually of arather dynamic nature, as it is our hypothesis thatthe setup of an e-marketplace should be changed con-tinuously as the environment of the e-marketplacechanges and the e-marketplace grows and matures.This is equivalent to how strategy and business plansshould be revised as conditions change. Fourth, theframework describes building liquidity and captur-ing value as the challenge. This is to illustrate thatalthough there are two elements they need to be con-sidered together due to their tight linkage. That is, e-marketplaces must always keep in mind thatdecisions on how to capture value influence thebuilding of liquidity – and the other way around.Lastly, it should be made clear that because most e-marketplaces are still in their infancy, the discussion(of both the setup and the challenge) below empha-sises the issues related to getting the e-marketplaceoff the ground, while less attention has been givento issues concerned with the later phases in the lifeof e-marketplaces.

The Setup of e-Marketplaces

The e-marketplace setup is the foundation for e-mar-ketplace success and consists of five elements: focus,governance, functionality, technology, and partner-ships. Taken together the five elements make up thestrategic position of the e-marketplace and as suchcan be seen as the position from where to meet thechallenge of building liquidity and capturing value.


The reason for using these and only these fiveelements in the setup is that taken together they accu-rately describe the most important, the least under-stood and the unique strategic issues inherent in thesetup of the e-marketplace business model. Further-more, each of these elements is core to currentresearch on e-marketplaces. Other aspects of e-mar-ketplaces (e.g. organisation, marketing, financing,and management team) are not part of the setup, asthey are neither core to current research on the topic,nor unique for the setup of the e-marketplace busi-ness model or amongst the most important or leastunderstood strategic issues concerning e-market-places.

In order for the e-marketplace to succeed, carefulconsideration must go into the design of and continu-ous change of each of the five elements of the setup.Furthermore, taken together the five elements mustbe in alignment to create a strong strategic positionfor the e-marketplace. The many issues that e-mar-ketplaces should take into consideration whendesigning or making changes to each of the fiveelements of the setup are described below.

FocusDeciding on an appropriate focus for the e-market-place involves identifying what specific buyer andseller segments to target as well as deciding whattype of products should be available on the e-market-place. Without a clear focus the e-marketplace runsthe risk of trying to sell everything to everybody.This is likely to result in selling nothing to anybody,as buyers and sellers are likely to prefer e-market-places that are able to cater more directly to their spe-cific needs as a company – and these needs are oftenvery industry specific. Therefore, while it is possiblethat an e-marketplace can evolve into the B2B Wal-Mart of the Internet1 over time, setting up as suchfrom the beginning is not likely to be feasible due tothe differences between the players of different mar-kets and industries. Focusing enables an e-market-


place to dominate its chosen market space quickly,which creates mind share and liquidity, and in turnhelps the e-marketplace scale up quickly. It alsoenables the e-marketplace to tailor its business modelto match the target market’s distinct characteristics.These are critical success factors from the start(Sculley and Woods, 2000). Also, in order to get agood start it makes sense to focus on key players ina given industry. This can be done in terms of whatsellers have the most complete product portfolios or,what buyers are likely to benefit the most from usingthe e-marketplace. Naturally, variables such as pur-chasing power, market coverage, technologicalsophistication, etc., can also be taken into consider-ation when trying to focus on the key buyers andsellers to target. e-Marketplace managers also needto have a clear focus when it comes to geographiccoverage, horizontal vs vertical focus and specificproduct categories and product types. For example,with respect to geography it made sense for gate-trade.net to initially focus on the Danish market, asthis way the partners behind gatetrade.net couldmake the best use of their relationships with keyplayers in the industry and of their extensive knowl-edge of the Danish market. When choosing whichproducts to focus on it is very important also to con-sider what is required in order to facilitate the pur-chasing process, e.g. selling automobile parts to a carmanufacturer will require advanced forecasting tech-niques and just-in-time implementation, while aneasy-to-use buyer interface and ease of adminis-tration might be the most important requirements forselling office supplies to the same car manufacturer.

GovernanceChoosing an appropriate form of governance canhelp ensure a rapid adoption of the e-marketplace byboth sellers and buyers. With respect to governanceat the broadest level, an e-marketplace can either bebiased or neutral (Kaplan and Sawhney, 2000). Aprivate e-marketplace will naturally always holdsome amount of bias towards its owner(s) whereas apublic e-marketplace may be biased towards eitherbuyers or sellers or be neutral. Strongly biased e-mar-ketplaces run the risk of deterring the non-biasedparty from using the e-marketplace. Therefore it isin most cases advantageous for the e-marketplace tochoose a neutral form of governance equally attract-ive to buyers and sellers (Sculley and Woods, 2000).Some of the benefits of a neutral form of govern-ance are:

❖ A perception of fairness and the trust of tradingparticipants:– Making it easier to agree on standards for pro-

duct specifications and collaboration func-tionality

– Making it easier to carry out regulatory taskssuch as supplier qualification, evaluation of cre-dit worthiness, resolution of disputes, etc.

❖ Fewer channel conflict issues:– Leading to increased transparency


– Leading to better exploitation of potential mar-ket and supply chain efficiencies.

Against these positive aspects of neutrality should beweighed the control and bargaining power that onegives up when choosing neutral governance. Further-more, it should be taken into consideration that neu-tral e-marketplaces commonly face a chicken and eggproblem (Kaplan and Sawhney, 2000). This is becausebuyers do not want to commit to using a neutral e-marketplace before the sell-side is well developed,while sellers do not want to commit before the buy-side is well developed. By nature it is hard for incum-bent sellers or buyers to create neutral e-market-places, which is the reason that independent start-ups dominate this field. However, for inherentlybiased e-marketplaces steps can be taken to increasethe degree of neutrality. One way to do this is bymaking the governance reflect the composition ofparticipants on the e-marketplace. For example,when gatetrade.net contracted with the Danish Statethey found that establishing an official forumenabling representatives from the Danish State tohave a say in the decisions was needed.

FunctionalityFor e-marketplace managers it is important to havea good understanding of the different elements thatmust be designed and combined in the optimal wayin order for an e-marketplace to create a powerfulvalue proposition towards its target market. A.T.Kearney (2000) has developed a useful frameworkcalled the 3 C’s of B2B, where e-marketplaces aredescribed with respect to three core elements: Com-merce, Content and Connection. This framework pro-vides a logical way of categorising the functionalityof e-marketplaces. However, we have chosen toreplace the term ‘Connection’ with ‘Collaboration’, aswe believe that it is a more adequate word for whatis actually offered by e-marketplaces today (see Fig-ure 3).

Figure 3 The 3 Cs of B2B e-Marketplaces. Adaptedfrom A.T. Kearney (2000)

Without a clear focus the

e-marketplace runs the risk of

trying to sell everything to

everybody


The commerce part of e-marketplaces is the part thatpeople can most often relate to. However, in muchthe same way as e-commerce is a subset of e-busi-ness, there is much more to e-marketplaces thanmerely commerce. As illustrated in Figure 3, the com-merce, the content and the collaboration functionalityare inter-linked and all three are important elementsof an e-marketplace. While these three concepts sep-arately are simple, the challenge is to apply them inthe best possible way in a specific context and to keeppace with the development.Each market space is unique,and therefore the mix of the 3C’s must be carefully thoughtout in order to address the keyinefficiencies inherent in thespecific market space that is thefocus of the e-marketplace –and to create new value. First,with regard to the commercemodel, the product complexity, the available liquid-ity, and the maturity of trading participants towardse-commerce should be considered before deciding oncatalogue trading or on one or more of the moreadvanced trading mechanisms such as auctions.Second, the content should be designed to attract buy-ers and sellers from the target group and to ensureloyalty and website stickiness. Third, the supply chainshould be streamlined and transformed by con-necting trading participants and third parties withcollaboration tools that satisfy their specific needs.Fourth, the three elements need to be co-ordinated toyield synergistic effects and to create new value forthe industry. Lastly, it is important to keep in mindthat the mix of the 3 C’s that make up the func-tionality of the e-marketplace should be dynamic andreflect the ongoing changes in the e-marketplaceenvironment.

TechnologySetting up an e-marketplace with the right techno-logical platform is of strategic importance as it hasdirect consequences for the success of the e-market-place. The major criteria for the technological plat-form is that it should be able to support the develop-ment of advanced market making tools (i.e. differentcatalogue structures and auction types), integratedprocurement tools (e.g. searchable catalogues andadministrative tools), and advanced collaborationtools. Furthermore, the migration of intimate sup-plier networks (e.g. in the form of supplier extranets)present in many industries on the e-marketplace plat-form should also be supported. For example, withoutthe possibility of migrating supply chain manage-ment solutions to the e-marketplace platform a bigpart of the value that e-marketplaces hold, the poten-tial for capturing cannot be realised.

Furthermore, to ensure that the technology does notbecome a major hindrance for the e-marketplace, thetechnological platform must offer the possibility offrictionless integration with the ERP-systems of part-


icipating buyers and sellers. Also, to make the e-mar-ketplace as efficient as possible, it should operateunder open standards. Most technology providers(e.g. Oracle, Ariba, i2 Technologies, and CommerceOne) are committed to open technical standards buthave yet to agree on them. This means that e-market-places must choose their technology partners care-fully in order not to be stuck with a non-standardplatform. This is especially important with respect tofuture integration between e-marketplaces2 Although

translation software that makesit possible to communicatebetween different platformsexists, this is a far more expens-ive solution than using a stan-dard. Furthermore, using anon-standard platform can bean inhibitor for buyers and sel-lers keeping them from partici-pating due to the risks involved

in backing a non-standard. Finally, the technologicalplatform for an e-marketplace must also be scalable,flexible and secure. Without scalability and flexibilitythe platform can become a major restriction as thefocus of the e-marketplace shifts or the demands forfunctionality increase or change, while a secure plat-form is necessary for ensuring the trust of the buyersand sellers participating on the e-marketplace.

PartnershipsPartnerships are important because as is the case forother companies, e-marketplaces cannot do every-thing themselves (Hagel and Singer, 1999). Like othertypes of companies e-marketplaces too need to stickto their core competencies and let partners withcomplementary skills carry out non-core activities.Furthermore, choosing the right partners is key tobeing able to scale up quickly and to be able to offerparticipants on the e-marketplace a wide array of ser-vices within the domains of commerce, content, andcollaboration. Sculley and Woods (2000) argue thatthe potential partners for an e-marketplace includeinvestors, buyers in the chosen market space, sellersin the chosen market space, existing broker inter-mediaries, new infomediaries, content providers, ITvendors, and software developers. It is especiallyimportant to choose the right technology partner(s),as few e-marketplaces have the knowledge andresources to develop and maintain a competitivetechnological platform themselves. Partnering withkey industry suppliers and buyers is useful for get-ting to understand the customers of the e-market-place as well as the industry better. Such partnershipscan also help secure early liquidity on the e-market-place as well as help gaining the trust of other playersin the market. Partnering with key industry suppliersand buyers is especially important for vertical e-mar-ketplaces, for which signing up a few big playersearly can often mean the difference between successand failure in consolidated industries. It is also agood strategy for e-marketplaces to partner with con-tent providers such as news services – especially if


they are strong on content directly related to a spe-cific industry. Providers of services that fit well withthe needs of the e-marketplace participants (e.g. pro-viders of financial or logistics services) are also valu-able as partners – and so are software developers thatcan help implementing advanced collaboration tools.Last, but not least, partnering with other e-market-places can also be beneficial. For example, horizontale-marketplaces are likely to struggle with delivery ofindustry specific functionality and content. Part-nering with a vertical e-marketplace can circumventthis problem, as the service offering towards a parti-cular industry can be extended.

Consistency of Setup ElementsFocus, governance, functionality, technology, andpartnerships are the five elements constituting thesetup of e-marketplaces. Careful consideration mustgo into the design of and continuous change of eachof the five elements of the setup. Furthermore, takentogether the five elements must be in alignment tocreate a strong strategic position for the e-market-place. However, creating a powerful setup is notenough to ensure the success of the e-marketplace.The challenge of building liquidity and capturingvalue must also be met, as building liquidity and cap-turing value are the pillars of e-marketplace success(see Figure 2 ). Both pillars must be in place in orderfor the e-marketplace to succeed.

Building Liquidity

The first pillar of e-marketplace success is buildingliquidity. The reason for liquidity being so importantis simple: having the greatest liquidity – that is, hav-ing the most transactions done on your e-market-place – translates into market domination (Sculleyand Woods, 2000). Furthermore, liquidity contributesto a positive loop by supporting the economies ofscale and scope, which are important drivers of thee-marketplace business model. The main service ane-marketplace provides is a centralised market space,and the more likely a buyer or seller is to make asatisfactory transaction using the e-marketplace, themore likely they are to join that e-marketplaceinstead of its rivals. Therefore, not only liquidity interms of transaction volume, but also liquidity ofinformation is needed in order for the e-marketplaceto be attractive to buyers and sellers.

In order to best build liquidity e-marketplace man-agers need to decide on a strategy for driving liquid-ity onto the e-marketplace. A good strategy for build-ing liquidity should encompass a plan for solving thechicken and egg problem of attracting buyers and sel-lers faced by most e-marketplaces and exploit thenetwork externalities inherent in the e-marketplacebusiness model. Furthermore, the strategy shouldalso consider how to protect and continuously buildliquidity, as the scope of the e-marketplace evolves.


Liquidity attracts more liquidity in the e-marketplacebusiness. Therefore, one of the most important chal-lenges of e-marketplaces is to get the initial liquidityneeded to get this positive feedback loop started. Thisinitial liquidity can be thought of as being the criticalmass needed for the e-marketplace to really take off.As soon as critical mass is achieved the powerful net-work externalities inherent in the e-marketplace busi-ness model are released and so is the potential for arapid increase in liquidity. However, first the chickenand egg problem of attracting the initial buyers andsellers and making them use the e-marketplace mustbe solved.

Solving the Chicken and Egg ProblemWithout sellers, no buyers are interested in joiningthe e-marketplaces. And without buyers, no sellersare interested. So how do e-marketplaces go aboutsolving the chicken and egg problem and getting thepositive feedback loop started? Sculley and Woods(2000) argue that building the transaction volume ismore important than the number of members at thestart. Therefore e-marketplaces should target keyplayers who are likely to trade the most and get themto join early, rather than focusing on signing up mostnumber of players. To speed up the adoption processe-marketplaces should actively help these key cus-tomers migrate transactions to the e-marketplace.Contracting with key buyers and sellers or perhapsoffering equity in the e-marketplace in exchange forparticipation is a common way for e-marketplaces toget off the ground and secure initial liquidity. A goodexample of how initial liquidity can be secured isprovided by gatetrade.net, as it managed to form acontract with the Danish State. According to this con-tract public purchasing for potentially EUR 27 billionover a five-year period is to go through gatetrade.net.For e-marketplaces that are formed by existing indus-try players (e.g. Covisint in the US AutomobileIndustry) the chicken and egg problem often solvesitself, as the existing industry players bring their owntransactions on-line to get the positive feedback loopstarted. However, for this type of e-marketplace, biasproblems are often present and can be as big a chal-lenge as the chicken and egg problem. Dealing withthese problems early therefore is very important inorder to secure a critical mass of transactions.

Exploiting Network ExternalitiesApart from the particular effort of solving thechicken and egg problem an e-marketplace strategyalso needs to address the more general issue ofexploiting the network externalities inherent in thee-marketplace business model. The main differencebetween network industries3 and other industries isthat the former is much more likely to be dominatedby a single company or standard. This is so becausewhen there are positive network externalities present,there is a positive feedback that makes current win-ners more likely to keep winning in the future. Thecompany with the largest base of users therefore hasa great advantage, which is why you do not want to

The challenge is to

maximise the combination of

cake size and cake share


be playing catch-up in a network industry (Shapiroand Varian, 1999).

For e-marketplaces network externalities are presentbecause the value of the e-marketplace to its parti-cipants increases with the more participants it has(e.g., the value of collaboration tools is greater if morecompanies are present to collaborate with). Goolsbee(2000) argues that in industries where strong networkexternalities are present some general strategies forachieving market dominance exist. First, and mostimportantly, first mover advantages should beexploited. The reason speed is so important is that e-marketplaces that can build liquidity fast will havesignificant advantages over other e-marketplaces asthe value of their service will be much higher forpotential participants. Naturally, it is important tounderstand the trade-off between quality and speed.While it is preferable to be able to offer a high-qualitye-marketplace in terms of a wide product and serviceportfolio, rapid execution to some extent wins pri-ority over quality in industries with network exter-nalities. Therefore an e-marketplace should not spendtoo much time refining its pro-duct and service offerings, ascompetitors are likely to achi-eve critical mass with aninferior offering before it canget its high-quality offering offthe ground. Second, using buzzto create expectations about thefuture is important for compa-nies in network industries. Therefore, if an e-market-place can convince customers that its service will bethe most widely accepted, this will tend to be self-fulfilling. Third, it makes good sense for e-market-places to target specific early adopters aggressivelybecause it requires less effort to convince those com-panies of the benefits and the opportunities that e-marketplaces bring about. Especially valuable earlyadopters are those high-profile companies that dueto their reputation alone can help the e-marketplaceconvince others that it is worthwhile to participate.Fourth, with respect to pricing there is a standardstrategy in an industry with network externalitiesthat is similar to that in an industry with large econ-omies of scale: penetration pricing. Because everyearly adopter is a beachhead that will bring in others,companies want to subsidise early use through lowprices (Goolsbee, 2000). For e-marketplaces it there-fore makes sense to charge early adopters less. How-ever, because pricing has such a direct influence onthe bottom line of the e-marketplace’s results carefulconsideration should always go into the impact suchpricing decisions are likely to have on the long-termprofitability of the e-marketplace. Lastly, companiesin industries that have powerful network exter-nalities should understand the importance of stra-tegic alliances. Since e-marketplaces are trying tobecome the de-facto standard within their chosenfocus segment, it helps to have powerful allies thatcan help make that happen. As already mentioned, it


makes good sense to have alliances with technologyproviders and key buyers and sellers. Forgingalliances with strong producers of complementaryproducts is helpful too. For e-marketplaces this couldbe with providers of logistic or financial services oreven with complementary e-marketplaces. Forexample, horizontal gatetrade.net has benefited frompartnerships with vertical e-marketplaces specialis-ing in ticketing services and in IT hardware.

Continuously Extending the LiquiditySo far this discussion of building liquidity has mainlyfocused on how to reach critical mass. However, theimportance of building liquidity does not end whencritical mass is achieved and the e-marketplace hasa solid grip in its target market. The importance ofcontinuously building liquidity remains because asthe e-marketplace builds liquidity beyond criticalmass a new set of liquidity related issues will find itsway to the management agenda. e-Marketplace man-agers need to work out strategies for how their ser-vice offering should develop as well as how to copewith the prevailing inter-marketplace competition.

The sooner e-marketplace man-agers start thinking about theselong term challenges the moreeffective their building liquid-ity effort will be. Paradoxically,being successful in the buildingof liquidity in the first place isa big part of the solution tomeeting these long-term chal-

lenges. With respect to the service offering, strategiesmust be closely tied to the creation of value. Thevalue proposition of the e-marketplace is based onimproving market and supply chain efficiencies andcreating new value. The best way for e-marketplacesto do this is by building liquidity. Increasing liquiditymakes it possible to rely on more dynamic commercemodels offering e-marketplace participants increas-ingly greater market efficiency. Increasing liquidityalso makes it possible to improve supply chainefficiency. For example, as liquidity increases andmore buyers and sellers join the e-marketplace itallows for participants always to be able to hook upto best-practice suppliers. This makes collaboratingon the e-marketplace more dynamic and moreefficient. Lastly, liquidity is also helpful for creatingnew value. The more liquidity an e-marketplace canattract the more it can take advantage of economiesof scale and scope in creating new value-added ser-vices. For example, liquidity of transaction infor-mation makes it possible for the e-marketplace to cre-ate new information based services such as productand inventory tracking services and data mining ser-vices.

The product scope is another parameter of the e-mar-ketplace service offering which management needsto think into their strategies. The ultimate goal of e-marketplaces is to evolve into one-stop shops wheree-marketplace participants can take care of all their

Liquidity translates

directly into bargaining

power


needs – with respect to commerce, content, and col-laboration. For e-marketplaces moving towards aone-stop shop is a natural move towards making themost of the relationship with the e-marketplace parti-cipants. e-Marketplaces should therefore try toexpand their product offering aggressively as soon asthey have built a stronghold within their particularfocus segment.

Making Use of Protection BarriersWith respect to defensive measures such as raisingentry barriers for competing e-marketplaces and rais-ing switching costs for e-marketplace participants inorder to protect first mover advantages, buildingliquidity is the ultimate defensive weapon. Obvi-ously high liquidity on an e-marketplace is a barrierto entry for other e-marketplaces, especially whenconsidering the network exter-nalities described above. How-ever, liquidity also helps raiseswitching costs for e-market-place participants. This is bestillustrated by looking at twoopposites. If a given companyonly uses the e-marketplaceoccasionally switching costs arelow, because both the e-marketplace’s share of mindand share of wallet are relatively low for this com-pany. However, if the company uses the e-market-place for almost all its transactions it becomes muchharder to switch – both out of fear of revenue lossand resistance to change. Systems integration withthe e-marketplace, contractual obligations, and equ-ity stakes also help increase switching costs. Finally,security and trust issues may be equally important.

The past two years or so a proliferation of e-market-places has been launched. Because only one or twowinners are likely to emerge in each distinct marketspace, consolidation is something that any e-market-place should make contingency plans for. A goodway to increase the chances for survival in the elimin-ation race is to build liquidity as fast as possible.Liquidity translates directly into bargaining power ina merger situation and into firepower in any battlefor market share.

Capturing Value

The second pillar of e-marketplace success is captur-ing value – in other words to make money by claim-ing a share of the value being created. The reason forthe importance of capturing value naturally is thatwithout the ability to capture a share of the value itcreates for its participants the e-marketplace will beunable to create a profit despite whatever liquidity itattracts. To use the analogy of a cake: liquidity deter-mines the size of the cake itself, while how muchvalue the e-marketplace captures determines how thecake is divided. The challenge is to maximise thecombination of cake size and cake share. Maximising


this is not a straightforward task, however, as bothpillars represent very complex problems. Further-more, a trade-off exists between building liquidityand capturing value, which further complicates thesituation. Claiming too large a share of the cake willprevent making the cake big, as potential participantsare not likely to join the e-marketplace if it keeps toomuch of the value it creates for itself. Deciding whereexactly to make this trade-off can be difficult. The e-marketplace that decides on giving priority to build-ing liquidity runs the risk of not being able to gener-ate a profit. On the other hand, the e-marketplace thatgives priority to capturing value runs the risk ofdelaying the penetration of its target market as wellas losing market share to competitors. In the competi-tive landscape that most e-marketplaces experiencetoday the preferred solution in most cases has been

to emphasise building liquidityover capturing value.Returning to the cake analogythis translates into doing every-thing possible to make the cakebig, while prioritising the cut-ting of a big slice comes second.However, it is important tokeep in mind that setting the

price too low can sometimes be irreversible and leadto a situation where it is impossible to make a profit(Marn, 2000). The recent development in many dot-com’s around the world has displayed this so as toleave no room for doubt.

In order for the e-marketplace to capture value it firstneeds to put together a value proposition that is com-pelling to its target customers – both buyers and sel-lers. Second, it needs to turn this value propositioninto a steady income. The key to doing this lies inunderstanding the advantages and limitations of thevarious revenue sources available and turn these rev-enue sources into a complete revenue model that asaccurately as possible reflects the value propositionas it is perceived by the various target customers.

Making the value proposition compellingAs mentioned above, e-marketplaces create value fortheir participants through (1) increased marketefficiency, (2) increased supply chain efficiency and(3) creation of new value. In order to make the valueproposition compelling to both buyers and sellers itis however necessary for e-marketplace managers tohave a detailed understanding of the benefits as buy-ers and sellers perceive them (Figure 4). With respectto the first source of value, increased marketefficiency, it can be argued that value is transferredrather than created. For example, the increased pricetransparency imposed by e-marketplaces throughreverse auctions and aggregation of supplier cata-logues will benefit the buyers while the margins ofsuppliers are reduced. On the other hand an auctioninitiated by a seller (e.g. of excess inventory) is likelyto derive a higher and more perfect price implying atransfer of value from the buyer to the seller. The fact


Figure 4 Key Elements of Value Proposition Towards Buyers and Sellers plus the Prospects of the e-Marketplaceto Capture Value. Sources: Andrew et al. (2000); Means and Schneider (2000); own analysis

that increased market efficiency often results in valuetransfer impacts the prospects for e-marketplaces tocapture value. That is, it will be much easier toimpose fees on the party that benefits from the mar-ket efficiencies that the e-marketplace creates than onthe party that does not benefit. This is important tokeep in mind when deciding on what functionalityto offer the e-marketplace participants. The e-market-place should make sure to verify that it does notsolely offer functionality that benefits only one partyas this might deter the other party from participating.

Whereas market efficiency often leads to value trans-fer the second source of value, supply chain efficiency,per definition leads to value creation as it impacts thee-marketplace participants’ processes leading directlyto cost savings. As such, supply chain efficiency rep-resents a very strong value proposition towards bothbuyers and sellers. For example, sellers who are oftensqueezed on margins due to the more efficient mar-ket created by the e-marketplaces can find compen-sation in lower marketing and sales costs. Further-more, by committing themselves to an e-marketplaceas their new channel both buyers and sellers have thechance to streamline internal processes and coordi-nate inter-organisational processes. Experiences fromgatetrade.net show that the potential for reductions


in these process costs is as much as 30–70 per centfor both buyers and sellers, and for most companiesthese savings in aggregate are large enough to sig-nificantly impact bottom line performance. Taken asa whole, supply chain efficiencies therefore representa very compelling value proposition to both buyersand sellers leaving room for the e-marketplace to cap-ture value (see Figure 4). In order to make sure thatbuyers and sellers exploit the full potential of thefunctionality offered it might be a good strategy forthe e-marketplace to offer advice (e.g. in the form ofconsulting services) on the optimal use of its services.Furthermore, offering consulting services onimplementation issues is an additional potential rev-enue source for the e-marketplace.

Finally the third source of value, new value creation,represents a huge potential for powerful value prop-ositions to e-marketplace participants as they perdefinition provide the participants with new valuethey cannot get anywhere else. For the same reasoninnovative services that create new value can be avery strong source of profit for the e-marketplaceitself as well as a powerful differentiator. Further-more, if the e-marketplace can leverage its aggre-gation of transaction information into developing


new information-based services this can be a strongway to capture additional value.

Configuring the Revenue ModelAfter having put together a value proposition thatappeals to the target customers the e-marketplaceneeds to figure out how to charge its customers forthe value it provides. The most common ways for e-marketplaces to do this is through various types offees. In order to capture as much value as possiblethe e-marketplace needs to carefully evaluate thepro’s and con’s of each type of fee (see Figure 5) andthen put together and configure a revenue model thatallows it to capture value. While the revenue modelof an e-marketplace can be based solely on a singlefee type, it is most often preferable that the revenuemodel rests on a combination of fees. This ensuresthat the e-marketplace becomes less vulnerable tocompetition as well as allowing the e-marketplace totie its revenue model more accurately to the valuebeing created. Central to the configuration of the rev-enue model is the value that the e-marketplace cre-ates as perceived by the customer. This perceptionof value often differs significantly amongst differenttypes of customers. Knowing the customer thereforeis key to deciding upon an appropriate revenuemodel. It is preferable that the revenue model takesinto account the different customer types and wherepossible uses prices that are tailored to specific cus-tomer segments.

Figure 5 The Advantages and Limitations of Various Revenue Sources


A well-planned revenue model also needs to takeinto consideration any competitors the e-marketplacemight have – both in terms of other e-marketplacesand other substitute services. Both types of compe-tition can severely limit the interval available forprice setting.

Adding to the complexity of the task of developingan appropriate revenue model is the dynamic natureof the e-marketplace. This makes configuring the rev-enue model an ongoing task as the revenue model atall points in time should preferably reflect as accu-rately as possible the value being created by the e-marketplace as it is perceived by the various cus-tomer segments. Furthermore, the revenue modelshould continuously be adjusted to reflect thedynamic setup, the stage of the lifecycle and the spe-cific competitive situation of the e-marketplace.

Conclusion

The Temple Framework presented in this article pro-vides e-marketplace managers with a holistic mind-set useful for understanding, analysing, crafting, andcommunicating e-marketplace strategy. As such theTemple Framework provides a tool for e-marketplacemanagers that can be used to logically structure stra-tegic issues and look at them holistically regardless


of whether it is the overall strategy or a specific prob-lem that is addressed. The structure that the TempleFramework provides, helps e-marketplace managersto move faster from diffuse problem identificationinto constructive problem solving and to craft moreconsistent strategies. This is supported by the casestudy of gatetrade.net, where both senior managersand employees have greatly benefitted from the useof the Temple Framework.

However, what remains to be seen is whether or notthe ambitous strategy that gatetrade.net has craftedwill turn out to be feasible in practice. No matter howgood a strategy is crafted, e-marketplaces in generaland gatetrade.net in particular still has to overcomethe significant hurdle of changing people’s purchas-ing behaviours as well as influence the way compa-nies in a given market space conduct business witheach other. This is at best a slow process. For thisreason we foresee that only the e-marketplaces witha solid strategy, deep pockets, and near-endless pati-ence will be left standing when the e-marketplaceconsolidation crunch is over. Behind them their pathto success will be littered with also-rans that did notquite get it right.

Case Study – gatetrade.net: Pursuing a HorizontalStrategy in the Nordic Market

gatetrade.net is a public e-marketplace founded inOctober 2000 by a consortium of four large Danishcorporations: TDC, Post Danmark, Danske Bank, andMaersk Data on behalf of the A. P. Møller Group. Byjoining forces the intention was to provide gate-trade.net with both the funding and other com-petencies needed to become the leading horizontal e-marketplace in the Nordic region. Each of the fourcompanies initially invested EUR 3.4 million in equalshares of gatetrade.net, and the EUR 13.6 milliontotal made gatetrade.net by far the largest e-market-place initiative in Denmark.

The Initial Challenges:

gatetrade.net soon discovered that two issues inparticular were delaying the penetration of the targetmarket. The first was technical in nature. In order forcustomers to easily find what they are looking forwhen browsing gatetrade.net’s online catalogue it iscrucial that the catalogue is logically structured,items are accurately described so they can be easilycompared, and the catalogue is easily searchable.Putting together an electronic catalogue containingjust one type of product (e.g. books or officefurniture) can be time-consuming enough. However,due to its horizontal nature gatetrade.net was facedwith the task of putting together a catalogue thatcould accurately capture the information of suchdiverse products as office supplies, consulting ser-vices, and computer hardware. The second issue wasto change the purchasing behaviour of its target cus-tomers in order to bring their purchasing online. And


as has been the case in B2C e-commerce, gate-trade.net found that there was a lot of resistance topurchasing online. In early 2001 most companies inDenmark were simply still not ready for e-market-places. Furthermore, no company wanted to be theguinea pig.

Government as Volume Driver:

Under the management of its newly hired CEO,Steen Gede, a strategy for how to penetrate the Dan-ish market started to take shape. gatetrade.net couldnot count on its owners to be the first companies totake care of their purchasing needs using the gate-trade.net platform. The owners were simply notready for that yet. Instead another solution had to befound to the chicken and egg problem of getting sel-lers and buyers onboard gatetrade.net. For this rea-son gatetrade.net focused its sales effort on a few keybuyers and sellers in the Danish market, the mostimportant of which was the Danish State. By March21 2001 the focused sales effort paid off as gate-trade.net was awarded the contract for the DanishPublic Purchasing Portal (DPPP) by the Danish State,ensuring that public purchasing for potentially EUR27 billion over a five-year period is to go throughgatetrade.net. For gatetrade.net winning the DPPPcontract has been a major milestone. However, thereis still a long way to go before gatetrade.net canrealise the full potential of the contract. As SteenGede puts it: ‘Our customers purchase a process. Itis not an IT-system that they purchase. For this rea-son it is much more difficult [to get companies to usean e-marketplace] than to supply an IT-system... youhave to change people’s behaviour, which is whygetting an e-marketplace off the ground takes muchlonger than IT-companies and consultants say.’

Lessons Learned:

Looking back, it is clear to the management of gate-trade.net that they have been on a very steep learningcurve. When asked what were the major lessonslearned gatetrade.net CFO, Tage Benjaminsen pointsto three: (1) That an e-marketplace is not an IT-busi-ness but a service business and should therefore bemanaged as such, (2) that operational issues like cata-logue management are not to be underestimated, and(3) that a clearly defined and focused strategy that isshared by all employees is essential. Elaborating onlesson number three Tage Benjaminsen emphasisesthe value of a shared mindset in the form of the Tem-ple Framework. This ensures the consistency withthe overall strategy of decisions made at all levels ofthe organisation.. One obvious indication of gate-trade.net having got its strategy fairly right is thatgatetrade.net is still alive and kicking while the Dar-winian market mechanism of market consolidationhas taken its toll on most of its competitors in theNordic region.


The Road Ahead:

However, looking forward Steen Gede and TageBenjaminsen agree that there is still a lot of work tobe done before gatetrade.net is where they aim tobe. Changing people’s behaviours is at best a slowprocess. Despite the challenge ahead gatetrade.net isconfident that it will succeed. The advantages ofusing e-marketplaces are simply too great to ignore.In the long run companies that want to stay competi-tive in their respective market space simply cannotafford to pass on the procurement savings and otheradvantages that e-marketplaces offer.

Notes

1. A strong parallel to this can be found in the B2C marketspace, where Amazon.com has evolved from being afocused player into something approaching a B2C Wal-Mart of the Internet.

2. A dominant trend in the e-marketplace landscape is that e-mar-ketplaces start to link to each other, giving rise to marketplace-to-marketplace (M2M) integration. M2M commerce refers totransactions occurring between two or more e-marketplaces.

3. Network industries are those industries that exhibitinherent network externalities.

References

Andrew, J.P., Blackburn, A. and Sirkin, H.L. (2000) The B2BOpportunity - Creating Advantage through e-Marketplaces.The Boston Consulting Group Inc, Boston, MA.

PETER BRUUN, TEM, MARTIN JENSEN, Bos-Technical University of ton Consulting Group,Denmark, Building 421, DK- Amaliegade 15, 1256 Copen-2800 Kgs, Lyngby, Denmark. hagen K, Denmark. E-mail:E-mail: [email protected] [email protected]

Peter Bruun is Professor of Martin Jensen is a manage-Industrial Management at ment consultant at Bostonthe Centre for Technology, Consulting’s CopenhagenEconomics and Manage- office. His research interestsment (TEM). His research include e-business, corporateinterests centre on business strategy, organisational

and operations strategy, strategic management includ- theory and project management.ing e-business and global manufacturing management.

JAKOB SKOVGAARD,McKinsey and Co., VedStranden 14, 1061 Copen-hagen K, Denmark. E-mail:jakob—[email protected]

Jakob Skovgaard is a man-agement consultant withMcKinsey and Company.His research interestsinclude strategic manage-

ment, e-business and supply chain management.


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e-marketplaces:: crafting a winning strategy

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