474 H.-C. Yu et al. / Technology in Society 24 (2002)

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1 Technology in Society 24 (2002) Setting up an e-marketplace: a three-stage approach H.-C. Yu, C.-S. Hsu, K.-H. Hsi Institute of Management of Technology, National Chiao-Tung University, 1001 Ta-Hsueh Road, Hinchu, Taiwan Abstract This paper studies the competitiveness and market positioning of different e-marketplace operators. The author proposes a three-stage business strategy to evolve an e-marketplace, with each stage offering more advanced services. The ideas are applied to setting up an e- marketplace for the Taiwan refrigeration/air conditioning industry implemented by the Energy Research Laboratory of the Institute of Industrial Technology Research (ITRI) in Taiwan Elsevier Science Ltd. All rights reserved. Keywords: e-marketplace; e-commerce; B2B; Refrigeration; Air conditioning 1. Introduction Although Internet commerce has experienced some setbacks, its potential should not be underestimated. Possibly the drawbacks in the business models of many dot.com companies arise from the fact that there have been too many B2C (businessto-consumer) websites competing to give out free services simply to increase their customer base or market share. This business model has failed to produce profits. The B2B (business-to-business) model, on the other hand, can bring efficiency and reduce costs for both suppliers and clients. An e-marketplace can do that by establishing an electronic or on-line platform that provides support between buyers and sellers for all the steps of the entire order fulfillment process. Strader [1] demonstrated that e-markets enjoy transaction cost advantages over traditional markets from both the buyers and sellers perspectives. Corresponding author. Tel.: , Ext 57508; fax: address: chengyu@cc,nctu.edu.tw (H.-C. Yu) X/02/$ - see front matter 2002 Elsevier Science Ltd. All rights reserved. PII: S X(02)

2 474 H.-C. Yu et al. / Technology in Society 24 (2002) This study explores the key e-marketplace success factors, which are largely determined by the willingness on the part of suppliers and buyers to participate in a certain market. The strength and competitiveness of an e-marketplace operator depends on its market position and its relationships with major suppliers and buyers in that market. Service-offering strategies for the evolution of an e-marketplace are also analyzed. This paper has five sections: Section 2 reviews the literature on the operation of e-marketplaces. Section 3 describes the competitiveness of e-marketplaces that are operated by different enterprises with differing market positions. Section 4 proposes business strategies and service offerings in three developmental stages for the evolution of an e-marketplace. Section 5 describes the application of the ideas discussed in Sections 3 and 4 by the Energy Research Laboratory of ITRI for its operation of an e-marketplace for Taiwan s refrigeration/air-conditioning industry. Section 6 discusses conclusions and offers recommendations. 2. Literature review To understand the characteristics or to master the success factors of an e-marketplace, one must first categorize the different types of e-marketplace. Bakos [2] refers to the firm that operates an e-marketplace as the intermediary, which may be a market participant (i.e., a buyer or seller), an independent third party, or a multifirm consortium. My study further differentiates the market participant into a friendly participant (complementary to other participants); a hostile participant (competing against other participants); a single-buyer participant (buy from multi-sellers), or a single-seller participant (sell to multi-buyers). Detailed descriptions of these participants are given in Section 3. Jutla [3] classified e-marketplaces into three categories: the e-broker (cybermediary) model (e.g., amazon.com), the manufacturer model (e.g., Dell), and the auction model (e.g., priceline.com). The e-broker is equivalent to the independent third party in my study, the auction model refers to the transaction method rather than differentiating the operator, and the manufacturer category does not distinguish a different market position or market strengths as I have distinguished them in Section 3. Jutla [4] also looked into the success factors of an e-marketplace: strategic factors, technical factors, and functional factors. Strategies include first-to-market, brand establishment, customer focus, targeted marketing, outsourcing, and development of a customer or user community. Technical issues encompass quality-of-service items such as response time, throughput, and reliability. Functional factors include facilitation of product customization, support for negotiation, and access to a similarinterest user community. In this paper, I propose establishing an e-marketplace in three stages, and I evolve service-offerings accordingly to meet some of the strategies and produce some of the functionalities described by Jutla. The technical performance objectives for an e-marketplace to satisfy all participants needs are not within the scope of this study.

3 H.-C. Yu et al. / Technology in Society 24 (2002) The competitiveness of e-marketplace operators B2B e-commerce can be defined as an enterprise conducting business with another enterprise over the Internet. If this is done on an individual basis, there is no marketplace involved. However, if many enterprises go to one website to do business with one another, then the website acts just like a marketplace. E-marketplaces may be classified into the following categories based on different characteristics of the operators: 3.1. E-marketplace of a single enterprise A very large enterprise that buys from many suppliers is in a good position to operate an e-marketplace on its own website. For example, General Motors buys a variety of products and components for a large amount of money from many suppliers. GM announces the products it wants to buy, the volume it needs, the specifications, and the delivery requirements on its website. Vendors throughout the world respond to the request for proposals by sending their responses to GM s website. Then GM can pick the most appropriate vendors through this on-line vendor selection mechanism. Both GM and the vendors benefit from this Internet e-marketplace because no paperwork is prepared, no express mail delivery is required, less manpower is needed to compare bids, and numerous other advantages. Decisions can be made in a relatively short time, and the GM purchasing department saves millions of dollars. A very large enterprise that sells to many customers is also in a good position to operate an e-marketplace on its own website. For example, China Steel is the top supplier of various steel products in Taiwan. China Steel can list all its products on its website and ask buyers to their purchase orders. China Steel can vary its prices instantly to reflect the latest supply and demand situation. China Steel can even ask buyers to bid for its products at times when demand exceeds supply. China Steel can also make adjustments to its production schedules based on knowledge of demand for its products. Since China Steel is the largest supplier of steel products in Taiwan, all of the downstream vendors have no choice but to cooperate with China Steel s e-marketplace selling mechanism E-marketplace operated by a third party outside the industry The previous section describes an e-marketplace operated by a large seller or buyer doing business with a large group of its business partners. This section describes a large group of vendors that need to do business with one another. Here the opportunity exits for a third party to operate a website e-marketplace that enables vendors to conduct business among themselves and allows their customers to do business with them. The incentives for vendors to join such an e-marketplace include: Most vendors do not have the technical expertise or capital to set up an e-com-

4 476 H.-C. Yu et al. / Technology in Society 24 (2002) merce transaction system, nor does sufficient business exist to justify their individual investment or to cover recurring maintenance expenses. An e-marketplace can generate a clustering effect by attracting more vendors and clients, which translates into higher visibility and more business for all participating vendors. The independent third party offers a useful service and poses no threat to the vendors. The following conditions must also be true if the third party is going to play the role of an e-marketplace operator: No vendor in the industry is big enough to form an e-marketplace. There are big vendors, but they are not interested in operating an e-marketplace. There are big vendors, and some of them are interested in operating an e-marketplace. Since the big vendors are competitors in the same market against the small vendors, the small vendors cannot trust that the big vendor s e-marketplace will treat them fairly. Therefore, an independent third party may be preferred to offer the e-marketplace service. The outside third party could be an Application Service Provider (ASP) that is experienced in developing front-desk and back-office e-commerce operations. Instead of helping individual companies set up e-commerce websites, the ASP could develop a custom e-marketplace for all vendors in an industry. The e-marketplace can be thought of like a shopping mall, which provides air conditioning, parking, security, etc., and in return expects shop owners to lease a space there. Similarly, an ASP could develop an e-commerce platform that includes an inquiry system, order system, transaction system, and payment system, with the expectation that vendors will set up e-shops in the e-marketplace. The mall owner collects monthly rent from shop owners. The mall may also charge a commission based on a percentage of each shop s revenues. An e-marketplace could institute a similar charging structure E-marketplace organized by several vendors in the same industry Several big vendors of similar size may sponsor an e-marketplace. Since none of them is in a dominant position, there is a balance of market strengths. They may realize that by joining efforts to form an e-marketplace, there will be lower operating costs and more profit for all of them E-marketplace operated by a competing vendor in the same industry A large vendor with brand name visibility and e-commerce capability on its website may want to expand its role and try to take the lead in becoming an e-marketplace. This large vendor may only invite other vendors to join this e-marketplace whose products/services are complementary to its own. The goal of this e-marketplace is

5 H.-C. Yu et al. / Technology in Society 24 (2002) to become a total-solution provider so customers can enjoy one-stop shopping. The strategy of such an e-marketplace is to increase competitiveness for vendors within this e-marketplace and compete against vendors outside of this e-marketplace. This big vendor s e-marketplace will compete directly with any other e-marketplaces in the same industry. Similar to competition in the bricks-and-mortar world, the size of the market ultimately determines how many e-marketplaces can co-exist E-marketplace operated by a complementary vendor in the same industry If the products or services provided by an institution are complementary to the products and services of other vendors, then this institution can set up an e-marketplace because it poses no threat to the other vendors. Some unique services, such as R&D, technical support, and consulting, are needed by other vendors. This institution may be a candidate that will attract the participation of vendors in this market. 4. Three stages of service in an e-marketplace To help accomplish its strategic objectives, the following services will be offered in three stages of e-marketplace development. Different competitive strengths, built at different stages of the e-marketplace, will win acceptance from a variety of suppliers/buyers in a target market Stage one The most challenging objective of an e-marketplace at its early stage is to increase awareness and win acceptance. The e-marketplace must provide value to equipment suppliers, service providers, and buyers. Suppliers must not feel threatened or become suspicious, so they will willingly support and participate in the e-marketplace. The following services would help position an e-marketplace in a role that is perceived to be supportive to all potential participants: Information content: The key contribution of a website is its ability to effectively distribute information of value to whomever needs it. The following public information could be made available on an e-marketplace website: product specifications, technical standards, government regulations, news releases, reference articles, updates of the latest technological improvements, activity announcements such as conferences, seminars, and new product releases. Some information content may be free of charge only to e-marketplace members, or usage charges may be levied based on the type and volume of information retrieved. Examples include: technical specifications and guidelines, standard operations procedures, design rules and methodologies, technical or marketing reports, design software, etc. Website hosting service: An e-marketplace could lease storage space to host vendors websites and presents their products and services. The operator of an e-

6 478 H.-C. Yu et al. / Technology in Society 24 (2002) marketplace could serve as an ASP to help design, implement, and maintain websites for vendors. The e-marketplace could also take advertising from vendors. Request for proposals: Designated areas for specific product categories in the e- marketplace would enable buyers to focus their requests for proposals. They would reach a large group of potential suppliers quickly, and suppliers become aware of more business opportunities. Search capability: There will be keyword search capability to locate information on the e-marketplace. Buyers can search for product information, suppliers can identify potential buyers, and all technical, regulatory, and market information can be located at users request. Directory service: The e-marketplace lists the names, addresses, areas of expertise, products and services, and other relevant information for all suppliers and providers in the market. Forums for user groups: Forums on a variety of subjects and special-interest user groups will be available, allowing people to raise questions or concerns and ask for advice. Those seeking partners for joint venture opportunities might also participate in these forums. Each user group will be a small community, and they will become the loyal buyers and suppliers in this e-marketplace [5] Stage two When most market suppliers participate in this e-marketplace, when most buyers are aware of the e-marketplace, and when they all utilize information from it, the e-marketplace is ready to evolve into the second stage. Now the e-marketplace can begin offering more value-added services, and it does not need to be as cautious as it was in Stage One about causing resentment from suppliers. The services that can be offered in the second stage are described below: Evaluation service: The e-marketplace operator needs to establish its image by assuring the quality of the products and services it offers. Even though the content on a vendor s website is its own responsibility, the e-marketplace can do like Consumer Reports: perform impartial testing, verification, evaluation, or provide ratings on the features and performances of vendor-provided equipment and services, as well as conduct client satisfaction surveys and make the responses available on the website for future reference by buyers. Price bargaining: The e-marketplace can promote its value to buyers by consolidating their purchases to gain more bargaining power. Products and materials commonly used by a large group of users can be purchased at a bulk-rate discount from the e-marketplace. It also provides an on-line mechanism for buyers of any product to consolidate their purchase orders and bargain for lower prices. Expand globally: The e-marketplace can expand its reach to foreign suppliers and industrial purchasers, thus taking full advantage of the worldwide connectivity of the Internet. However, language barriers will be an issue, so the e-marketplace must hire staff who speak other languages and can translate domestic buyers needs to foreign suppliers and translate foreign buyers request for proposals to

7 H.-C. Yu et al. / Technology in Society 24 (2002) domestic suppliers. This e-marketplace would certainly serve as a bridge to bring a domestic industry into the global market, while global suppliers also meet domestic buyers needs Stage three Most small vendors still may not have a company website or use the Internet to conduct business. In the third stage, the e-marketplace operator should expand its reach to these small and medium-size companies, bring them onboard, give them a presence in the e-marketplace, and distribute technical information and business opportunities to them. A large group of medium-size participants could bolster the value of an e-marketplace and strengthen its ability to deal with larger vendors. Generally, the internal operations of most small and medium vendors are computerized on a small scale, and they are not ready for on-line B2B transactions. This provides an e-marketplace operator with additional business opportunities for helping to set up the requisite internal e-commerce operating system for vendors. At the same time, the e-marketplace should develop a secure on-line electronic payment platform. 5. An e-marketplace for the Taiwan refrigeration/air conditioning industry The ideas discussed in Sections 3 and 4 were used by the Energy Research Laboratory of the Institute of Industrial Technology Research (ITRI) to establish an e- marketplace for Taiwan s refrigeration/air-conditioning industry. Products in the consumer market include air conditioners, dehumidifiers, air purifiers, and refrigerators. In the industrial market there are large freezers for the food industry, large coolers used in chemical processes by textile and petrochemical industries, dehumidifiers used in lithium battery plants, and clean room air conditioning systems used in semiconductor, pharmaceutical, and bio-tech industries as well as in hospital operating rooms. The equipment and processes used in high-tech industries always require stringent environmental conditions with precise control over temperature, humidity, and air purity. As traditional industries gradually adopt high-tech manufacturing processes, the demand for high-quality refrigeration and air conditioning will increase. Once Taiwan joins the World Trade Organization, fierce foreign competition in the refrigeration/air conditioning sector is inevitable. Hence, increasing efficiency and establishing distribution channels via the Internet to enhance the competitiveness of Taiwan s refrigeration/air conditioning industry is essential Suppliers of refrigeration/air conditioning products and services According to the 2000 Yearbook of Taiwan Refrigeration & Air-Conditioning Products/Services, total revenue in this industry is about US$3 billion [6], 60% of which belongs to the air conditioning sector, and 40% to the refrigeration sector. Revenues are expected to grow as the economy grows. Taiwan is the world s fifth

8 480 H.-C. Yu et al. / Technology in Society 24 (2002) largest production region for small-size air conditioners. The number of suppliers to this industry is summarized in Table 1. Refrigeration/air conditioning products are sold to residences, business offices, and commercial and industrial facilities. To determine proper product design, vendors have to analyze a variety of client needs. Because equipment from suppliers will have differing performance characteristics, users are often confused by the number of possible choices. Add to this confusion the government s stringent regulations, safety codes, and technical standards. Therefore, a refrigeration/air conditioning system often requires registered engineering companies to assist a customer with design and registered technicians to install. In Taiwan, there are millions of customers, thousands of engineers and technicians, and hundreds of equipment suppliers in the refrigeration/air conditioning market. The information flow among these parties is neither efficient nor effective, and consequently customers do not always identify the best solution to satisfy their needs; engineers may not have complete knowledge of the latest available technologies and equipment; in all likelihood, equipment suppliers do not know who needs their products. All of these parties can be brought together via one website and everyone would benefit from a more efficient information exchange Services provided by ITRI The Energy Research Laboratory at ITRI conducts technology research and provides technical support to equipment manufacturers, engineers and technicians in the refrigeration/air conditioning industry. ITRI maintains a large database of information on refrigeration and air conditioning, including product specifications, national standards, government regulations, design rules and methodologies, construction and installation procedures, and vendor lists. In order to better manage knowledge in this field, ITRI has set up a website to deliver its services via the Internet. Expanding the functions of such a website to include e-marketplace capabilities is a logical extension. Table 1 Suppliers in Taiwan s refrigeration/air conditioning industry a Category of suppliers Number of suppliers Licensed refrigeration/air-conditioning technicians 452 Licensed electrical technicians 265 Registered refrigeration/air-conditioning engineering companies 1064 Registered plumbing engineering companies 2454 Registered refrigeration/air-conditioning equipment suppliers 402 Registered freezer/refrigeration equipment suppliers 358 Registered ventilation equipment suppliers 441 a Source: 2000 Yearbook of Taiwan Refrigeration & Air Conditioning Product/Services.

9 H.-C. Yu et al. / Technology in Society 24 (2002) The rationale for ITRI offering e-marketplace services As mentioned previously, the Taiwan refrigeration/air conditioning industry has many equipment and service suppliers. Unfortunately, most are too small to benefit from web technologies, let alone conduct e-commerce via the Internet. In addition, there is no dominant equipment manufacturer in this market, and no e-marketplace exists that is focused on refrigeration/air conditioning products and services in Taiwan. Since ITRI is partially sponsored by government funding, one of its major charters is to promote Taiwan s refrigeration/air conditioning industry. This impartial thirdparty position should enable ITRI to win trust from local suppliers and buyers. Offering e-marketplace services will increase the efficiency of conducting business for all vendors, engineers, and clients in the industry. Information about the latest R&D developments, either by ITRI or from foreign sources, can be posted on the e-marketplace to improve knowledge about the quality of products and services provided by domestic refrigeration/air conditioning vendors. Establishing a focused e-marketplace will also help expand the global visibility of Taiwan s refrigeration/air conditioning equipment suppliers. By offering this level of value to domestic refrigeration/air conditioning suppliers and buyers, ITRI is in a good position to operate an e-marketplace for the industry. 6. Conclusions and recommendations Although e-commerce has encountered setbacks due to over-investment and overoptimistic expectations, nevertheless the efficiency and effectiveness of doing business via the Internet will undoubtedly continue and become more prominent. The refrigeration/air conditioning industry in Taiwan lags behind in this respect, and a leader is needed to organize an e-marketplace for the industry. The Energy Research Laboratory of ITRI is in a unique position to take on this role. This paper analyzed the competitiveness and strengths of e-marketplaces operated by organizations from various market positions, and it further proposed a three-stage business strategy and corresponding service offerings for the evolution of e-marketplaces. E-marketplaces in Western countries have focused on on-line transactions and integration with enterprises internal computer systems, such as Enterprise Resource Planning and Supply Chain Management. However, with little or no Internet activity among most vendors in Taiwan, any e-marketplace there should first begin by disseminating technical information and highlighting business opportunities that increase the efficiency of both suppliers and buyers. The electronic transaction functionality of the e-marketplace must come in the next phase after vendors internal operating systems have been upgraded. An e-marketplace can serve as a driver for encouraging businesses to make the transition into the new digital economy. Although it may take a few years to transform the industry structure or the business transaction operations, the payoffs for

10 482 H.-C. Yu et al. / Technology in Society 24 (2002) both the vendors and the e-marketplace will be enormous. Because the entry barrier for e-marketplace followers is high, the need for early investment and patience while bringing vendors into the e-marketplace, should ultimately prove to be worthwhile in the long run. Eventually, suppliers and buyers will revolutionize the way business can be conducted via the Internet. References [1] Strader T, Shaw M. Characteristics of electronic markets. Decision Support Systems 1997;21: [2] Bakos JY. A strategic analysis of electronic marketplaces. MIS Quarterly 1991;15(3). [3] Jutla D, Bodorik P, Hajnal C, Davis C. Making business sense of electronic commerce. IEEE Computer 1999;32(3): [4] Jutla D, Bodorik P, Wang Y. Developing Internet e-commerce benchmarks. Information Systems 1999;24(6): [5] Hagel J, Armstrong A. Net gain: expanding markets through virtual communities. New York: McKinsey & Company, [6] 2000 Yearbook of Taiwan refrigeration & air-conditioning products/services. ITRI: Chung Jyh Publishing Co., Ltd, Hsiao-Cheng Yu received his B.S. degree in electronic engineering from Chung-Yuan University, Taiwan, in 1972, and Ph.D. degree in Industrial & Systems Engineering from Georgia Institute of Technology, Atlanta, GA in He was a telecommunications consultant with Contel Information System in Great Neck NY from 1981 to He then joined AT&T Bell Labs as a system engineer from 1985 to He is a professor in the Institute of Management of Technology, Chiao-Tung University, Taiwan. His current research interests include telecommunications policies and e-business strategies. Kuo-Hua Hsi received his B.S. in Mechanic Engineering from the Academy of the Army in He received his M.S. degree in Information Management from National Defense University, Taiwan, in He is a colonel in the army and is currently a Ph.D student in the Institute of Technology Management, Chiao Tung University, Taiwan. His research interests include e-commerce, Internet, and technology management. Chi-Sheng Hsu is the Acting Director of the International Program Center of Industrial Technology Research Institute. He is currently a Ph.D student in the Institute of Technology Management, Chiao-Tung University, Taiwan. His research interests include e-commerce, and high-tech organization performance appraisal.