A study of the business model of a successful B-to-B market.

Author:Miyamoto, Takuya
Position::Report
 
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  1. INTRODUCTION

    B-to-B and B-to-C electronic markets play an important role in the modern business environment. However, most B-to-B websites founded in Japan in the late 1990s, such as O-net, have gradually disappeared from the market, with the notable exception of NC Network. In sharp contrast to the failure of most B-to-B websites, many B-to-C websites, such as Rakuten Inc., have enjoyed continued success throughout the years.

    Although B-to-B websites play an important role, they are only useful if they accommodate the unique institutions of the Japanese manufacturing industry. One such institution is the "Keiretsu," a closed type of B-to-B transaction enabled by a closed B-to-B system ("the Keiretsu system") based on a long-term contractual agreement between a parent company and the small and medium-sized enterprises (SMEs) that serve as its suppliers. Recently, however, companies that have relied on the Keiretsu system to conduct transactions have had to confront change in the market. As the Keiretsu system has become weaker in recent years, SMEs have become increasingly able to transact freely and openly with companies other than their Keiretsu parent companies. Taking advantage of this trend towards greater openness, B-to-B websites have emerged as tools promoting and enabling open transactions in the market.

    Lucking-Reily and Spulber (2001) found that although more than 1,600 B-to-B exchange markets had opened in the United States by 2001, most have since ceased operations. Evans (2009) attributed their failure to their inability to achieve three important objectives: (1) to provide value comparable to that provided by existing bilateral relationships or an existing offline consortium, (2) to develop an effective incentive system, and (3) to achieve the critical mass necessary to produce a network effect. As have most in the United States, most B-to-B exchange markets in Japan have ceased operations. One notable exception has been NC Network, currently the only successful B-to-B website in Japan. This paper examines the case of NC Network in order to identify the elements in its business model that have allowed it to succeed when other B-to-B websites have failed.

  2. REVIEW AND ANALYTICAL FRAMEWORK

  3. 1 Transaction Costs and Electronic Markets

    Back in 1987, Malone et al. predicted that reductions in transaction costs would lead to an increase in market activities, which would in turn initiate a transition from traditional commercial institutions to electronic markets. In accordance with this transition, electronic markets would take up the role of the Keiretsu system in the market owing to their ability to provide companies with greater opportunities to conduct transactions outside of the Keiretsu system. By this, electronic markets would allow companies to reap the benefits of engaging in an open market, one of which is the ability to identify other companies with which it could conduct transactions that would yield the greatest benefit to both parties; that is, identify companies with which they had a superior "fit."

    The primary benefit offered by the Keiretsu system has been its promotion of a trusting, long-term relationship between a parent company and its suppliers, that eliminated the need for the parent company to search for a new supplier, a type of transaction cost, whenever the company desired to engage in a new venture. However, the Keiretsu system simultaneously promoted collusion and complacency by preventing suppliers from transacting openly with companies with which they did not have existing relationships in order to identify companies with which they may have a superior fit.

    Despite this disadvantage, parent companies and suppliers were hesitant to work outside the Keiretsu system due to their desire to avoid paying transaction costs. Before the advent of the Internet, a transition to the open market inevitably entailed paying large transaction costs, as is theorized by traditional market economics. When the advent of the Internet inevitably brought about the radical change in economic conditions that undermined the Keiretsu system, many companies sought a new business model that would accommodate the existing institutions of the Japanese manufacturing industry. They soon found that electronic markets were particularly efficient in bringing companies together owing to the low search costs associated with conducting transactions in these markets (Wigand and Benjamin, 1995). Indeed, Lee and Clark (1996) predicted that the reduction in transaction costs resulting from the emergence of electronic markets would be so significant that it would lead Japanese manufacturing companies to form relationships with suppliers through accessing electronic markets rather than relying on the Keiretsu system.

    2.2 Institutions for Electronic Markets

    According to Macmillan (2002), markets can only facilitate transactions and provide benefits if they are based on the appropriate institutions and guided by adequate regulations. However, the business models of unsuccessful B-to-B websites were based on the same models as those of B-to-C websites despite the different nature of the services provided by these two types of websites (Evans, 2009). As a business model must accommodate an industry's unique institutions and customs (Aoki, 2001), the application of a B-to-C business model led to the failure of many B-to-B websites. More specifically, Boudreau and Hagiu (2009) asserted that the platforms of B-to-B websites must shape their business models and manage regulations in order to allow their registered users (in this case, companies) to interact effectively. Thus, the platforms of B-to-B websites must be based on institutions and a business model that allows registered companies to transact and interact within a business environment conducive to their needs and goals as 'ecosystem' (Gawer and Cusumano, 2002).

    At the same time, Putnam (1993) noted the importance of being aware of the inherent drawbacks of markets based on information technology. First, users can enter and exit cyberspaces, such as B-to-B websites, so easily that many do not develop reciprocal relationships that lead to exchange. Second, information seekers in cyberspace...

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