Lightfoot 78..84

The effect of the Internet in industrial channels: an industry example

William Lightfoot Peace College, Raleigh, North Carolina, USA James R. Harris Peace College, Raleigh, North Carolina, USA

Keywords

Business-to-business marketing, Industry, Management, Electronic commerce

Abstract

This paper critically examines the affect of the Internet on industrial sales channels. The technology and strategy of industrial exchanges is discussed. Recent critiques of B2B activities are reviewed within the context of the motion control industry. Conclusions are provided that should assist managers in this industry.

Industrial Management & Data Systems 103/2 [2003] 78-84 # MCB UP Limited [ISSN 0263-5577] [DOI 10.1108/02635570310463401]

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Introduction

participants in this industry are not yet ready to begin buying online to the degree many analysts have predicted. While it is true that the Internet does provide an infrastructure that can reduce cost and increase efficiency, the idea that companies that can leverage the Internet to add value to their role in the supply chain, strengthening their relationships, and creating new opportunities for growth can only be fully realized when circumstances differ from those present in the current motion control industry. What may be missing from the present exchange business models is the realization of a more fundamental need on the part of buyers and sellers to develop a trusting relationship that grows with each transaction, over a period of years. The purpose of this paper is to examine the progress of B2B exchanges in the motion control industry. The technological changes in this industry will be discussed next.

Business-to-business (B2B) exchanges, a Web enabled market space that brings together buyers and sellers (Scully and Woods, 1999) hold the promise of efficiently managing procurement activities within various distribution channels. Through a variety of applications, they can consolidate the power of the supply chain, enabling buyers to leverage their position to negotiate better prices and terms that are more favorable. For manufacturers, market exchanges hold the promise of extending their reach, delivering buyers to their virtual doorstep from around the world. During the initial phase of Web based market exchanges, much has been written about generalized business models of B2B exchanges (Lief, 1999). In the motion control marketplace, companies like Rockwell, Grainger, and Siemens have funded start ups aimed at different industrial market segments, with a goal of becoming the primary intermediary for companies looking to buy and sell motors, drives, and motion control globally. The promise that these exchanges generated within various sales channels initially caused concern among many of these firms' competitors and traditional channel participants. These firms' sales channels and competitors worry they will be eliminated from the supply chain, ultimately being forced out of business as customers realize the value of buying through these more efficient online exchanges (Gilert and Bacheldor, 2000). The reality is, however, that the B2B exchanges within the motion control industry have not been successful. The recent failures of well-funded market exchanges including Rockwell's SourceAlliance.com may indicate that

The market for motors, drives, and motion control is estimated at between $100 and $125 billion globally[1]. Further estimates indicate that over 5,000 manufacturers, and perhaps as many as 150,000 industrial sales channels are involved in manufacturing and supplying these devices. Manufacturers range from large, global corporations like Siemens, ABB, and Toshiba, to local manufacturers that focus on specific small markets. Likewise, sales channels include large multi-billion dollar competitors like Grainger, Graybar Electric and others, as well as smaller distributors with less than a dozen employees and sales often less than one million dollars per year[2]. As with many industries, motion control sales channels form the critical link between

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The motion control sales channel

William Lightfoot and James R. Harris The effect of the Internet in industrial channels: an industry example Industrial Management & Data Systems 103/2 [2003] 78-84

manufacturers and customers. They perform many functions that require a local presence and that can be done more efficiently and less expensively than by other avenues to consumers. Stern et al. (1996) highlight that sales channels' many functions include carrying inventory, generating demand for products and services, sales, distribution, financing transactions, and handling aftersales service. Traditional sales channel functions are: . gather and collect competitive information; . oversee transfer of title; . provide financing; . assume risks of channel work; . order placement; . break bulk and create assortment; . reach agreement on price and terms of transfer price; . provide successive storage and movement of products; . develop and disseminate persuasive communications. Corey (1991) specifies activities specifically for industrial sales channels: customizing products to meet specific customer needs, and creating markets for reconditioned or used equipment. These functions are necessary to a successful exchange, and therefore they are required regardless of who performs them. A manufacturer that eliminates a sales channel, or one link in the supply chain, will have to find an alternative approach in order to satisfy their end users' needs for those functions. There have been significant changes in the way industrial products are distributed and sold in the last 25 years. The use of information technology led to an increased level of complexity in the physical distribution of the products, and in many of the products themselves. Robotics and numerical controllers have replaced mechanical and electromechanical machinery, increased the throughout in production processes, and have become more integrated with the enterprises' information technology system (Evans and Wurster, 1999). Channel participants have had to change or risk becoming obsolete as both manufacturers and end users have pressured them to adapt to the changes in the manufacturing and supply chain processes, under the premise that there are cost savings ± and increased profitability ± in doing so (Merrifield and Epner, 1999).

Current status of B2B exchanges A wide range of entrepreneurs and traditional firms have established market

exchanges. Companies like Boeing, Lockheed Martin, Raytheon, and BAE Systems are building an online marketplace for the aerospace industry while Ford, General Motors, and DaimlerChrysler are creating an exchange for the auto industry. In the pulp and paper market, International Paper, Weyerhaeuser, and Georgia-Pacific have come together to create their own exchange. In the industrial market, ABB, Legrand, Nexans, Philips Lighting, Schneider Electric, and a division of Pirelli have created a portal for the electrical industry that may include an exchange aimed at the European marketplace (Frum, 2000). In the motion control marketplace, Rockwell founded SourceAlliance.com in late 1999 and Siemens started up Vertacross.net. ABB and Schneider Electric announced a European based initiative, and of course Grainger spawned numerous marketplaces and exchanges building on its superior distribution and logistics capabilities. Exchanges seem to hold the promise of reducing costs, while streamlining the transaction process by eliminating steps and intermediaries. As Wise and Morrison (2000) point out, the idea is that prices will be the determinant of which suppliers customers buy from, and that online exchanges have an advantage due to lower overheads, and broader selection of suppliers, and therefore sales people will no longer be required for many transactions Kaplan and Sawhney (2000) highlight four different types of exchanges, each with a unique role to play in linking up buyers and sellers: 1 MRO hubs. Exchanges that link buyers and sellers electronically for low value, high transaction cost items. These hubs work best for situations that require ongoing procurement agreements. They can also leverage logistics firms (like UPS or FEDEX) and may be the most likely types of exchanges to actually eliminate intermediaries like industrial wholesalers. 2 Yield managers. Exchanges that allow companies to add capacity rapidly to meet demand. These exchanges work best for industries that exhibit a great deal of price and demand volatility, or for markets with high cost assets that are hard to acquire or liquidate, rapidly. 3 Online exchanges. Exchanges designed to help move commodities, enabling purchasing agents to smooth out supply and demand curves for their operations. The exchange plays the role of intermediary by maintaining relationships with both buyers and

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sellers, helping to source products or make markets as need be to satisfy its customers. 4 Catalog hubs. Exchanges similar to MRO hubs, except that they tend to focus on specific industry segments. They are often comprised of suppliers and their sales channels as the channels are typically well positioned to deliver the goods and services on a local basis.

Internet can increase the speed and lower the cost of transactions but the true impact will be on changing the types of business models and creating new classes of intermediaries. The net effect of these new models will be to ``shift value from vendors to customers'' (Scully and Woods, 1999, p. 28).

Estimates suggest that 80-90 percent of all business goods and services are systematic purchases, which means that for an exchange to become a major intermediary, they will have to offer services that support such activity (Violino, 1999). Wholesalers, distributors, and other sales channels have traditionally handled these services.

Traditionally a business has to develop a close connection to the consumer to develop a profitable and long-term relationship. Faceto-face contact has been identified as the most valued type of contact in the businessto-business world as the parties involved are able to learn a great deal about each other that is often unavailable via phone, fax, mail, or Internet (Hunter and Tietyen, 1997). It is also typically the most expensive and, for firms looking to expand their business, the options come down to increasing the number of sales people, or leveraging technology and other resources (Hunter and Tietyen, 1997). One distinct advantage of personal sales calls is that the sales channel can find out who else is calling on the manufacturer. This can help the sales channel in developing a strategy for keeping the competition out of an account, or conversely, knowing who they are competing against so that they can sell their products and services against a specific competitor. Jackson (1985) argues that personal selling or relationship marketing is effective when customers have long-term time horizons and high switching costs, where the customer and the supplier invest a lot of time and money. Conversely relationship marketing may be inappropriate for commodity-like products or when the time horizons are short and switching costs are low. The differences in the perceived value of relationship marketing may be much more a function of customer than of the industry. In other words, within an industry some customers will prefer the value of low product cost versus high relationship (Anderson and Narus, 1991). Many manufacturing companies have delegated interaction with the consumer to their sales channels (Seybold, 1998). That relationship is an asset to the sales channel, it can be said that the sales channel ``owns'' the customer in exchange for the services they provide. As with any asset, sales channels protect this relationship from other channel participants (Gilert and Bacheldor, 2000). Heide (1994) points out that channel conflict is inevitable because channel members often have goal incompatibility and unclear roles and rights. To this end,

Impact of exchanges on wholesalers As noted in Business Week (2000), most revenue from exchanges comes from advertising and licenses, and many exchanges do not actually handle transactions ± they leave it up to the suppliers to assume responsibility for processing orders, and supporting the financial aspects of the exchange. It is argued that the primary goal of big-business sites is to automate the supply chain for all involved. Rothschild (2000) adds that buyers will ultimately measure the success of using an exchange based on improvements in price, service, and transaction costs. Exchanges are in essence sales channels. They may take title to products, like a wholesaler, or they may broker a deal like an agent or independent sales representative, but in the end they are intermediaries. Exchanges simplify transactions and they can bring together large numbers of buyers and sellers efficiently. The common features of B2B exchanges are: . centralized market space; . neutrality; . standardized contracts, documents and products; . pre-qualification and regulation of users; . dissemination of price quotes, post-trade information and pricing history; . maintenance of the integrity of the market; . self regulation of the market and pricing mechanism; . clearing, settlement and fulfillment services. Clearly, B2B exchanges pose a threat to traditional channel participants. The

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The role of relationship marketing

William Lightfoot and James R. Harris The effect of the Internet in industrial channels: an industry example Industrial Management & Data Systems 103/2 [2003] 78-84

traditional sales channels utilizing personal selling techniques have a clear advantage in the industrial markets area over exchanges.

The Internet and the motion control sales channel Despite the importance of relationship marketing to the motion control industrial channel, many new ventures focused on the advantages of their Web sites, software, and in some cases hardware. eBusiness sites abound in the motion control industry, as do anecdotes, and remnants of eBusiness efforts by small and large competitors alike, including the recent failure of SourceAlliance.com and the impending failure of Vertacross[3]. Small firms that put eCommerce capabilities on their sites have backed off ± AC Technologies began offering drives for sale in late 1999, but by January 2001 was no longer offering products for sale. Merrill Martin, Marketing Manager at AC Technology, indicated their primary interest was in generating leads for their distributors. Anacon Systems expressed early interest in converting MotorControl.com[4] into an eCommerce site that would sell AC drives and motors and then began offering their drives for sale through their own Web site. A recent redesign of Anacon Systems Web site toned down the sale of drives, by positioning them as samples with strong inducements for buyers to follow up with a distributor.

` ... Whether it is distributors, or firms like FedEx, UPS, or even the US Postal Service, it should be clear that the supply chain still needs firms that provide traditional fulfillment and support services... ' A large company in the motion control industry, ABB made one of the highest profile eBusiness initiatives when it launched Comp-AC.com in late 1998. ABB has long been a global leader of AC drives, but has largely served the industrial and commercial end user markets. Comp-AC was seen by others in the AC drive market as ABB's attempt to break into the small end user, and OEM markets. Both markets were deemed critical to ABB's efforts at increase sales of its small family of AC drive products. According to Mark Kenyon, Product Line Manager for ABB in New Berlin, Wisconsin in late 1999 Comp-AC.com had not lived up to its expectations, and that many channel partners (wholesalers and independent representatives) were unhappy with the initial positioning of

Comp-AC.com (personal communication, December 3, 1999). In 1999, PLCDirect ± formerly a small direct marketer of Koyo PLC's and peripheral devices and software, repositioned itself as an online marketer of automation products ± including motion control devices ± and changed the company's name to automationdirect.com. More recently, INA Holding Schaeffler KG, Rockwell Automation, The SKF Group and The Timken Company formed a new company jointly owned. This new company ± CoLinx, LLC ± will operate Ptplace.com, an eCommerce site that previously only offered Rockwell power transmission products. With its new partners, it will now expand its range of products and brand names, while also providing reach into the European marketplace. Whether it is distributors, or firms like FedEx, UPS, or even the US Postal Service, it should be clear that the supply chain still needs firms that provide traditional fulfillment and support services. For commodities that are often bought based on price and availability, logistics firms tied in with a B2B exchange may be the ultimate solution. For products that require a certain amount of technical expertise and support, intermediaries may add value to their roles by fulfilling multiple functions, including the establishment and maintenance of relationships that continue to serve as the cornerstone of successful businesses. Gatigon and Robertson (1997) point out that wholesalers who focus on total transaction cost, as opposed to product price, are the ones who really provide a valuable service to customers. They refer to the initial industrial market exchange and highlight that it does help users by offering one-stop shopping convenience, but it fails to provide on-site management services, like vendor managed inventory, or product selection assistance ± a critical aspect for more sophisticated purchases such as factory automation and motion control equipment. Seybold conceptualizes it in the following manner: To be sure, not all middlemen will survive in the era of electronic commerce. Brokers, agents, and middlemen who assume that customers will continue to work through them to gain access to product information, pricing and basic service are doomed. However, those who recognize customers' increased desire to help themselves and who focus on making it as easy as possible for the customer to transact business will prosper. Their ongoing challenge will be to ensure they continue to offer services that the customer really values and can't do on his own (Seybold, 1998, p. 37).

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The current state of B2B exchanges Recent reports indicate that B2B commerce is not increasing as fast as many consultants estimated a year or two ago. Evers (2001) points out that none of the 600 B2B exchanges studied had yet achieved level 1 percent of the sales volume within any if industry. Another study by Edifecs (2000) indicated, ``regardless of a company's size, experience with B2B eCommerce, or trading-partner base, equally little progress has been made in moving beyond even a small subset of possible functions in the B2B arena.'' And if eBusiness was taking off at the rate suggested by the analysts, it would be rational to assume the number of wholesalers that would be declaring bankruptcy would be on the rise as buyers sought more efficient, lower cost solutions which squeezed profits, and eliminated inefficient firms. However, this does not appear to be the case. A review of the National Association of Wholesale Distributors Web site, statistics from the US Government, does not show any indication of a significant decline in the number of wholesale locations, or sales volume (see http://www.naw.org and http:// www.firstgov.gov). Fein et al. (1999) point out that wholesale trade was actually increasing at a rate 1.4 times the rate of GDP growth at the time of his paper. Clearly, these observations suggest that the decline of B2B exchanges in the motion control industry reflect a problem that is not related to market demand. The reasons for the lack of predicted success are many. Porter (2001) suggests that using the Internet as the primary driver for corporate strategy is misguided. The issue is not whether to deploy Internet technology but how to deploy. In addition, Internet technology changes the attractiveness of the structure of the industry. Examples specific to B2B exchanges are shown below: 1 Barriers to entry. Internet reduces barriers such as the need for a sales force, access to channels and physical assets. 2 Buyer power: . eliminates powerful channels or improves bargaining power of traditional channels; . shifts bargaining power to end users; . reduces switching costs. 3 Competitive rivalry: . migrates competition to price; . widens geographic market. 4 Supplier power: . Internet provides channel for suppliers to reach end users;

Internet provides equal access to all companies. 5 Threat of substitutes. Internet approaches create new substitution threats. .

Porter argues that the net effect of Internet technology on most industries is negative. Butler (2001) supports Porter's observations of Internet technology by observing that the number of exchanges has probably peaked. Brady (2000) suggests that the failure of B2B exchanges can be traced to three important issues: 1 price not being of primary consideration for big business; 2 Internet security precautions; and 3 anti-trust concerns. The realization that long-term customer relationships can also be broken down by Internet technology is of concern for the future of B2B exchanges (Yamada, 2001). The available evidence demonstrates that the initial rush to develop B2B exchanges has created an environment that is difficult to manage and forced many organizations to rethink their strategies and opportunities. Despite these obstacles new business models are being developed that leverage the opportunities available on the Internet in a more constructive way. Fein et al. (1999) highlight that trends like vendor managed inventory (``VMI''), in which final end users allowed distributors to maintain inventory at the user's facility, serve to reinforce the role of wholesalers, making it less likely they will be eliminated. The types of purchases that wholesalers would be managing on site would are defined by Kaplan and Sawhney (2000) as ``systematic'' purchases. A procurement agreement was in place between the wholesaler and the user, and for many, some form of EDI could already be to which streamline the transaction and reduce costs. Johnson (2000) argues that customer relationship management (CRM) is critical and offers four alternative business models for Internet technology: 1 bargain finding engines or intermediaries that match buyers and sellers where customers are looking for the lowest price; 2 product configurators that offer products for customers' specific needs; 3 solutions providers that bundle a variety of different products to meet customer needs; and 4 intentions value networks or groups of companies that offer cross-industry solutions. The focus of any of these models shuld be gathering and sharing customer information.

William Lightfoot and James R. Harris The effect of the Internet in industrial channels: an industry example Industrial Management & Data Systems 103/2 [2003] 78-84

Summary and conclusions In the USA, as in many countries, the purpose of a commercial firm is to make a profit, and then to reward its stakeholders, either with continuing employment, benefits, or financial gain. Industrial firms like GM, Ford, and Daimler-Chrysler are global competitors, each seeking to make profits, and reward stakeholders. To infer that they will be able to come together to establish an exchange that satisfies all parties may be unrealistic. In a speech to a group of food industry executives in 1992, noted author and Professor, Gary Hamel, indicated that western companies have a poor track record of forming alliances and joint ventures[5]. He indicated that once the euphoria of ``the deal'' has worn off, the reality of how each company achieves profitability sinks in, and either both or one party typically ends up dissatisfied with the margins, and the deals fall apart after several years. End users who use the Internet as a source of information and procurement cannot help but judge manufacturers and channels based on their Web sites ± just as manufacturers and channels are judged based on their sales force. The key is to leverage the online presence into real value and profits; to develop an ongoing relationship with end users ± a task previously handled primarily through a sales channel (Gascoyne and Ozcubukcu, 1997). Online and traditional communities have very similar goals and elements. Both seek to develop ongoing relationships centered on customization of interface, and delivery of services that satisfy the specific needs of the end user. Both attempt to leverage all available resources, and then accumulate information into a central database that can be shared across all business functions. Traditional sales channels, however, add the human element into the complex mix of end user contact and value extraction. Hoover (2000) observes, ``Besides setting specific privacy policies, e-marketplaces also must make businesses feel comfortable about doing deals with strangers.'' He indicates that exchanges can increase the comfort level of users by setting up certification processes, offering insurance, and developing dispute resolution mechanisms. It used to be that wholesalers were the aggregator of information, products, and services for suppliers and customers alike. Today, they no longer serve as the sole aggregator of information, and in some cases (such as for the delivery of software, and technical documentation), the Internet is even more efficient in servicing customers.

Customers can download software that fixes bugs, upgrades machinery, or solves problems in minutes, versus having to call a wholesaler, and then wait for the rep to arrive. This suggests that traditional wholesalers will have to shift their focus to adding value in ways the Internet cannot replicate. Delivery of hard goods, and troubleshooting/servicing the products they sell are two areas that may be difficult for manufacturers to replicate using the Internet. B2B market exchanges have had an enormous affect on a wide range of companies. Their mere presence has served to cause traditional companies to spend millions of dollars developing their own eCommerce solutions. Wholesalers, entrepreneurs, trade associations and even publishers have all developed eCommerce enabled Web sites designed to help buyers and sellers connect. To date, there has been little direct affect in terms of lost sales and customers on the traditional firms. Perhaps the legacy of the recent rise and fall of many B2B market exchanges will be to shake up the traditional supply chains, causing them to put a greater focus on information technology and human resources, as powerful weapons that will help them increase their value to manufacturers and customers alike.

Notes

1 Per Motion Tech Trends, Inglewood, California. 2 US Census, Trade Associations (National Association of Wholesale Distributors, others) and Motion Tech Trends. 3 Per VP of Marketing ± Toshiba and Director of Business Development of Schneider Electric. 4 The author's Web site, a portal for the motor, drive and motion control industry. 5 Attended by the author in Amsterdam, June, 1992.

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