Wisdom Without Waiting: The Power and Puffery of Portals
© John L. Mariotti 2000
It is hard to read a business publication these days without reading a story about yet another vertical purchasing portal. Auto companies, retailers, steel companies, chemical companies and many more are joining forces in the formation of digital, Internet-based marketplaces. The one certainty about these portals is that the best deals and lowest prices will start to become startlingly evident.
A secondary consequence is that the companies that use them wisely-suppliers and customers both---will realize substantial transaction savings. Transaction costs for purchase orders have long been believed to average $100 or more per order/shipment. If the participating companies use the full power of an Internet based system, including electronic funds transfer and elimination of accounts payable and accounts receivable transaction costs, then those saving could double or more.
Here is where the problem crops up. Pyramid marketing schemes have long existed because for a while, at the start, participants can actually double their money, repeatedly. Sooner or later, they run out of participants and suckers-or just total population to involve. These portals aren't quite like pyramids, but some of the benefits may be just as illusory. The resultant "auctions" will generate intense competition and savings-but for how long?
The transaction costs for a purchase order, even if it is $200 (double the $100 average so often cited) are only a small percentage of the total value of the order. If these costs are eliminated entirely, savings of a few percent might be realized. Then come the ripple effects of making the best price and best deal evident to all. Suppliers who are currently charging higher prices will be squeezed badly-until they run out of room reduce prices to maintain volume. Then those suppliers who are not efficient, low cost producers will cut corners, cut quality, cut overhead, and finally, fail.
Only the strong will survive. Prices will find their level just like water does. The pyramid-like savings attributed to the portals will look great at first, as the inefficient and high priced suppliers are squeezed, and as the large suppliers & customers find price parity. The interesting part of this concept is that the purchasers taking advantage of the vertical portals will also be equalized-at least temporarily. Competitive advantages that once went to the largest or most astute buyers, will be gone-lost as the "widely-known best deal" is exposed on the portal.
The puffery about the billions of dollars of savings that will occur will be exposed over time. Some of the IPOs of these portals-the early ones--will soar, and then plateau, to be followed by the reality of a price based on what value they really contribute.
The fat, high profit or low efficiency industries will be shaken to their roots with the competitive pressures. The strong, efficient suppliers will find the pricing floor, below which they cannot go, and they will start to "take sides"-picking which purchaser they choose to serve for other than price/volume based reasons.
Whenever an industry group approaches its business with a lowest common denominator approach, the strongest competitors and most competent (well-managed) companies will revolt, either openly or quietly, and re-establish their superior positions. The new economy won't change this. It will simply accelerate the speed at which it happens, and amplify the severity with which it eliminates the weak and ineffective.
Where competition is rife and capacity plentiful, price driven auctions will continue and thrive. Where there is growth in a market segment, there will be greater potential for increases in sales and profits. Where there is stagnation and maturity, the fight for survival will be bitter and bloody. Where there is superior execution and cost/quality/speed advantages, the winners will emerge. Where there is slow, fat, or sloppy execution, the culling will be brutal.
Thus it has always been and thus it will be again--and that is the way it is in the real world.
