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Thursday, August 14, 2008


Knowledge exchange with virtual customers

E-commerce is not only about reducing cost and automating transactions; it is also about using it as a channel to exchange better and larger amounts of knowledge with business partners.

If I were to say that competition in the packaging industry has been based all along primarily on knowledge, most of you will agree but only after some thought.

Some of the recent hype about “knowledge management” may give an impression that it is something new. In the packaging industry, we have been doing it all along without necessarily using a very formal name and process.

Even while selling a basic package, a successful salesperson typically talks less about the actual package and more about how it will protect the product, provide aesthetics and reduce cost. This salesperson will also probably bring along a technical professional who can help the customer’s manufacturing group implement all of the above.

This sales team has not only used knowledge to sell the product, it has actually sold knowledge and got paid for it (through stronger customer relationship).

Catalog approach
At the other end of the spectrum in the packaging industry are suppliers who sell using a catalog approach — standard products, service, price, terms of contract and limited or no knowledge to share. With the recent trend to provide e-commerce capabilities, packaging companies need to be extremely careful in not becoming catalog type suppliers. This is especially true when products are sold through an e-marketplace.

Participation in an e-marketplace is almost a must for most companies, but it may also result in erosion of product value and eventually commoditization, which is a serious problem if your products are not inherently commodities. Thus, suppliers of value-added packaging materials have to make sure that the bond with their customers that has been built on sharing of knowledge does not weaken as more business is conducted electronically.

Sharing the knowledge
Suppliers of value-added packaging materials typically dedicate considerable resources to working together with their customers designing customized packages. In fact, most companies end up offering these services for free as a means to strengthen customer relationships and boost sales. Apart from helping customers design better packages and, of course, allowing them to use their materials, this relationship also works as a means of sharing knowledge since suppliers pick up intelligence from the marketplace, get exposed to competitive technologies and better understand unmet and emerging needs.

E-commerce presents opportunities for reducing cost of selling and reaching a wider pool of customers. The downside is that companies are so focused on selling that their sites are turning into electronic catalogs. The e-marketplaces are even worse since their value proposition is based on product standardization and thus encouraging price-based competition.

E-commerce is not only about reducing cost and automating transactions; it is also about using it as a channel to exchange better and larger amounts of knowledge with business partners. As companies employ the latest tools for knowledge management within the enterprise, the program has to be designed to include business partners in the loop as well so that this knowledge can be shared with them and used to strengthen virtual bonds.

Recommendations for an e-commerce strategy
An e-marketplace would work fine for those products that are manufactured by more than one supplier and have attained some degree of standardization in the industry. Fortunately, in the packaging industry, there are not too many of them. Customers continue to demand high degree of customization even if it is in printing of the package. Thus, companies have to segment their customers into essentially two groups.

The first group comprises those customers that seek standardized products with minimal technical support. Suppliers should steer these customers to an e-marketplace if they participate in one, or the supplier should have its own e-commerce site for them.

The second group of customers demands customized designs, technical support and even a dedicated team to assist them. Suppliers have to take special care of these customers because these will not only be the supplier’s most profitable customers, but they are more likely to reward the supplier with additional business as they simplify their supply chain and start treating the supplier as a provider of turnkey packaging solutions. The supplier will need to build a private network for them that will provide a virtual space for collaboration on product and service development and gather intelligence on markets, products and technologies not only about the supplier itself but also the whole industry.

The basis of competition in the future will be predominantly knowledge, and as packaging suppliers’ customers increasingly use it as a competitive weapon, suppliers need to do the same.

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Transforming your organization in times of rapid change

If you’re a packaging company frustrated with trying to “get your arms around” e-business solutions, you’re not alone. There are, however, some simple strategies that both packaging companies and e-business solutions providers can implement to successfully engage in business online.

As e-business solutions continue to emerge, the pace at which packaging companies are embracing them has been slow. These companies have been frustrated with not being able to identify the right solution for their needs.

My discussions with executives of both e-business solutions providers and packaging companies lead me to believe that some dedicated work needs to be done by both parties before they can better appreciate and complement each other.

A large proportion of packaging companies is seriously committed to exploiting online opportunities. By now, the benefits and strategic considerations are apparent to almost all decision-makers. However, actually making this transition is not easy, especially when these companies do not have the liberty of suspending their operations and dedicating themselves exclusively to making the transformation to online business.

The dilemma
Packaging executives still must meet their regular business goals and, eventually, the expectations of their investors. (It is not hard to imagine the scenario in boardrooms as evidenced by Arthur M. Stupay’s article). The situation is further complicated by the fact that by the time you get your arms around one solution, half a dozen competitors are already talking about a new, better solution.

Providers of e-business solutions, meanwhile, have to recognize that the packaging industry has traditionally been very customer-centric. Most customers rely on their packaging supplier for quality products and entrust them with proprietary information. Packaging companies reciprocate by serving these customers extremely well. Such intimate customer relationships and a relatively stable scenario make it even unnecessary in many cases to actively seek new customers.

Additionally, the pressure to reduce costs is also relatively less due to high costs of switching packaging suppliers. Understandably, these are hard issues to grasp for dot-com companies, who typically start with a clean sheet of paper, have employees that are generally more receptive to change and are under tremendous pressure to increase their revenue in a short span of time.

What should packaging companies do?
The four major issues that I see packaging companies facing are:

• Which functions or set of customers should we shift online?
• Which will deliver the most value to our customers and investors?
• How do we prioritize so that we do not exhaust our resources?
• How fast should we move to keep up with technology but not spend exorbitant amounts of money?

These issues are not easy to address because they have to be balanced with corporate financial goals and limited availability of resources. Here are some guidelines to consider:

1) No business succeeds without best-in-class operations. Building the coolest e-business infrastructure is not going to be effective unless it is backed up by solid operations.

2) E-business has to be seamlessly integrated into the overall scheme. Without a proper integration of these processes into the hardware of a corporation, it will only result in more e-chaos, as some of the early adapters saw.

3) If you do not understand e-business fully, do not try to do it yourself. It is new, complex, and changes faster than anything that we are used to in the packaging industry. In the existing setup of most companies, it is hard to develop the necessary skills and speed. Therefore, I always emphasize that companies should seriously consider outsourcing this function and focusing their attention instead on managing change from a strategy standpoint.

What should e-business solutions providers do?
After looking at the solution providers to the packaging industry, it is clear that only a few of them have had an initial packaging-industry focus. A vast majority of them have served other industries and have not invested sufficient time into better understanding the unique needs of our industry.

While these companies may very well believe they have a solution for every problem of the packaging industry based on the success they may have had in other industries, individual packaging companies may not experience any of those problems for reasons cited above. I would accordingly encourage these providers to respect the dynamics of the packaging industry, better understand its priorities and offer a solution that addresses its problems.

The packaging industry has certain unique issues, and ours is not as homogeneous an industry as the term “packaging industry” may lead some to believe.

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How to differentiate your business?

I have received several emails recently pointing my attention to some extremely important things to consider before you digitize your business. The number one item that almost everyone has pointed out as absolutely critical in any business process, and even more so in e-business, is differentiation. The reason I’m dedicating this column to differentiation is the fact that the speed at which companies have had to or are implementing e-business programs has sometimes resulted in a difficult situation. Specifically, in some cases, putting an ‘e’ in business has become more important than paying attention to what we have always considered as the core element of doing business, i.e. differentiating yourself from your competitors.

In our industry, we have not prided ourselves on exploiting IT. We are still an industry obsessed with materials and engineering and have come up with some great solutions for our customers. Of course, some IT tools like design software or communication channels have helped us in doing our jobs faster and better, but these tools have not been the drivers of innovations. What that means is that as an industry, our IT resources are rather weak. We have changed only when we had to.

This impacts us in two ways. By not having strong, internal IT resources, we have been slow to embrace technological changes. Secondly, we are forced to rely on outside agencies to help us with some of these programs. While I am a strong advocate of outsourcing, effectively managing your IT provider is still your responsibility. A provider can only know so much about your business and, while this company may have only good intentions for your business, it may still end up providing you with a solution that is no different than what they sold to half a dozen of your competitors.

The solutions providers have another interest in selling you a standard product. If you do not know enough and also do not want to select a customized product, the only way that you can be served is by using an off-the-shelf product that requires minimum tweaking. The outcome is that, while your packaging products may be significantly superior to your competitors, your website is unable to convey that message.

Why is differentiation crucial even in e-business?
So far the pressure on us has been to develop an online platform to conduct business. However, very soon everyone will be there, and the issue will no longer be if you have an online channel, but how effective it is in highlighting the differences and advantages that you have over everyone else. If that is not clearly apparent, the dot com mantra that ‘your competitor is only few clicks away’ is actually true.

As I have indicated in my previous columns, with the elimination of business inefficiencies through better information management, commercial friction will largely disappear, further squeezing our margins. As a result, retaining customers will be predicated on how much value we can create for our customers and what differentiates us from our competitors. Thus, the basic rules related to differentiation from competitors still apply.

Suggested road map
While e-business may be a new channel, the principle of competitive advantage remains essentially the same. You still have to differentiate yourself from your competitors, no matter what. If not, your customers will simply select the supplier with the lowest price every time they have to make a selection.

While developing an online strategy, make sure that you have your strategy managers on the team. If you do not have good internal IT people who understand your business inside and out, get some help from industry experts who understand the packaging business as well as IT. Putting together a team with such diverse backgrounds will enable you to work more effectively with your e-business provider so that you will be able to develop an online presence that duplicates your offline strengths.

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Exploiting the Internet to generate revenue

I am often asked by packaging industry executives how they can exploit the Internet as a source of revenue generation because, when they present a case for integrating Internet in their business process, this is the first question that is asked of them. There is no simple answer to this question because it depends on such factors as type of business/products/customers that a company has, typical order size, degree of customization required, and nature of relationships with customers.

Since most companies in the packaging industry have not made e-commerce a significant part of their business activities yet, it is difficult to say what the potential savings can be and how much of their business can be moved online. There is still too little information available to us. However, there is some learning to be had from companies in other industries that have taken a more aggressive approach to making the Internet a tool to find new customers, improve customer relationships, and reduce the cost of transactions.

Some of the companies in other industries that have realized huge savings by exploiting the Internet in their core business are Cisco Systems, Oracle, General Electric, and Dana Corporation. Some of these companies actually do a lot more customization than we do in the packaging industry. Most of them also have long-term relationships with their customers and have to regularly worry about proprietary information. Thus, these companies have quite a few similarities with us.

Why not the packaging industry?
The key question that packaging industry executives should ask is, “If other industries like ours can take this approach, then what is stopping us from doing it?” My discussions so far lead me to believe that the delay in implementing these initiatives is being caused by both packaging industry executives and providers of IT solutions. For instance, one of the areas with potential for cost reduction is package design and taking it to manufacturing. With the number of teams and steps involved in the process, some of which may not be in the same physical location, the Internet provides a perfect opportunity to move these functions online so that different participants in the process can work remotely.

The problem is that packaging industry has a process in place for doing this today, and there is resistance to change it, as there is for any change. The problem gets compounded by the fact that there is no simple IT solution available today for us to do it. Until the day such solutions become as simple as entering your user ID and password to access the design system, companies will not be receptive to investing thousands of dollars in developing proprietary systems.

Why do some companies still think it is wise to make huge investments and develop proprietary systems? In my opinion, this has been prompted by three considerations: these companies recognize that inefficiencies in business processes can be minimized by use of new tools; secondly, they believe in using information technology as a competitive weapon; and finally, they want to keep pace with the changes in business environment.

While I have talked about these issues in my previous columns, let me reemphasize why proactively driving inefficiencies out of the business processes should be every executive’s priority. For centuries our economic system was built on making profits simply because somebody else could not find information fast enough – for instance, information on who the suppliers are, what prices are they willing to offer, does someone have excess inventory to unload, and how soon is it possible to get a large enough number of suppliers to compete for a piece of business to receive a lower price? The rate at which information flows today (and this is just the beginning) has made it so much easier to get these tasks done within a matter of hours at practically no cost.

Our goal of using the net should not be limited to revenue generation. It should actually encompass higher sales, lower costs, and better relationships (which eventually translate into higher sales and lower costs).

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Packaging converters business model

The majority of packaging converters do not appear to be prepared to make the transition to e-commerce. This jump will require a reengineering of business processes.

I tend to look at the packaging industry as a combination of three value blocks. We start with the raw material manufacturers, then we have the packaging companies or converters (who convert raw materials into cans, bottles, bags, etc.), and finally there are the end-users. There are others in the value chain such as distributors, designers, equipment manufacturers and packagers, but their role is not strategic to the value chain and can be safely grouped elsewhere for the purpose of this discussion.

In looking at some of the recent developments, I have concluded that the strategic control of the value chain has shifted to the converters. They seem to be capturing the highest value in the chain. The raw material manufacturers typically serve more than one industry, and packaging happens to be one of them. Accordingly, their business model is driven by volume rather than capturing higher value. The end-users treat packaging as a “necessary evil” and tend to focus on minimizing its cost (except for such cases as cosmetics packaging). That leaves the converters to capture the highest value.

This dynamics of the packaging industry value chain is also reflected in the manner each of the value blocks has embraced e-business models. The raw materials suppliers have been very active in integrating e-business models since the efficiencies on both buy and sell side are simply enormous. This is also reflected in the emergence of exchanges and consortia. The end-users, on the other hand, have been focusing primarily on the buy side in their e-business initiatives.

Penetration of e-business in packaging industry
An interesting finding from my recent research work is that, partly as a cost-cutting initiative and partly due to the pressure from their suppliers, converters are embracing e-commerce in purchasing raw materials since the savings are clearly visible. However, the converters have been relatively slow to integrate e-business in their core business process.

During the past two years, while the raw material suppliers and the end-users have invested millions of dollars in e-business tools, about 50% of the converters are yet to have even professional websites (ones that provide sufficient information that enables visitors to make a business decision). Moreover, I am not aware of many converters that have fully e-commerce-enabled websites, though I understand that approximately 10% of them do provide varying degrees of ordering capabilities from their websites. This leads me to believe that due to their complacency — which arises probably out of wanting to capture the highest value in the chain — the converters are relatively slow in exploiting the newly available tools.

On the other hand, my discussions with executives at end-users lead me to believe that they are starting to require their suppliers to enable their information technology (IT) infrastructure to be compatible with their systems to ensure machine-to-machine connectivity and to make almost all functions of their relationship accessible by electronic means. The end-users are driving this as part of their buy-side logistics initiatives. This means that very soon the converters will have to upgrade their IT systems to conduct business with their major customers.

It is clear that a vast majority of converters are unprepared at this time to make that transition. While the technology part can be easily outsourced to an IT firm, the bigger challenge is going to come from reengineering of business processes. Take, for instance, customer needs assessment. When selling is done in person, there is a whole lot going on other than selling. You come to know about your customer’s concerns, future plans and unmet needs. E-business systems, including customer relationship management (CRM) programs, provide excellent data on customer behavior, but you still have to use other means to uncover hidden needs and better understand future plans.

Suggestions for packaging companies
If you are carefully observing the market trends, you must have noticed how customer relationships are changing. While a packaging supplier’s priorities still have to be centered around making it easier and less expensive for its customers to do business with them, the company will need to uncover its customer’s “hidden needs” so that it can fulfill those needs before its competition does.

Since selling will be executed through electronic means, a supplier has to retrain its sales force to become “customer relationship representatives,” whose sole responsibility will be to prepare their company’s business for the future needs of its customers.

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Empowering customers in the packaging industry

Let me talk about a typical end-user of packaging materials — a food company, we’ll call it Company X, that uses bottles, cans and films for packaging its range of products.

Company X purchases packaging materials from several manufacturers and distributors. It employs an army of purchasing agents to accomplish this mammoth task, and this is not always seamless. Some of the jobs that the purchasing folks perform are requisitioning, research, qualification, receiving quotes, writing purchase orders, tracking supplier performance, certifying, negotiating and even fire-fighting (when goods do not show up as promised).

Good news, bad news
Well, here is some good news and some bad news. The good news is that a lot of these painful tasks can now be automated, transferred to other agencies, outsourced to the suppliers or eliminated altogether. The bad news is that our friends in the purchasing department would need to learn new skills. The Internet has empowered the department of purchasing at Company X to the point that not only can it eliminate some of the aforementioned inefficient business processes, but it can also start integrating its supply chains.

The fragmented base of the packaging materials suppliers has created these inefficiencies in the value chain that can potentially be eliminated. Despite the critical role of packaging in shipping and presentation to the customers, end-users still treat it as an item on which value is captured by its supplier and not by them. While this perception may not be so widely prevalent among the medical and pharmaceutical companies, such thinking is very typical among other users of packaging materials since they operate on extremely tight limits for their packaging costs.

From our research at Kline & Company, economics is forcing Company X and its peers to manufacture the absolute minimum number of core products and outsource everything else. This is making their supply chains not only extremely complex but also a key driver of profitability, especially for such companies as X, which use a wide variety of packaging materials.

Suggestions for sellers
For sellers of packaging materials, especially undifferentiated products, the emerging e-procurement systems present new challenges. The need for your products is not going away, but you will have to become smarter about doing business. You will have to keep pace with your customers and also stay ahead of your competitors in incorporating these new processes in your business model. Here are a few suggestions:

Suggestions for buyers
If you are a buyer of packaging materials, your traditional responsibility to procure materials in a cost-effective manner is about to disappear. Your role is about to change dramatically and here are suggestions to prepare yourself:

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Online business rules

While talking to industry executives during recent weeks, I have been shocked by the radical change in attitude insofar as the digitization of their business is concerned. Only a couple of months ago, I would hear complaints about how they were experiencing threats to their core business from online competitors and executives wanted to formulate strategies to protect their business. Now what I hear is “I told you so” attitude. While some of the remarks that industry executives make these days are arrogant, there are others who have just settled down in their comfort zone by rationalizing their fears – The Internet is only a fad, it is already starting to show signs of failure, and the threats to my business are over.

Nothing could be farther from the truth. As Michael Dell puts it, if bad business models are implemented online, they do not become good businesses; they just become bad online businesses. Like all other bad businesses, these too will go out of business, eventually.

For the packaging industry, the fundamental issues are not if some dot-com companies are going out of business these days or if some online companies are struggling to conduct sufficient number of transactions to remain profitable. The foremost considerations are still related to the basics of doing business – whether a new business process is going to enable a company get more business, serve customers better, and reduce the cost of doing business. While there are several classic examples of how companies are successfully exploiting the web, my favorite company is General Electric. It has taken an ambitious, but simple, approach – do everything over the Internet if it can be done more cost effectively. Now is that too complex for anyone to understand?

Advantages of the Web
In a survey by Cyber Dialogue regarding the advantages of being present on the World Wide Web, more than 40% of the companies responded that they were able to improve customer service, expand business territory, and keep up with the competition. More than 30% of the companies increased sales leads and lowered marketing costs at the same time. More than 20% of the companies reported that they increased both online and offline sales. In another survey conducted by Verizon/ and Gallup has found that 55% of the websites have either broken even or paid for itself in increased business.

That is why I keep emphasizing to my friends in the industry that we have consistently seen pricing pressures only increase over the years and life is not going to get any better than this. In fact my discussions with industry participants lead me to believe that we will only see these pressures become more intense as the global economy slows down and international trade becomes easier.

What can you do now?
So while you can watch some of the excitement in the dot-com world as it unfolds, here are few things to do to in the meantime. By the way, this is also a good time to execute some of these projects as the providers are experiencing slower growth and you can hire some of the best firms at much lower prices:

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Internet commerce for a packaging company

A recent study reveals that the packaging industry need not be discouraged by misleading indicators that predict the doom of the “new economy” but instead should continue to focus on being prepared for the long term.

When I speak to packaging industry executives at companies of all sizes these days, I am surprised by the degree of confusion that is widely prevalent. I can appreciate their anxiety — there are signs that the economy may be slowing down (though a recession appears unlikely), the competitive dynamics have completely changed and new business models are emerging (and failing, in some cases).

Since April, the stock market has further complicated the picture by sending several misleading messages to all of us. The media, which needs spicy stories all the time, has been delighted with the bloodbath on Wall Street. The same magazines and journals that were talking about nothing else but “dot com” companies and how they will change everything, are now similarly making a big deal about how it is all over.

No wonder, we just don’t know what road to take and what lies ahead. The risks appear to be so high that many of us in our professional roles are afraid of committing to anything for fear of being proven wrong within weeks.

Focus on long term
As a consultant, I try to be as objective as possible and help my clients take a longer-term and strategic perspective rather than be carried away by hype or discouraged by roadblocks. While everyone seems to be having fun at the expense of failed “dot com” companies or how stock prices of some have crashed, the reality is vastly different insofar as the strategic issues are concerned.

I have been regularly addressing in depth the fundamental issues underlying the new economy in my previous articles, but this time I want to share some eye-opening findings from a recently released study by The University of Texas’ Center for Research in Electronic Commerce. These findings should be able to convince all of us that we, in the packaging industry, need not be discouraged by misleading indicators and instead continue to focus on preparing ourselves for the long term.

Some of the findings from the fourth bi-annual Internet Indicators study that I think are relevant for us in the packaging industry are as follows:

What does it mean for us?
These findings clearly show that real and significant business improvements are possible if we can adapt the tools to meet our specific needs. For instance, those packaging companies that have embraced online tools for collaborating on package designs with their customers and colleagues are already seeing major improvements in productivity. Several executives have confirmed to me that merely having a website has helped their company increase the number of good leads, reduce the cost of marketing communications, and, above all, their potential customers can evaluate and consider their products right away without having to wait for catalogs to arrive in the mail.

We all know that companies with bad business models eventually die whether they have a “dot com” in their name or not. On the other hand, we should learn from the mistakes that these failed companies made and then develop a business model that is better suited to our business, fits our corporate philosophy and can be implemented at a speed that meets the needs of our customers.

What drives growth within an enterprise is innovation, that is, coming up with breakthrough ideas and implementing them before anyone else does. General Electric, which believes in reinventing itself every couple of years and completely changing its business models (to the point of destroying its own business models, developed and perfected by it over the years), should be our role model. While the future is as unpredictable as always, it still makes sense to learn from industry leaders.

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Large packaging suppliers should help small suppliers become e-businesses

The advantages of connectivity, e-commerce and exploiting other tools for more effectively purchasing products or reducing supply chain inefficiencies are clearer to small businesses than to larger ones. The reason is simple: small packaging suppliers, in many cases, compete with some of the largest companies but do not have the same bargaining power when it comes to purchasing raw materials or being able to force suppliers to expedite a delivery when absolutely necessary. If they can do anything to get that extra penny out of their costs, they are in a more competitive position.

The major problem facing small suppliers in our industry, however, is the lack of availability of suitable products that enable them to do that. As e-marketplaces are trying to build their businesses, their focus is on increasing the number of transactions. Since large companies typically conduct more business transactions, there is a greater tendency to design products for them and to pursue their participation more aggressively. To many in the packaging industry, this means that the game has not changed a whole lot. Wasn’t the Internet supposed to be the greatest equalizer?

Issues before small- and medium-sized suppliers
While discussing the unmet buy-side needs of this highly diverse and fragmented group of packaging companies, I came up with the following themes that were consistent across the industry:

An equally important, but not as critical in the industry yet, is enabling these suppliers to sell online and to streamline their back-end processes. Most estimates put the number of small businesses at this stage at just 10%. This does not appear to be a serious problem right away since customers in our industry continue to buy through traditional channels and the point at which they will no longer do business with a company that is not integrated into their system is about 12 to 18 months away. (This period can shrink somewhat as the slowdown in the economy puts increasingly higher pressure to cut costs.)

Recommended roadmap
The turmoil in the business world is not likely to subside any time soon as we see slower growth in the economy, higher competition from global suppliers and, consequently, pressure to reduce costs. Some of the tools available today already enable small businesses to take advantage of purchasing over the Internet (though I am told that only about a quarter of the companies use the Internet to procure even office supplies, airline tickets and other similar products that every company should be doing today). While it may be difficult to procure specialized raw materials for small-volume buyers right now, they can definitely start with other products. This will not only reduce cost but also make the company’s executives more web-savvy and hopefully speed up the implementation in other areas.

The second solution that I am proposing may appear to be less practical right away but I would like to generate an industry debate on this issue. The larger packaging companies are already making or are planning to make significant investments into their IT infrastructure to address the realities of business today. Since the new economy thrives on partnerships and alliances, the larger companies should allow smaller companies to take advantage of their bargaining power, IT infrastructure and memberships of e-marketplaces. This will be a win-win situation for everyone because once the IT infrastructure has been set up, the marginal cost of an additional transaction approaches zero.

I am convinced that we can still compete in a healthy environment while enabling everyone to grow.

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Ppotential for e-marketplaces in the packaging industry

Based on the packaging industry’s fragmented market structure, e-marketplaces make sense in niches. A high degree
of fragmentation creates new opportunities for both buyers and sellers when they can meet each other in an e-marketplace.

A question that I get asked very often relates to the potential for e-marketplaces in the packaging industry. This question has become even more relevant recently since several e-marketplaces are being developed in the packaging industry, though rather belatedly, and e-marketplaces are beginning to generate sizeable revenue in other industries.

In my opinion, the reasons for the slower emergence of e-marketplaces in the packaging industry are threefold. One, the packaging industry did not appear to be as suited for e-marketplaces as other industries that have a larger number of undifferentiated products. Secondly, the materials used in the packaging industry such as metals, polymers, paper, etc. were already being sold on other exchanges. Finally, the sponsors of earlier chemical
marketplaces had also assumed that packaging could simply be treated as a subset of the chemical industry.

Does a packaging e-marketplace make sense?
The packaging industry is not as homogeneous as some of the e-marketplaces would like it to be. For instance, while polymers can be manufactured by only large companies, small and medium sized companies can easily convert it into films, and even smaller companies can convert it into more usable forms. This is true for metals, glass, paper, wood, and all other materials that are used in the packaging industry. Thus, the packaging industry is a mix of
companies of all sizes, and such diversity and fragmentation is not always ideal for an e-marketplace. However, based on the market structure, e-marketplaces make sense in niches.

As I see it, the manner in which business will be conducted in the very near future will be largely dictated by the number of buyers and sellers or the degree of concentration. Of course, this will also determine the power buyers and sellers will have.

Small number of buyers and sellers: If this is a small group, there is no value added by moving to an e-marketplace
since the most effective method of doing business would still be through direct sales. In fact, the Internet only provides a better means of communication within the group.

Small number of sellers and large number of buyers: In this scenario, buyers should seriously consider pooling their resources to develop a consortium. This will not only enable them to reduce their cost of selling, the buyers are also likely to benefit through transparent competition.

Large number of sellers and small number of buyers: In this case, the aggregation model is more likely to serve the interests of both buyers and sellers. A large number of sellers pursuing a small number of buyers is inherently an inefficient selling process and aggregation can eliminate some of these inefficiencies.

Large number of buyers and sellers: This seems to be one of the most common scenarios in the packaging industry. Such a high degree of fragmentation creates new opportunities for both buyers and sellers when they can meet each other in an e-marketplace. This also enables both buyers and sellers to find each other easily and cost-effectively.

If and when should you join an e-marketplace?
At this time, it is becoming extremely hard to predict which business model is going to sustain in the long run. That is clear not only from the speed at which business models are being changed but also from the nervousness in the stock market.

E-marketplaces do provide a relatively cost-effective means of bringing buyers and sellers together, but they have to generate a large volume of trade to become profitable themselves. So far the only companies that have benefited from participating in an e-marketplace are buyers and sellers. This phenomenon partly explains why buyers and sellers are increasingly coming together to sponsor such marketplaces.

Since the initial results have shown positive results for both buyers and sellers, it is a good idea to seriously consider
participating in even more than one e-marketplace. But do not fire your sales or purchasing teams yet. You should continue to be proactive in embracing new business models but also have the speed to change gears if market dynamics changes.

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