In July 2006 Chris Anderson published a book called The Long Tail which illustrated how new Internet business models from pioneers such as amazon.com, Netflix and Apple have enabled an entirely new economic model for the media and entertainment industry. Even if you have not read the book, you are probably familiar with the concept. Traditional mass market economics have led to product strategies focused on developing the few blockbuster “hits” that appeal to the mass market. Niche products with smaller target markets were generally not stocked in stores, played on radio stations or featured in movie theatres due to the lack of a profitable distribution model.
Source: The Long Tail – Chris Anderson 2006
Chris Anderson states that in the traditional brick and mortar retail model, selection was limited by the “tyranny of the lowest-common-denominator.” In other words, historically selection was driven by economics rather than actual end-user demand. For example:
· “Wal-Mart must sell at least 100,000 copies of a CD to cover its retail overhead and make a sufficient profit; less than 1 percent of CDs do that kind of volume.”
· “An average movie theatre will not show a film unless it can attract at least 1500 people over a two-week run, that’s essentially the rent for a screen.”
In The Long Tail Anderson proposes that entertainment industry is shifting away from the traditional mass-market model towards a broader market of niche-oriented, micro-segments. The change is made possible by the unlimited selection of books, movies and music available through Internet channels.
The Long Tail concept applied to B2B
I believe that a long tail effect also has developed in the B2B e-commerce community. During the early history of B2B in the 1980s and 1990s, EDI was the dominant standard. There were several variants of EDI utilized in different geographies, most notably ANSI X12 in North America and UN/EDIFACT in Europe and Asia. Adoption of B2B was concentrated primarily amongst the largest of companies. And data exchange was limited to the use of third party VANs (value added networks) whose applications only supported EDI. The relative immaturity of the technology and limited demand by the market combined to create economics discouraging the development of alternative standards. In many respects, the B2B e-commerce ecosystem suffered from “the tyranny of the lowest-common-denominator effect” throughout the first few decades of its existence.
In the late 1990s, the Internet began to enjoy widespread adoption. With the Internet, the economics and technology paradigms for B2B fundamentally changed. Documents could be exchanged using Internet protocols such as SMTP, FTP and HTTP liberating B2B from the traditional private networking models. XML was created offering unparalleled flexibility to model new transaction types and business processes. New groups of non-profit organizations (Dot Orgs) were formed with the goal of developing a successor to EDI. Together these Dot Orgs have introduced dozens of new XML-based standards designed to meet the specialized needs of industry subsectors. Examples of the new standards include PIDX in the Oil & Gas market, CIDX in the chemicals industry, SPEC2000 in the aerospace sector, RosettaNet in the high tech industry, GUSI in the consumer products sector and papiNet in the forestry market. The new XML standards offer a level industry specialization and technology flexibility not possible with traditional EDI. Despite the benefits offered, the new XML standards have failed to achieve critical mass. In many vertical industries XML has yet to grow beyond 10-20% total volume with the remaining B2B transactions still EDI-based. If you were to plot the various B2B e-commerce standards on a long tail diagram, the result would be the diagram below:
The short head is represented by the handful of dominant standards used globally across various industry sectors. EDI, with its two major variants ANSI X12 (North America) and EDIFACT (Europe and Asia), is certainly the most prevalent. The only other noteworthy standard I am aware of is the SWIFT FIN message format used widely in the international financial services sector. Open Office XML is quickly gaining adoption as Microsoft’s Office 2007 is deployed to more and more desktops. However, all of the other standards remain confined to niches used by only a subset of the targeted community.
The Business Significance of the Long Tail Phenomenon in B2B
Although many of the standards plotted on the long tail have yet to achieve a critical mass of adoption, these new e-commerce frameworks are enabling a new level of collaboration within business communities that was never before possible with traditional EDI. To illustrate the power of the long tail in B2B, it is helpful to review an example of a niche standards and its impact on business performance. Consider the case of Green Coffee XML. You may be surprised to learn that there is actually a specific e-commerce standard for growers and buyers of coffee beans. You may also be surprised to discover that the coffee beans used to produce your morning decaf are actually green, not brown, when harvested. Nevertheless, Green Coffee XML is a standard utilized by coffee growers, brokers and buyers to ensure uniformity of contracts, bills of lading and other commercial documents. There is a surprising degree of variability even within an individual product’s supply chain. For example, there are nine different types of sales contracts in use within the coffee sector along with five different units of measure commonly applied to weigh the beans. By developing an XML document set specifically designed for coffee imports and exports, the industry can achieve higher levels of efficiency for their specific business processes. The Green Coffee organization reports benefits such as lower Days Sales Outstanding, higher perfect order fill rates and lower total landed costs. In today’s economy with commodity prices rising rapidly, the financial benefits to be gained from optimizing a supply chain will be compelling to every CFO.
For Better or Worse?
Someone recently asked me - Is the long tail phenomenon in B2B making e-commerce better or worse? There is no question that the exponential rise in the number of standards over the past decade is making B2B more complicated than ever before. Considerable effort is required to migrate from traditional EDI to newer XML paradigms. Even greater challenges exist for companies in different industries (e.g. manufacturing and banking) to perform document exchange as different standards are used. So for many, the long tail is making B2B e-commerce more challenging, expensive and complex – in order words - worse. But for others, the long tail is unlocking the potential to collaborate with business partners electronically in ways never before possible. So what is the answer? I would say that for those willing to invest the effort to master the new e-commerce paradigms the long tail phenomenon is making B2B more effective than ever. Through the long tail standards, companies can gain operational efficiencies that provide a long term competitive differentiation in the marketplace…
Steve Keifer is the Vice President – Industry and Product Marketing for GXS and can be reached at email@example.com.