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The X-Economy: Driven By Demand
As Internet-based exchanges take over the traditional relationships in the value chain, a demand-driven X-economy is replacing the supply chain marketplace.
Posted Aug 9, 2000
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Just as it seemed we were starting to understand the new economy, another fundamental shift has begun. The great promise of disintermediation has crumbled, giving way to fundamentally new online marketplaces and communities of trade. These changes are so profound that we can begin to talk about the X-economy.

The X-economy provides an instant enterprise for the creation of goods and services. Nearly 1,000 Internet-based exchanges already automate the transactions required to build a value chain. These communities emphasize constantly shifting relationships among community members, not the rigid control that was a hallmark of the rigid supply chains of 20th century behemoths.

The new marketplace is more complex and sophisticated than anything traditional business institutions are prepared for. Exchanges are likely to force a change from traditional supply chains to a new era driven by demand chains.

In complex markets such as manufacturing, myriad transactions and mechanisms form value chains that are complex and deeply entrenched. For example, a seemingly endless cascade of suppliers goes into the production of an automobile. The path from innovation to the construction of any new model requires an enormous amount of time and effort to establish a value chain of partners, suppliers and distributors. As a result of these costs, the history of industrial evolution has been focused on the supply chain.

The X-economy, in contrast, is driven by the demand chain, where buyer behaviors, purchasing patterns and changing requirements instantly reshape the supply chain. Partnerships, trading communities, and even the notion of a free market must be supplanted with new models to describe the way tomorrow's demand-driven businesses will be run.

Late last year, General Motors alone predicted that more than $500 billion of purchasing would flow through its exchange in just a few years' time. (GM's own top line is less than $70 billion.) Then GM, Ford and DaimlerChrysler joined forces to create an exchange (tentatively called Newco) that already accounts for $250 billion in volume. Don't rule out the possibility of an IPO for this exchange. In that case, the market capitalization of the new exchange will eclipse that of three automakers' manufacturing operations. This possibility leads to a fascinating question: What business are the Big Three and many other traditional manufacturing concerns really in? I'll give you a hint: It's not manufacturing.

A New Model
Exchanges are being built by both existing businesses and new Internet-based players, such as Ariba, Bid.com, esteel, FreeMarkets, PurchasePro and Ventro. At the heart of each exchange is an anonymous marketplace that allows for the instantaneous creation of trading communities. It functions not unlike the reverse market concept, which is familiar to anyone who has used Priceline.com to make travel arrangements. You simply name your price and the online buying agent matches your offer with a willing seller.

Exchanges act as the "hub" of an anonymous global market, mediating the relationships between available buyers and sellers. Exchange platform players such as VerticalNet have developed a community-based approach to the reverse market that simplifies bidding for business goods, increases the market opportunity for suppliers and decreases costs for buyers. Others provide support services for the life cycle of an entire industry (such as Bid.com for the construction industry).

Hubs also maximize the opportunity for business partnering by establishing a venue for the dissemination of buyer information in near real time across the entire community of possible sellers. The power of buyers to demand what they want and be heard now defines supply chain partnerships.

Today, buyers take for granted the ability to find information on goods and services at the click of a mouse; sellers have to scramble to keep up. This shift has brought the exchanges to center stage. A multiplicity of interrelated business partners, rather than any one business, now interacts to suit the needs of the consumer. Coordination is essential to achieve competitive responsiveness. In a demand-driven market where customers configure their own products and services, the luxury of response time is eliminated. Exchanges create an asynchronous and immediately responsive market.

Exchanges establish the ground rules for being a buyer or a seller in these demand-driven value chains, mediating the countless variations in relationships that can develop. In this nearly frictionless market, exchanges become the defining construct for business in the new economy.

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