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CHAPTER 6 Electronic Commerce

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1 CHAPTER 6 Electronic Commerce

2 Learning Objectives Describe electronic commerce, its dimensions, benefits, limitations, and process. Describe the major applications of electronic commerce, both business-to-customer and business-to-business. Discuss the importance and activities of market research and customer service. Describe the electronic commerce infrastructure and EDI. Compare the various payment systems and describe the role of smart cards. Describe the relationship between EC, supply chain management, ERP, and EDI. Discuss legal and ethical issues related to e-commerce.

3 Intel Corporation Embracing the Web
The Problem slow, expensive, and frequently not up to date distribution and communication process The Solution established an e-business program using an extranet The Results enhances competitive advantage by giving Intel’s customers better tools for managing transactions brings substantial tangible savings

4 Toshiba’s Extranet Keeps Dealers on Time
The Problem dealers needed parts quickly The Solution created a Web-based ordering entry system using an extranet The Results reduces the cost per order reduces the networking cost of the Electronic Imaging Division (EID) increases customer satisfaction

5 Foundations of Electronic Commerce (EC)
In EC, business transactions take place via telecommunications networks, primarily the Internet Marketspace is an electronic market place E-business (or e-biz) refers to a broader definition of EC, not just buying and selling, but also servicing customers, collaborating with business partners, and conducting electronic transactions within an organization

6 A Framework for EC Management Infrastructure People: Buyers, Sellers,
Electronic Commerce Applications • Direct Marketing • Stocks, Jobs • On-line banking • Procurement and purchasing • Malls • Procurement • Auctions • Travel • On-line publishing • Customer Services • Intrabusiness Transactions People: Buyers, Sellers, Intermediaries, Services, IS People and Management Public Policy : Taxes, Legal, Privacy Issues, Regulations, and Technical Standards Marketing and Advertisement: Market Research, Promotions, and Web content Supply Chain: Logistics and Business Partners Infrastructure (1) Common business services infrastructure (security, smart cards/authentication electronic payments, directories/catalogs (2) Messaging and information distribution infrastructure (EDI, , Hyper Text Transfer Protocol, Chat Rooms) (3) Multimedia content and network publishing infrastructure (HTML, JAVA, World Wide Web, VRML) (4) Network infrastructure (Telecom, cable TV wireless, Internet) (VAN, WAN, LAN, Intranet, Extranet) Access (cell phones) (5) Interfacing (The databases, logistics, customers, and applications) Management

7 Electronic Markets The business center is not a physical building but a network-based location where business interactions occur The principal participants - transaction handlers, buyers, brokers, and sellers - not only are at different locations but seldom even know one another

8 Interorganizational Information System (IOS)
Drivers of Interorganizational Systems Reducing costs Improving the quality of information Compressing cycle time Eliminating paper Making the trading process easy for users Types of Interorganizational Systems Electronic data interchange (EDI) Electronic funds transfer (EFT) Extranets Integrated messaging Shared databases

9 Benefits of EC to Organizations
Decreasing information costs Reduced inventories Reduced cycle time Supports BPR Lowers telecommunication costs

10 Benefits of EC to Consumers
More choice Less expensive products Quick delivery 24-hour availability Quick access to information Customized product at competitive prices Virtual auctions Interact with other EC customers

11 Benefits of EC to Society
Lower air pollution Increase standard of living Enjoy products and services in third-world Facilitate delivery of public services

12 Limitations of EC Technical
Lack of security Insufficient telecommunication bandwidth Software tools still evolving Integration of internet and EC software Special Web servers Interoperability of software and hardware

13 Limitations of EC Nontechnical
Accessibility Legal issues Government regulations Difficult to measure benefits EC still evolving Customers resist change

14 Limitations Nontechnical
Insufficient support services Perception that EC is expensive and insecure EC has not obtained a critical mass of sellers and customers EC - breakdown of human relationships

15 The network organization:
Non-Company Manufacturers Customers Sales peoples and other mobile employees Distributors Market Non-Company Retailers Suppliers (Purchasing) Liquidateors contractors Toy Industry Extranet Other Extranets Banks and other business partners Professional Associations, large suppliers, competitors Corporate Extranet Head Quarter Retail Stores Employees Manufacturing Toys Inc Corporate Intranet Public Travel agency Small customers Small retailers Small vendors Government EDI, VAN Internet The network organization: How a company uses the Internet, and internet and extranet

16 Interactive One-to-One Marketing
“Treat Different Customers Differently” A firm must be able to change how its products are configured or its services is delivered, based on the needs of individual customers

17 The New Marketing Model
Relationship Building Customer receives marketing exposure Customer decides on marketing medium for response Customer makes purchase decision Detailed transaction/ behavior data collection New media chosen to best serve/reach customer “Four P’S” updated uniquely to customer Customer profiled based on behavior; custom segmentation developed Database Update

18 Electronic Retailing Electronic retailing is the direct sale (B2C) through electronic storefronts or in electronic malls, usually designed around an electronic catalog format Electronic storefronts maintain their own Internet name and a Web site and may or may not be associated with electronic malls.

19 Electronic Malls (Cybermalls)
Electronic mall is a collection of individual shops under one Internet address. Electronic mall provide a one-stop shopping place that offers many products and services. Representative cybermalls Downtown Anywhere ( America’s Choice Mall ( Shopping 2000 (

20 Advertising Online • Why Internet advertisement?
Ads can be updated any time with a minimal cost, so they can always be timely Ads can reach very large numbers of potential buyers all over the world Online ads are frequently cheaper Web ads can efficiently use text, audio, graphics, and animation The audience for Internet advertisement is growing Web ads can be interactive and targeted to specific interest groups and/or individuals Customers can move easily and quickly from viewing an ad to getting details and to ordering

21 Banner Advertisement Keyword banners Random banners
appear when a predetermined word is queried target Random banners appear randomly

22 Benefits ( ) and Shortcoming() of Internet Advertisement
24 hours a day, days a year Large market segmentation opportunity One-to-one direct marketing More attractive and compelling ads Low distribution costs Always up-to-day Ease of logical navigation No clear standard or language Immature measurement tools and metrics Apples-to-apples comparisons difficult for media buyers Difficult to measure size of market Small audience

23 Advertisement advertisement send advertisement material to potential buyers advertisement offers cost-effective implementation and a better and quicker response rate than other advertisement channels Marketers develop or purchase a list of addresses, place them in a database, and then send ads to them via

24 URL Advertisement URL - universal resource locator It is free
Any company can submit its URL to a search engine and be listed The targeted audience can be locked and uninterested viewers can be filtered The chance to be placed at the top of the list is low

25 Online Advertisement Issues
Customizing Ads Filtering the irrelevant information by providing customized ads can be beneficial to customers and advertisers alike Push technology - When a user establishes his/her system, the user selects the type of desired information. The user then gets the information he or she wants, but at the same time also gets banner ads.

26 Online Advertisement Issues
Difficulties in measuring the effectiveness of advertisements difficult to relate sales to the number of hits it is inadequate to use the gross number of visits as a possible measure of effectiveness no guarantee that a purchase will be made offline purchasing may be the results of online advertisement

27 Online Advertisement Issues
Attracting visitors to a site Online events and promotions Contests Quizzes Coupons Give-away samples

28 Intelligent Agents in EC and Retailing
To help users to conduct routine tasks To help users to search and retrieve information To help users to support decision marking To help users to act as consulting experts

29 Intelligent Agents for Information Search and Filtering
Product broker use collaborative filtering process use like-minded people to make recommendations alerts users to new product releases or recommends products based on past selections or requirements specified by the buyer

30 Electronic Catalogs Advertise and promote products and services, whereas customers use them as a source of information on products and services Consists of product database, directory, search capability, and a presentation function Dynamic, customized, and integrated with selling and buying procedures such as order taking and payment

31 Benefits() and Shortcoming () of Online Catalog
Easy to update Able to integrate with the purchasing process Good search and comparison capabilities Able to provide up-to-date information Provision for global range of information Possibility of adding voice and motion pictures Cost savings Easy to customize More comparative shopping Ease of connecting order processing, inventory processing, and payment processing to the system Large fixed cost Need for customer skill to deal with computers and browsers

32 Customized Catalogs Assembled specifically for a company, usually a customer of the catalog owner Tailored to individuals consumers in certain cases Two approaches to let the customers identify the interesting items out of the total catalogs to let the system automatically identify the characteristics of customers, based on their transaction records, and build a catalog accordingly

33 Disintermediation and Reintermediation
by using the Internet, manufacturers can sell directly to customers and provide customer support online the traditional intermediaries are eliminated Reintermediation traditional intermediaries like retailers and department stores have initiated online stores new electronic intermediaries - and product selection agents - are emerging

34 Impact of EC on Manufacturers’ Distribution Strategy
Manufacturer’s monopolistic Internet-based distribution Coexistence with the dealers Regionally mixed strategy Restraint of competition by powerful distributors

35 Cyberbanking Includes all major banking activities, from paying bills to securing a loan, conducted from home, a business, or on the road instead of at a physical bank location Saves time and is convenient for customers

36 The Future of Banking Customer’s agents Product manufacturers
offers customers the widest possible choice of banking products from multiple outside sources provide customers with information-integrated services Product manufacturers a branded or unbranded wholesaler of product and processing services to other banks Integrated players

37 Personal Finance Bill paying and electronic check writing
Tracking bank accounts, expenditures, and credit cards Budget organization Record keeping of cash flow and profit and loss computations Portfolio management, including reports and capital gains (losses) computations Investment tracking and monitoring of securities Quotes and tradelines, historical and current prices Tax computations Retirement goals, planning, and budgeting

38 Paying Bills Online Automatic payment of mortgages
Automatic transfer of funds to pay monthly utility bills Paying bills from online banking account Merchant-to-customer direct billing Using an intermediary

39 Online Investment Trading
Includes stocks and bonds, financial derivatives, commodities, mutual funds, and more Less expensive No waiting on busy telephone lines, and the chance of making mistakes Anywhere, anytime Considerable amount of information

40 Investment Information
Municipal bond pricing Overall market information and many links Free gurus’ advice Stock screening and evaluation Articles from the journal of the American Association of Individual Investors Chart lovers have many options Mutual fund evaluation and other interesting investment information Earning estimates Current news

41 The Job Market Online The participants in the job market
Job seekers : reply to employment ads posted online; take the initiative and place resumes on their own resumes Job offerers : advertise openings on their Web sites Recruiting firms : post available job descriptions and advertise their services in electronic mail and in others’ Web sites Newsgroups : able to post job; conduct discussions; and send resumes

42 Advantages For Job Seekers
Ability to find information on a large number of jobs and employing companies worldwide Ability to quickly communicate with potential employers Ability to write and post resumes for large-volume distribution Ability to customize resumes quickly and at no cost Ability to search for jobs quickly from any place at any time Several support services available at no cost Ability to learn how to use your voice in interview

43 Advantages For Employers
Ability to advertise to a large number of job seekers Ability to save on advertisement costs Ability to post job openings quickly Lower cost of processing applications Ability to provide greater “equal opportunity” for job seekers Ability to find highly skilled employees

44 Limitations of the Electronic Job Market
Many people do not use the Internet Security and privacy Creating high and expensive turnover Information overload

45 Travel and Tourism Potential savings through special sales, auctions, and the elimination of travel agents Online services by all major airline vacation services, large conventional travel agencies, car rental agencies, hotels, and tour companies

46 Real Estate Consumers can view many properties on the screen, saving time for themselves and the brokers Consumers can sort and organize properties according to their criteria and preview the exterior and interior designs of the properties, shortening the search process Consumers can find detailed information about the properties and frequently get even more details than brokers usually provide Homebuilders can use virtual reality technology on their Web sites to demonstrate three-dimensional floor plans to potential home buyers

47 Auctions, Bidding,and Bartering
specialized auction sites; auction cars; art auctions; airline tickets Bidding special type of auction (Reverse auction) Bartering the exchange of goods and/or services

48 B2B Business Models Seller-Oriented Marketspace (e-selling)
the buyer is an organization that may be a regular customer of the seller EC is used in the seller-oriented model to increase sales, reduce selling and advertisement expenditures, increase delivery speed, and reduce administrative cost

49 B2B Business Models Buyer-Oriented Marketspace (e-procurement and bidding) involves placing a request for quotation (RFQ) on the buyer’s Web site, or in a bidding marketspace Intermediaries in Electronic Commerce (exchange) make markets make money, improve service for customers, reduce search time of its own staff

50 B2B Business Models Buyer’s Internal Marketplace (aggregation)
company buys large number of supply items from many vendors items purchased are listed in the company’s catalog purchasers at various company offices around the world now view the catalog, select, electronically place orders, and pay with a company procurement card

51 B2B Business Models Business-to-Business Auctions
to use the organization’s own Web site or use an auction site of an intermediary benefits of auctions generating revenue increasing page views acquiring and retaining members

52 B2B Business Models Type of B2B Auctions Independent auctions
use a third-party auctioneer to create the site and sell the goods Commodity auctions many buyers and sellers come together to a third-party Web site Private auctions by invitation only several companies bypass the intermediaries and auction their products by themselves Auction at the company web site company build an auction capability on their web site

53 Intrabusiness Commerce on Intranets
Intrabusiness EC is electronic commerce within companies Intranet uses Internet-based technology, including browsers and search engines, to provide access to a variety of information within a firm

54 The Extranets and Whole Industry Vertical Markets
Extranet is a network that links business partners to one another over the Internet by tying together their corporate intranets Goal is to foster collaboration between organizations Vertical market-in one industry only

55 Consumers and Their Behaviors
Mostly 15- to 35-years-old Males and females Married and highly educated Working in educational institutions, computer industry, professions, and organizations High household incomes

56 Models of Market Research
IT for Management Prof. Efraim Turban Models of Market Research Decision Making Process Personal Characteristics Age, Gender, Ethnicity, Education, Lifestyle, Psychological, Knowledge, Values, Personality Environmental Characteristics Social, Family, Communities Vendors’ Controlled Systems Logistic Support Payments, Delivery Technical Support Web Design, Intelligent Agents Customer Service FAQs, , Call Centers, One-to-One Buyers’ Decisions Buy or Not What to Buy Where (Vendor) When How Much to Spend Repeat Purchases Stimuli Marketing Price Promotion Product Quality Others Economical Technology Political Cultural

57 How to Find out What Customers Want?
Asking customers what they want ask potential customers to fill in electronic questionnaires Tracking customers’ activities on the Web based on cookies or other approaches data such as where customers come from or how many customer have gone straight from the home page to ordering

58 Process of Conducting the Research
Define the target market Identify newsgroups to study Identify topics for discussion Subscribe to the pertinent groups Search discussion group topic and content lists to find target market Search discussion group lists Subscribe to filtering services that monitor groups Read FAQs and other instructions

59 Intelligent Agents for Product and Vendor Findings
Helps consumers decide where to buy by comparing merchants’ offers Jango originates the requests for the price form the customer’s site instead of Jango’s site In Kasbah, users who want to sell or buy a product assign the task to an agent that is then sent out to proactively seek buyers or sellers

60 Negotiation Agents Intelligent agents negotiate the price and other terms of the transactions for consumers Intelligent agents can take away some of the real-world problems associated with negotiation such as the frustration some customers experience in the process, and the technical limitations of being physically in different locations

61 Customer Services The process of customer service
Phase 1 : Requirements assisting the customer to determine needs Phase 2 : Acquisition helping customer to acquire a product or service Phase 3 : Ownership supporting customer on an ongoing basis Phase 4 : Retirement helping client to dispose of a service or product

62 Business to Consumer (B2C) Applications
Advertising, online publishing and push technology Cyber banking, personal finance and stock trading Job market, auctions, bids and bartering Travel and real estate Electronic retailing and malls

63 Facilitating Customer Service
Personalized Web pages A chat room FAQs Tracking capabilities Web-based call centers

64 Electronic Commerce Infrastructure
IT for Management Prof. Efraim Turban Electronic Commerce Infrastructure COMPONENT DESCRIPTION AND ISSUES Networks A shift from VANs to the Internet. Increased use of VPNs (virtual private networks) to enhance security and capabilities over the Internet. Web severs Special Web servers are usually superior to dual-purpose servers. Available for rent. The interface to legacy systems may be a problem Web server support and software 1. Web site activity tracking. 2. Database connectivity. 3. Software for creating electronic forms. 4. Software for creating chat rooms and discussion groups. Electronic catalogs Product description, multimedia use, customized catalogs, inclusion in Web site design and construction, templates for construction. Web page design and construction software Web programming languages (HTML, JAVA, VRML, XML) Transactional software 1. Search engines for finding and comparing, products. 2. Negotiating software. 3. Encryption and payment. 4. Ordering (front office) inventory and back office software. Internet access components TCP/IP package, Web browsers, remote access server, client dial-in software, Internet connection device, leased line connection, connection to leased line, Internet kiosks Others Firewalls, , HTTP (transfer protocols), smart cards

65 Electronic Data Interchange
Business transactions messages electronically transfer repetitive business transactions Data formatting standards use some formatting (coding) standards EDI translators does the conversion of data into standard format Private lines versus the Internet problem of compatibility of EDI Internet-based EDI

66 Benefits of EDI Send and receive large amounts of routine transaction information quickly around the globe Very few errors Information flow among several trading partners consistently and freely Access partner’s databases to retrieve and store standard transactions Fosters true partnership relationships Creates a complete paperless TPS environment Shorten payment collection cycle Enter data offline Use data immediately Deliver Sales information in real time Save a considerable amount of money

67 Reasons to Create EDI Ability over the Internet
Few geographical constraints Reach the widest possible number of trading partners of any viable alternative currently available Seedbed for growth of a vast range of business applications Cut EDI communication coasts Complement or replace current EDI application Very user-friendly

68 Limitations of Traditional Payment Instruments in EC
Cash cannot be used since there is no face-to-face contact It takes time to be received by mail It takes time to process the credit card number provided by phone or fax Some buyers do not have credit cards or checking accounts

69 Security Requirements
Authentification : be assured of the identity of the party with whom they are dealing Privacy : want identity to be secured Integrity : data and information transmitted are not accidentally or maliciously altered or destroyed Non-repudiation : protection against unjustifiable denial of placing an order or payments made Safety : ensure it is safe to provide a credit card number on the Internet

70 Encryption Single-key (Symmetric) encryption Public/Private key system
The sender of the message encrypts the information with a key and the receiver used an identical key to decrypt the information to a readable form Public/Private key system Several authorized people may know the public key, while only its owner knows the private key encryption and decryption can be done with either key Sophisticated systems use both keys

71 Electronic Certificates
Issued by a trusted third party - certificate authority (CA) Verify that a specific public key belongs to specific individual A higher certificate authority that guarantees certifiers is the Post Office in many countries

72 Protocols A protocols is a set of rules and procedures that govern the transfer of information on the Internet Secure Socket Layer (SSL) encrypt messages Secure Electronic Transaction Protocol (SET) incorporate digital signatures, certification, encryption, and an agreed-upon payment gateway

73 Electronic Credit Cards
Payments using unencrypted credit card the buyer his or her credit card number to the seller on the Internet Encrypted payments Using SSL encryption, credit card details are encrypted for security High level of security and privacy Using the SET protocol or a third-party intermediation, very high level of security, integrity and privacy will be given

74 Electronic Checks STEP 1 : the customer establishes a checking account with a bank STEP 2 : the customer contacts sellers, buys a product or service, and s an encrypted electronic check signed with a digital signature and two certificates, one for the bank, one for the buyer STEP 3 : the merchant deposits the check in his or her account; money is debited in the buyer’s account and credited to the seller’s account

75 Electronic Cash STEP 1 : the customer opens an account with a bank and receives special software for his or her PC STEP 2 : the customer buys “electronic money” from the bank by using the software STEP 3 : the bank sends an electronic money note to this customer, endorsing it with a digital signature STEP 4 : the money is stored on the buyer’s PC and can be spent in any electronic store that accepts e-cash STEP 5 : the software is also used to transfer the e-cash from the buyer’s computer to the seller’s computer STEP 6 : the seller can deposit the e-cash in a bank, crediting his or her regular or electronic account, or use the e-cash to make a purchases elsewhere

76 Electronic Payment Cards (Smart Cards) with E-cash
Using smart cards combine several credit cards, debit cards, and stored electronic cash Electronic payment from cellular phones enable people to make payments form their cell phone Electronic funds transfer transfer money electronically to and from financial institutions using telecommunication networks

77 Fraud on the Internet Internet stocks fraud Other financial fraud
In fall 1998, the SEC brought charges against 44 companies and individuals who illegally promoted stocks on computer bulletin boards, online newspapers, and investment Web sites Other financial fraud Other areas include selling bogus investments and phantom business

78 Buyer Protection Tips for safe electronic shopping include:
Look for reliable brand names at sites like Wal-Mart Online, Disney Online, and Enter it directly (Not from a link) Search any unfamiliar selling site for company’s address and phone and fax number Check out the seller with the local Chamber of Commerce and/or Better Business Bureau Investigate how secure the seller’s site is and how well it is organized Examine the money-back guarantees, warranties, and service agreements Compare prices to those in regular stores (too low-a suspect) Ask friends what they know Find out what your rights are in case of a dispute Consult the National Fraud Information Center Check for a listing of useful resources Be aware that you have shopper’s rights

79 Seller Protection Sellers are protected against:
consumers who refuse to pay, or pay with bad checks use of sellers’ name by others buyers’ claims that the merchandise did not arrive use of sellers’ unique words and phrases, names, slogans, and Web address customers downloading copyrighted software and/or knowledge and selling it to others

80 Legal Issues Specific to E-commerce
Domain Name several companies that have similar or same names (in different countries) compete over a domain name that is not registered trademark Taxes and Other Fees particularly complex for interstate and international commerce Copyright intellectual property is protected by copyright laws and cannot be used freely

81 Ethical Issues Privacy The Human Element Web Tracking
most electronic payment systems know who the buyers are; therefore, it may be necessary to protect the buyers’ identity The Human Element technology is new to many IS directors and employees; so many require new sets of skills Web Tracking by using sophisticated software it is possible to track individual movements on the internet Disintermediation use of EC may result in the elimination of some of a company’s employees as well as brokers and agents

82 IT for Management Prof. Efraim Turban Copyright  2001 John Wiley & Sons, Incorporated. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner in unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Son, Inc. Adopters of the textbook are granted permission to make back-up copies for his/her own use only, to make copies for distribution to student of the course the textbook is used in, and to modify this material to best suit their instructional needs. Under no circumstances can copies be made for resale. The publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. 6-82

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