Overview of Electronic Commerce

Overview of Electronic Commerce
Chapter 1 Overview of Electronic Commerce

Learning Objectives Define electronic commerce (EC) and describe its various categories. Describe and discuss the content and framework of EC. Describe the major types of EC transactions. Describe some EC business models.

Learning Objectives (cont.)
Describe the benefits of EC to organizations, consumers, and society. Describe the limitations of EC. Describe the role of the digital revolution in EC. Describe the contribution of EC to organizations responding to environmental pressures.

Marks & Spencer—A New Way to Compete
The Problem UK-based, upscale, global retailer of high-quality, high-priced merchandise faces stiff competition, since economic slowdown that started in 1999 Critical success factors Customer service Appropriate store inventory system Efficient supply chain activities

Marks & Spencer (cont.) The Solution
M&S realized that digital era survival depends on the use of information technology in general and electronic commerce in particular Electronic commerce (EC, e-commerce)—a process of buying, selling, transferring, or exchanging products, services, and/or information via electronic networks and computers

Marks & Spencer (cont.) M & S initiated several EC initiatives, including: Security Warehouse management Merchandise receiving Inventory control Speeding up the supply of fashion garments Collaborative commerce

Marks & Spencer (cont.) The Results
As of summer 2002, a turnaround is underway M & S has become a leader and example setter in retailing, resulting in increased profitability and growth

Marks & Spencer (cont.) What can we learn…
Traditional brick-and-mortar companies face increasing pressures in a competitive marketing environment A possible response is to introduce a variety of e-commerce initiatives that can improve supply chain operation information money from raw materials through factories increase customer service open up markets to more customers

E-Commerce I and II E-Commerce I E-Commerce II
Explosive growth starting in 1995 Widespread of Web to advertise products Ended in 2000 when dot.com began to collapse E-Commerce II Began in January 2001 Reassessment of e-commerce companies

E-Commerce I For computer scientist and information technologists Vindication of a set of information technologies developed over 40 years Extending from the early Internet to the PC and local area networks The vision of universal communications

E-Commerce I 1995-2000 For economists
Raised realistic prospect of perfect Bertrand Market where price, cost, and quality information is equally distributed where a nearly infinite set of suppliers compete against one another where customers have access to all revelant market information worldwide Merchants have equal direct access to hundreds of millions of customers

E-Commerce I 1995-2000 Disintermediation
displacement of market middlemen who traditionally are intermediaries between producers and consumers by a new direct relationship between manufacturers and content originators with their customers

E-Commerce I 1995-2000 Friction-free commerce
a vision of commerce in which information is equally distributed transaction costs are low prices can be dynamically adjusted to reflect actual demand intermediaries decline unfair competitive advantages are eliminated

E-Commerce I 1995-2000 First mover Network effect
a firm that is first to market in a particular area and that moves quickly to gather market share Network effect occurs where users receive value from the fact that everyone else uses the same tool or product

E-Commerce II Crash in stock market values of E-commerce I companies throughout 2000 is an end to E-commerce I Led to a sobering reassessment of the prospects of e-commerce and the methods of achieving business success. E-commerce II begins in 2001 and ends five year later -- the limit for making technology and business projections

E-Commerce II 2001-2006 Reasons for the end of E-Commerce I
run-up in technology stocks due to enormous information technology capital expenditure of firms rebuilding their internal business systems to withstand Y2K telecommunications industry had built excess capacity in high-speed fiber optic networks 1999 e-commerce Christmas season provided less sales growth that anticipated and demonstrated e-commerce was not easy (eToys.com) valuations of dot.com and technology companies had risen so high supporters were questioning whether earnings could justify the prices of the shares.

Unique of E-commerce Technology and Their Business Significance
is ubiquitous has global reach operates according to universal standards provides information richness is interactive increases information density permits personalization

Seven Unique Features of E-commerce Technology and Their Business Significance
Page 9, Table 1.1

Electronic Commerce: Definitions and Concepts
The Internet has emerged as a major, perhaps eventually the major, worldwide distribution channel for goods, services, managerial and professional jobs This is profoundly changing economics, markets and industry structure, products and services and their flow, consumer segmentation, consumer values, consumer behavior, jobs, and labor markets The impact may be even greater on societies and politics, and on the way we see the world and ourselves in it

Electronic Commerce: Definitions and Concepts (cont.)
E-commerce defined from the following perspectives: Communications: delivery of goods, services, information, or payments over computer networks or any other electronic means Commercial (trading): provides capability of buying and selling products, services, and information on the Internet and via other online services

Business process: doing business electronically by completing business processes over electronic networks, thereby substituting information for physical business processes Service: a tool that addresses the desire of governments, firms, consumers, and management to cut service costs while improving the quality of customer service and increasing the speed of service delivery

Learning: an enabler of online training and education in schools, universities, and other organizations, including businesses Collaborative: the framework for inter- and intraorganizational collaboration Community: provides a gathering place for community members to learn, transact, and collaborate

e-business: a broader definition of EC, which includes: buying and selling of goods and services servicing customers collaborating with business partners conducting electronic transactions within an organization

Amazon.com: Before and After

Most well-known e-commerce company Conceived by Jeff Bezos in 1994 Opened in July 1995 Four compelling reasons to shop Selection (1.1 million titles) Convenience (anytime, anywhere) Price (high discounts on bestsellers) Service (automated order confirmation, tracking, and shipping information)

($1.4 Billion) $2.7 Billion 2000 ($720 Million) $1.6 Billion 1999 ($125 Million) $610 Million 1998 ($31 Million) $148 Million 1997 ($6.24 Million) $15.6 Million 1996 Earnings Revenues Revenues and Earnings

E-commerce vs. E-business
E-commerce involves Digitally enabled commercial transactions between organizations and individuals. Digitally enabled transactions include all transactions mediated by digital technology Commercial transactions involve the exchange of value across organizational or individual boundaries in return for products or services

E-commerce vs. E-business
E-business involves Digital enablement of transactions and processes within a firm, involving information systems under the control of the firm E-business does not involve commercial transactions across organizational boundaries where value is exchanged

The Difference Between E-commerce and E-Business

Pure vs. Partial EC depends upon the degree of digitization (the transformation from physical to digital) of: the product (service) sold; the process; and for the delivery agent (or digital intermediary) Brick-and-Mortar organizations are old-economy organizations (corporations) that perform most of their business off-line, selling physical products by means of physical agents

Virtual (pure-play) organizations conduct their business activities solely online Click-and-mortar organizations conduct some EC activities, but do their primary business in the physical world Electronic market (e-marketplace) online marketplace where buyers and sellers meet to exchange goods, services, money, or information

Interorganizational information systems (IOSs) allow routine transaction processing and information flow between two or more organizations Intraorganizational information systems enable EC activities to go on within individual organizations

: The Dimensions of Electronic Commerce

Section Review 1. Define EC and e-business.
2. Distinguish between pure and partial EC. 3. Define click-and-mortar organizations. 4. Define electronic markets, IOSs, and intraorganizational information systems. 5. Identify the seven unique features of e-commerce technology and explain how these features set e-commerce apart from more traditional ways of conducting commercial transactions. 6.Describe the visions and forces behind e-commerce I in terms of what the various interest groups hoped for: the computer scientist and information technology people; the economists; and the entrepreneurs, venture capitalists and marketers. Explain whether what each group envisioned came to fruition and why or why not.

The EC Framework, Classification, and Content (cont.)
Computer environments Internet: global networked environment Intranet: a corporate or government network that uses Internet tools, such as Web browsers, and Internet protocols Extranet: a network that uses the Internet to link multiple intranets

EC Framework EC applications are supported by infrastructure and by five support areas: People Public policy Marketing and advertising Support services Business partnerships

A Framework for Electronic Commerce

Types of EC by Transactions or Interactions
business-to-consumer (B2C) : online transactions are made between businesses and individual consumers business-to-business (B2B): businesses make online transactions with other businesses e-tailing: online retailing, usually B2C

Major Business-to-Consumer (B2C) Business Models

Portal offers powerful search tools plus an integrated package of content and services typically utilizes a combines subscription/advertising revenues/transaction fee model may be general or specialize (vortal)

E-tailer online version of traditional retailer includes virtual merchants (online retail store only) clicks and mortar e-tailers (online distribution channel for a company that also has physical stores) catalog merchants (online version of direct mail catalog) online malls (online version of mall) Manufacturers selling directly over the Web

Content Provider information and entertainment companies that provide digital content over the Web typically utilizes an advertising, subscription, or affiliate referral fee revenue model Transaction Broker processes online sales transactions typically utilizes a transactions fee. revenue model

Market Creator uses Internet technology to create markets that bring buyers and sellers together typically utilizes a transaction fee revenue model Service Provider offers services online Community Provider provides an online community of like-minded individuals for networking and information sharing revenue is generated by referral fee, advertising, and subscription

Major Business-to-Business (B2B) Business Models

B2B Hub also known as marketplace/exchange electronic marketplace where suppliers and commercial purchasers can conduct transactions may be a general (horizontal marketplace) or specialized (vertical marketplace) E-distributor supplies products directly to individual businesses

B2B Service Provider sells business services to other firms Matchmaker links businesses together charges transaction or usage fees Infomediary gather information and sells it to businesses

Insight on Business: E-Steel.com Breaks the Mold
B2B marketplace 3,500 member companies trading globally Uses private negotiation model rather than auction model

Types of EC by Transactions or Interactions (cont.)
business-to-business-to-consumer (B2B2C): e-commerce model in which a business provides some product or service to a client business that maintains its own customers consumer-to-business (C2B): e-commerce model in which individuals use the Internet to sell products or services to organizations or individuals seek sellers to bid on products or services they need

consumer-to-consumer (C2C): e-commerce model in which consumers sell directly to other consumers peer-to-peer (P2P): technology that enables networked peer computers to share data and processing with each other directly; can be used in C2C, B2B, and B2C e-commerce

Business Models in Other Emerging Areas of E-Commerce

C2C Business Models connect consumers with other consumers most successful has been the market creator business model P2P Business Models enable consumers to share file and services via the Web without common servers a challenge to find a revenue model that works

mobile commerce ((m-commerce): e-commerce transactions and activities conducted in a wireless environment location-based commerce (l-commerce): m-commerce transactions targeted to individuals in specific locations, at specific times

M-commerce Business Models traditional e-commerce business models leveraged for emerging wireless technologies to permit mobile access to the Web E-commerce Enablers’ Business Models focus on providing infrastructure necessary for e-commerce companies to exist, grow, and prosper

E-commerce Enablers

intrabusiness EC: e-commerce category that includes all internal organizational activities that involve the exchange of goods, services, or information among various units and individuals in an organization business-to-employees (B2E): e-commerce model in which an organization delivers services, information, or products to its individual employees

collaborative commerce (c-commerce): e-commerce model in which individuals or groups communicate or collaborate online e-learning: the online delivery of information for purposes of training or education exchange (electronic): a public electronic market with many buyers and sellers

exchange-to-exchange (E2E): e-commerce model in which electronic exchanges formally connect to one another the purpose of exchanging information e-government: e-commerce model in which a government entity buys or provides goods, services, or information to businesses or individual citizens

C2C Business Models connect consumers with other consumers most successful has been the market creator business model P2P Business Models enable consumers to share file and services via the Web without common servers a challenge to find a revenue model that works

Insight on Technology: Google.com -- Searching for Profits
Web’s hottest search engine Started in 1998 by two enterprising Stanford grad students Uses outside criteria to validate that a search result is likely to be relevant the more outside links there are to a particular page, the higher it jumps in Google’s ranking structure

A Brief History of EC (cont.)
EC successes Virtual EC companies eBay VeriSign AOL Checkpoint Click-and-mortar Cisco General Electric IBM Intel Schwab EC failures 1999, a large number of EC-dedicated companies began to fail EC’s days are not numbered! dot-com failure rate is declining sharply EC field is experiencing consolidation most pure EC companies, are expanding operations and generating increasing sales (Amazon.com)

The Success Story of Campusfood.Com
Provide interactive menus to college students, using the power of the Internet to replace and/or facilitate the traditional telephone ordering of meals Built the company’s customer base expanding to other universities attracting students generating a list of restaurants from which students could order food for delivery

The Success Story of Campusfood.Com (cont.)
Now some of these activities are outsourced to a marketing firm, enabling the addition of dozens of schools nationwide Financed through private investors, friends, and family members, the site was built on an investment of less than $1 million Campusfood.com’s revenue is generated through transaction fees—the site takes a 5 % commission on each order from the sellers

The Success Story of Campusfood.Com (cont.)
At campusfood.com you can: Navigate through a list of local restaurants, their hours of operation, addresses, phone numbers, etc. Browse an interactive menu Bypass “busy” telephone signals to place an order online Access special foods, promotions, and restaurant giveaways Arrange electronic payment of your order

Review Questions List the major components of the EC framework.
List the major transactional types of EC. List some EC successes and failures Define intranets and extranets. Give examples of B2C, B2B, C2C and P2P Web sites How does disintermediation impact friction-free commerce?

Campus food questions Explain the benefits of Campusfood.com for its students and for the restaurants it represents. Trace the flow of digitized information in this venture. How does the outsourcing of marketing activities contribute to the business?

Kozmo Finally Crashes Use the Internet to combine the convenience of a catalog with the immediate gratification of in-store shopping by offering entertainment, food, and convenience products delivered within one hour, with no minimum order required and no delivery charges.

Kozmo Finally Crashes Created a Web site that featured localized offerings based on customer zip code. An order placed on the Web site would be transmitted directly to Kozmo’s distribution center, packed, and delivered.

Kozmo Finally Crashes $250 million in Venture capital
Rapid expansion and intensive spending to gain market share and brand recognition No concern for short-term profitability

Kozmo Finally Crashes Painful lessons:
Hard to make money delivering low-priced convenience store items. Business model didn’t work everywhere. Company founders are not necessarily its best managers. Difficult for a new firm to establish a profitable e-commerce business in an entirely new market niche.

E-Commerce Business Models
a set of planned activities designed to result in a profit in a marketplace Business plan a document that describes a firm’s business model E-commerce business model a business model that aims to use and leverage the unique qualities of the Internet and the World Wide Web.

Eight Key Ingredients of a Business Model
Page 58, Table 2.1

Eight Key Ingredients of a Business Model: Value Proposition
Defines how a company’s product or service fulfills the needs of customers. Questions Why will customers choose to do business with your firm instead of another company? What will your firm provide that other firms do not and cannot?

Eight Key Ingredients of a Business Model: Revenue Model
Describes how the firm will earn revenue, produce profits, and produce a superior return on invested capital. E-commerce revenue models include: advertising model subscription model transaction fee model sales model affiliate model

Advertising revenue model a company provides a forum for advertisements and receives fees from advertisers (Yahoo) Subscription revenue model a company offers it users content or services and charges a subscription fee for access to some or all of it offerings (Consumer Reports or Wall Street Journal)

Transaction fee revenue model a company receives a fee for enabling or executing a transaction (eBay or E-Trade) Sales revenue model a company derives revenue by selling goods, information, or services (Amazon or DoubleClick) Affiliate revenue model a company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales (MyPoints)

Five Primary Revenue Models
Page 61, Table 2.2

Eight Key Ingredients of a Business Model: Market Opportunity
refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm in that market space defined by the revenue potential in each of the market niches where you hope to compete Marketspace the area of actual or potential commercial value in which a company intends to operate

Eight Key Ingredients of a Business Model: Competitive Environment
Refers to the other companies operating in the same marketplace selling similar products Influenced by: how many competitors are active how large are their operations the market share of each competitor how profitable these firms are how they price their products

Marketspace and Market Opportunity is the Software Training Market
Page 62, Figure 2.1

Eight Key Ingredients of a Business Model: Competitive Advantage
Achieved by a firm when it can produce a superior product and/or bring the product to market at a lower price than most, or all, of its competitors Achieved because a firm has been able to obtain differential access to the factors of production that are denied their competitors -- at least in the short term

Asymmetry exists whenever one participant in a market has more resources than other participants First mover advantage a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service

Unfair competitive advantage occurs when one firm develops an advantage based on a factor that other firms cannot purchase Perfect Market a market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production Leverage when a company uses its competitive advantage to achieve more advantage in surrounding markets

Eight Key Ingredients of a Business Model: Market Strategy
The plan you put together that details exactly how you intend to enter a new market and attract new customers Best business concepts will fail if not properly marketed to potential customers

Eight Key Ingredients of a Business Model: Organizational Development
Describes how the company will organize the work that needs to be accomplished Work is typically divided into functional departments Move from generalists to specialists as the company grows

Eight Key Ingredients of a Business Model: Management Team
Employees of the company responsible for making the business model work Strong management team gives instant credibility to outside investors A strong management team may not be able to salvage a weak business model Should be able to change the model and redefine the business as it becomes necessary

The Interdisciplinary Nature of EC
Major EC disciplines Computer science Marketing Consumer behavior Finance Economics Management information systems

Disciplines Concerned with E-Commerce
Page 39, Figure 1.9

A Brief History of EC 1970s: innovations like electronic funds transfer (EFT)—funds routed electronically from one organization to another (limited to large corporations) electronic data interchange (EDI)— electronically transfer routine documents (application enlarged pool of participating companies to include manufacturers, retailers, services) interorganizational system (IOS)—travel reservation systems and stock trading

1969 U.S. government experiment—the Internet came into being initially used by technical audience of government agencies, academic researchers, and scientists 1990s the Internet commercialized and users flocked to participate in the form of dot-coms, or Internet start-ups Innovative applications ranging from online direct sales to e-learning experiences

Most medium- and large-sized organizations have a Web site Most large U.S. corporations have comprehensive portals 1999 the emphasis of EC shifted from B2C to B2B 2001 the emphasis shifted from B2B to B2E, c-commerce, e-government, e-learning, and m-commerce EC will undoubtedly continue to shift and change

The Future of EC the future is bright
2004—total online shopping and B2B transactions in the US between $3 to $7 trillion by 2008: number of Internet users worldwide should reach 750 million 50 percent of Internet users will shop EC growth will come from: B2C B2B e-government e-learning B2E c-commerce the future is bright

E-commerce Business Models
Business models—a method of doing business by which a company can generate revenue to sustain itself Examples: Name your price Find the best price Dynamic brokering Affiliate marketing

E-commerce Business Plans and Cases
Business plan: a written document that identifies the business goals and outlines the plan of how to achieve them Business case: a written document that is used by managers to garner funding for specific applications or projects; its major emphasis is the justification for a specific investment

Structure of Business Models
Business model: A method of doing business by which a company can generate revenue to sustain itself

Structure of Business Models (cont.)
Revenue model: description of how the company or an EC project will earn revenue Sales Transaction fees Subscription fees Advertising Affiliate fees Other revenue sources

Structure of Business Models (cont.)
Value proposition: The benefits a company can derive from using EC search and transaction cost efficiency complementarities lock-in novelty aggregation and interfirm collaboration

Exhibit 1.4: Common Revenue Models

Typical Business Models in EC
Online direct marketing Electronic tendering systems tendering (reverse auction): model in which a buyer requests would-be sellers to submit bids, and the lowest bidder wins Name your own price: a model in which a buyer sets the price he or she is willing to pay and invites sellers to supply the good or service at that price

Typical Business Models in EC (cont.)
Affiliate marketing: an arrangement whereby a marketing partner (a business, an organization, or even an individual) refers consumers to the selling company’s Web site Viral marketing: word-of-mouth marketing in which customers promote a product or service to friends or other people

Group purchasing: quantity purchasing that enables groups of purchasers to obtain a discount price on the products purchased SMEs: small to medium enterprises Online auctions

Product and service customization customization: creation of a product or service according to the buyer’s specifications Electronic marketplaces and exchanges Value-chain integrators Value-chain service providers

Information brokers Bartering Deep discounting Membership Supply chain improvers Business models can be independent or they can be combined amongst themselves or with traditional business models

Example of Supply Chain Improver
Orbis Group changes a linear physical supply chain to an electronic hub Traditional process in the B2B advertising field

Example of Supply Chain Improver (cont.)
ProductBank simplifies this lengthy process changing the linear flow of products and information to a digitized hub

Benefits of EC Benefits to organizations Rapid time-to-market
Lower communication costs Efficient procurement Improved customer relations Up-to-date company material No city business permits and fees Other benefits Global reach Cost reduction Supply chain improvements Extended hours: 24/7/365 Customization New business models Vendors’ specialization

Benefits of EC (cont.) Benefits to consumers Ubiquity
More products and services Cheaper products and services Instant delivery Information availability Participation in auctions Electronic communities “Get it your way” No sales tax

Benefits of EC (cont.) Benefits to society Telecommuting
Higher standard of living Hope for the poor Availability of public services

Limitations of EC

Barriers of EC Security Trust and risk Lack of qualified personnel
Lack of business models Culture User authentication and lack of public key infrastructure Organization Fraud Slow navigation on the Internet Legal issues

The Digital Revolution
Digital economy: An economy that is based on digital technologies, including digital communication networks, computers, software, and other related information technologies; also called the Internet economy, the new economy, or the Web economy

The Digital Revolution (cont.)
A global platform over which people and organizations interact, communicate, collaborate, and search for information Includes the following characteristics: A vast array of digitizable products Consumers and firms conducting financial transactions digitally Microprocessors and networking capabilities embedded in physical goods

New Business Environment
Customers are becoming more powerful Created due to advances in science occurring at an accelerated rate Results in more and more technology Rapid growth in technology results in a large variety of more complex systems

New Business Environment (cont.)
Characteristics in the business environment A more turbulent environment with more business problems and opportunities Stronger competition Need for organizations to make decisions more frequently A larger scope for decisions because more factors More information and/or knowledge needed for making decisions

Environment-Response-Support Model
Critical response activities traditional actions such as lowering cost and closing unprofitable facilities introduce innovative actions such as customizing or creating new products or providing superb customer service

Exhibit 1.6: Major Business Pressures and the Role of EC

Major Business Pressures
Strong competition Global economy Regional trade agreements (e.g. NAFTA) Extremely low labor cost in some countries Frequent and significant changes in markets Increased power of consumers Market and economic pressures

Major Business Pressures (cont.)
Changing nature of workforce Government deregulation of banking and other services Shrinking government subsidies Increased importance of ethical and legal issues Increased social responsibility of organizations Rapid political changes Societal and environmental pressures

Major Business Pressures (cont.)
Rapid technological obsolescence Increase innovations and new technologies Information overload Rapid decline in technology cost vs. performance ratio Technological pressures

Organizational Responses
Strategic systems Continuous improvement efforts and business process reengineering—including business process reengineering (BPR) Customer relationship management (CRM)—divided into the following areas Operational CRM Analytical CRM Collaborative CRM

Organizational Responses (cont.)
Business alliances Electronic markets Reductions in cycle time and time-to-market Cycle time reduction: Shortening the time it takes for a business to complete a productive activity from its beginning to end

Empowerment of employees Supply chain improvements Mass customization: make-to-order in large quantities in an efficient manner Mass customization: Production of large quantities of customized items

Intrabusiness: from sales force automation to inventory Knowledge management Knowledge management (KM): The process of creating or capturing knowledge, storing and protecting it, updating and maintaining it, and using it

Putting It All Together
Task facing each organization is how to put together the components that will enable the organization to transform itself to the digital economy and gain competitive advantage by using EC Many employ corporate portals A major gateway through which employees, business partners, and the public can enter a corporate Web site

Exhibit 1.8: The Networked Organization

Managerial Issues Is it real?
How should we evaluate the magnitude of the business pressures? Why is B2B e-commerce so attractive? There are so many EC failures—how can one avoid them?

Managerial Issues (cont.)
What should be my company’s strategy toward EC? How do we transform our organization into a digital one? What are the top challenges of EC?

Summary Definition of EC and description of its various categories.
The content and framework of EC. The major types of EC transactions. The major business models.

Summary (cont.) Benefits to organizations, consumers, and society.
Limitations of EC. The role of the digital revolution. The role of EC in combating pressures in the business environment.

Overview of Electronic Commerce

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