1. Chapter © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin Chapter 5 ELECTRONIC COMMERCE Strategies for the New Economy 5

2. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-2 INTRODUCTION E-commerce is changing everything Electronic commerce (e-commerce) – commerce, but it is commerce accelerated and enhanced by IT Build powerful relationships with customers Build powerful relationships with suppliers Build powerful relationships with partners

3. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-3 INTRODUCTION

4. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-4 E-COMMERCE BUSINESS MODELS B2B is where most of the money is About 97% B2C is the most well-known Amazon, eBay, etc. B2B and B2C differences require that you know your customers well, develop the right marketing mix, and move money easily

5. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-5 E-COMMERCE BUSINESS MODELS

6. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-6 PORTER’S FIVE FORCE MODEL Five Forces Model – helps business people understand the relative attractiveness of an industry

7. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-7 Buyer Power Buyer power – high when buyers have many choices from whom to buy, and low when their choices are few If you’re a buyer, you want buyer power to be high If you’re a supplier, you want buyer power to be low

8. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-8 Buyer Power Loyalty programs can help you as a supplier Loyalty program – rewards customers based on the amount of business they do with a particular organization Airline frequent flyer programs

9. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-9 Supplier Power Supplier power – high when buyers have few choices from whom to buy, and low when their choices are few The converse of buyer power

10. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-10 Threat of Substitute Products or Services Threat of substitute products or services – high when there are many alternatives to a product or service, and low when there are few alternatives If you’re a buyer, you want this to be high If you’re a supplier, you want this to be low

11. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-11 Threat of Substitute Products or Services As a supplier, you can use switching costs Switching costs – costs that make customers reluctant to switch to another supplier Can be monetary penalties for early termination Can be like Amazon, which tracks information about you and tailors offerings

12. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-12 Threat of New Entrants Threat of new entrants – high when it is easy for new competitors to enter, and low when there are significant entry barriers If you’re a buyer, you want this to be high If you’re a supplier, you want this to be low

13. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-13 Threat of New Entrants Entry barrier – product or service feature that customers have come to expect and all new competition must offer Banking – online banking Grocery stores – savings cards

14. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-14 Rivalry Among Existing Competition Rivalry among existing competition – high when competition is fierce, and low when it is more complacent If you’re a buyer, you want this to be high If you’re a supplier, you want this to be low

15. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-15 Five Forces Model and E-Commerce Because of IT, in most industries… Buyer power has increased Entry barriers have lessened Threat of substitute products or services has increased

16. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-16 BUSINESS RULES TO LIVE BY 1. Understand your business, products, services, and customers 2. Find customers and establish relationships 3. Move money easily and securely

17. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-17 UNDERSTAND YOUR BUSINESS, PRODUCTS, SERVICES, AND CUSTOMERS To be successful, you must… Define your products and services Define your target customers B2B (other businesses) B2C (individuals) Define your customers perception of the value of your products and services

18. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-18 Who Are Your Customers? Business to Business Other businesses Business to Consumer Individuals Each is different and has different needs and wants

19. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-19 Product and Service Value as Perceived by Your Customers

20. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-20 B2B: MRO Versus Direct Maintenance, repair, and operations (MRO) materials (indirect materials) – materials necessary for running a company but do not relate to the company’s primary business activities Similar to convenience items in B2C Office supplies, repair parts, lubricating oils

21. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-21 MRO Materials Buyers in B2B make large purchases Can then demand a discount (not true in B2C) Can team up with other buyers to create demand aggregation Demand aggregation – combining purchase requests from multiple buyers which justifies a larger discount

22. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-22 Direct Materials Direct materials – materials that are used in production in a manufacturing company or are placed on the shelf for sale in retail environments Relate directly to a company’s primary business activities Quality, quantity, and delivery timing are important

23. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-23 Direct Materials Buyers can participate in reverse auctions for direct materials Reverse auction – process in which a buyer posts its interests in buying items and sellers compete by submitting successively lower bids The lowest bidder wins

24. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-24 B2B: Horizontal Versus Vertical B2B e-commerce takes advantage of e-marketplaces Electronic marketplace (e-marketplace) – interactive business providing a central market where multiple buyers and sellers can engage in e-commerce Horizontal e-marketplaces https://www.ibmilw.com/officesupply.html https://www.ibmilw.com/officesupply.html http://www.fuzing.com/ Vertical e-marketplaces https://www.plasticsportal.net/wa/plastics/portal http://www.trhubnet.com/plastics/home.nsf/contents/contact_u s https://www.plasticsportal.net/wa/plastics/portal http://www.trhubnet.com/plastics/home.nsf/contents/contact_u s

25. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-25 To Summarize B2C Varying demographics and lifestyles Convenience versus specialty products Commoditylike and digital work best of all Mass customization necessary in some instances

26. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-26 To Summarize B2B MRO versus direct materials Demand aggregation is present E-marketplaces are vitally important Horizontal (MRO materials mainly) Vertical (direct materials mainly)

27. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-27 FIND CUSTOMERS AND ESTABLISH RELATIONSHIPS You must first find customers Then establish relationships Otherwise, you can’t make a sale B2C and B2B techniques are very different

28. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-28 Business to Consumer Need to determine your marketing mix Marketing mix – set of marketing tools your organization will use to pursue its marketing objectives in reaching and attracting potential customers There are many such tools for B2C

29. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-29 Business to Business Marketing Much more personal Not usually done with generic ads designed for mass distribution Often take place in e-marketplaces

30. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-30 Business to Business Marketing Once a contact is made, the relationship must be established This often requires face-to-face meetings Must also integrate the IT systems to the supplier business and customer business

31. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-31 To Summarize… B2C Marketing mix drives customers to Web site (4 Ps-product, place, promotion and price) Search engines, online ads, viral marketing, and affiliate programs (click-through, conversion rate—measures for pay and to evaluate success) http://www.identicards.com/links/HuntingLinkIndex.html http://www.identicards.com/links/HuntingLinkIndex.html advertising for specialty goods http://www.dell.com/ mass customizationhttp://www.dell.com/ check out google! http://www.eieifood.com/http://www.eieifood.com/ groceries Focus on conversion rates to measure success

32. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-32 To Summarize… B2B Frequently occurs in an e-marketplace Requires establishing formal business relationship Requires IT system integration Doesn’t include broad and generic marketing mix

33. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-33 MOVE MONEY EASILY AND SECURELY In e-commerce, most money moves electronically Security becomes very important

34. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-34 B2C Payment Systems Credit cards Financial cybermediaries (like Paypal) Electronic checks system that sends bills over the Internet and provides an easy-to-use mechanism (perhaps a button) to pay for them if the amount looks correct (Checkfree (www.checkfree.com) and Quicken (www.quicken.com)www.checkfree.comwww.quicken.com Electronic Bill Presentment and Payment Smart cards Digital Wallets (server side or client side)

35. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-35 To Summarize… B2C Credit cards, financial cybermediaries, electronic checks, EBPP, smart cards, and digital wallets Pay for individual purchases, usually in small amounts Each payment must be validated

36. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-36 B2B Payment Systems Business customers… Make large purchases Will not pay with credit card or financial cybermediary Use financial EDI Pay for many purchases at once (perhaps the end of the month)

37. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-37 To Summarize… B2B Use EDI to facilitate ordering process VANS can provide for EDI and financial EDI Use financial EDI for payment of purchases

38. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-38 Security: The Pervading Concern Security is very important when moving money Some security measures… Encryption Secure Sockets Layers Secure Electronic Transactions Many, many others

39. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-39 Secure Electronic Transactions Secure Electronic Transaction (SET) – transmission method that ensures transactions are legitimate as well as secure Helps verify use of a credit card, for example, by sending the transaction to the credit issuer as well as the seller/supplier

40. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/ Irwin 5-40 To Summarize… B2C and B2B – security… Overriding concern Encryption, SSLs, SET, and others