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Prentice Hall, 2003 1 Chapter 1 Overview of Electronic Commerce.

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1 Prentice Hall, Chapter 1 Overview of Electronic Commerce

2 Prentice Hall, 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 Discuss the benefits of EC to organizations, consumers, and society

3 Prentice Hall, Learning Objectives (cont.) Describe the limitations of EC Describe the role of the digital revolution in EC and the economic impact of EC Discuss the contribution of EC in helping organizations respond to environmental pressures Discuss some major managerial issues regarding EC

4 Prentice Hall, Qantas Airways A New Way to Compete The Problem Increased fuel costs placed pressure on the airline industry Qantas faced two major competitors and higher fees at Sydney Airport Air traffic dwindled after September 11 th Qantas needed to replace aircraft in order to stay competitive Australian economy slowed down

5 Prentice Hall, Qantas Airways (cont.) The Solution Bought fuel contracts for future dates (traditional response) Took major steps to implement e-commerce (EC) involving buying, selling, and exchanging goods, services, information, and payments electronically

6 Prentice Hall, Qantas Airways (cont.) E-marketplace member Joined Airnew Co. links major airlines with suppliers Fuel Fuel services Light maintenance services Catering Joined with 13 other large Australian corporations Electronically purchase general goods and services Office supplies Light bulbs Maintenance services Business-to-business (B2B)

7 Prentice Hall, Qantas Airways (cont.) Formed Pan-Pacific exchange E-marketplace Business-to-business-to-consumer (B2B2C) Provides Full spectrum travel services Products and services to business partners Travel agencies who can use this marketplace to sell directly to consumers

8 Prentice Hall, Qantas Airways (cont.) Business-to-customer (B2C): Online booking s to frequent-flyer members Mileage bonuses and opportunities to win $10,000 AU Wireless communications Business-to-employee (B2E): Online training Online banking

9 Prentice Hall, Qantas Airways (cont.) The Results Qantas expects to see an estimated $85 million AU in cost reductions per year by 2003 Qantas expects to increase annual revenues by $700 million AU from nontravel sales Outlasted one competitor

10 Prentice Hall, EC Definitions & Concepts Electronic Commerce (EC) is the process of buying, selling, or exchanging products, services, and information via computer networks EC defined from these perspectives Communications Business process Service Online Collaborations Community

11 Prentice Hall, EC Definitions & Concepts (cont.) E-business is a broader definition of EC that includes not just the buying and selling of goods and services, but also Servicing customers Collaborating with business partners Conducting electronic transactions within an organization Pure vs. Partial EC: based on the degree of digitization of product, process, delivery agent

12 Prentice Hall, Exhibit 1.1 The Dimensions of Electronic Commerce

13 Prentice Hall, EC Definitions & Concepts (cont.) Traditional commerce: all dimensions are physical Brick-and-mortar organizations Old-economy organizations (corporations) Perform all business off-line Sell physical products by means of physical agents

14 Prentice Hall, EC Definitions & Concepts (cont.) Pure EC: all dimensions are digital Pure online (virtual) organizations New-economy organization Sell products or services only online Partial EC: a mix of digital and physical dimensions Click-and-mortar organizations Conduct EC activities Do their primary business in the physical world

15 Prentice Hall, EC Definitions & Concepts (cont.) Internet vs. Non-Internet EC VANsvalue-added networks LANslocal area networks Single computerized machines Using a smart card in a vending machine Using a cell phone to make an online purchase

16 Prentice Hall, Electronic Markets vs. Interorganizational Systems E-markets Buyers and sellers meet to exchange Goods Services Money Information Interorganizational Information Systems (IOS) Between two or more organizations Routine transaction processing Information flow

17 Prentice Hall, The EC Framework and Field An EC Framework EC applications supported by infrastructure and 5 support areas People Public policy Technical standards and protocols Business partners Support services

18 Prentice Hall, Exhibit 1.2 A Framework for EC

19 Prentice Hall, Classification of EC by the Nature of the Transaction Business-to-business (B2B) : EC model in which all of the participants are businesses or other organizations Business-to-consumer (B2C): EC model in which businesses sell to individual shoppers Business-to-business-to-consumer (B2B2C): EC model in which a business provides some product or service to a client business; the client business maintains its own customers, to whom the product or service is provided

20 Prentice Hall, Classification of EC by the Nature of the Transaction (cont.) Consumer-to-business(C2B): individuals who use the Internet to sell products or services to organizations and /or seek sellers to bid on products or services they need Consumer-to-consumer (C2C) : consumers sell directly to other consumers

21 Prentice Hall, Classification of EC by the Nature of the Transaction (cont.) Mobile commerce (m-commerce)EC transactions and activities conducted in a wireless environment Location-commerce( l-commerce) m-commerce transactions targeted to individuals in specific locations, at specific times

22 Prentice Hall, Classification of EC by the Nature of the Transaction (cont.) Intrabusiness (organizational) EC: EC category that includes all internal organizational activities that involve the exchange of goods, services, or information among various units and individuals in an organization

23 Prentice Hall, Classification of EC by the Nature of the Transaction (cont.) Business-to-employee (B2E): EC model in which an organization delivers services, information, or products to its individual employees Collaborative commerce (c-commerce): EC model in which individual or groups communicate or collaborate online E-government: Government-to-citizens (G2C): EC model in which a government entity buys or provides good, services, or information to businesses or individual citizens

24 Prentice Hall, Classification of EC by the Nature of the Transaction (cont.) Exchange (electronic): a public e-market with many buyers and sellers Exchange-to-exchange (E2E): EC model in which electronic exchanges formally connect to one another for the purpose of exchanging information

25 Prentice Hall, Marketing Computer sciences Consumer behavior and psychology Finance Economics Management information systems Accounting and auditing Management Business law and ethics Others Interdisciplinary Nature of EC

26 Prentice Hall, Brief History of EC EC applications first developed in the early 1970s Electronic funds transfer (EFT) Limited to: Large corporations Financial institutions A few other daring businesses

27 Prentice Hall, Brief History of EC (cont.) Electronic data interchange (EDI) electronic transfer of documents: Purchase orders Invoices E-payments between firms doing business Enlarged pool of participants to include: Manufacturers Retailers Service providers

28 Prentice Hall, Brief History of EC (cont.) Interorganizational systems (IOS) Stock trading Travel reservation systems Internet became more commercialized in the early 1990s Almost all medium-and large-sized organization in the world now has a Web site Most large corporations have comprehensive portals

29 Prentice Hall, Brief History of EC (cont.) EC Successes Pure online eBay VeriSign AOL Checkpoint Click-and-mortar GE IBM Intel Schwab EC Failures E-tailors began to fail in 1999 This does not mean that ECs days are numbered Large EC companies like are expanding but success or failure is not certain

30 Prentice Hall, Success Story of Campusfood.coms recipe for success was to provide interactive menus to college students Using the power of the Internet to enhance traditional telephone ordering of meals Taking thousands of orders for local restaurants, bringing pizzas, hoagies, and wings to the Penn community

31 Prentice Hall, (cont.) Building the companys customer base involved Registering other universities Attracting students Generating a list of restaurants from which students could order food for delivery Some activities are outsourced to a marketing firm enabling the addition of dozens of schools nationwide

32 Prentice Hall, (cont.) Built on an investment of less than $1 million Private investors Friends Family members Revenue is generated through transaction fees5 percent commission on each order

33 Prentice Hall, (cont.) At you can: Navigate through a list of local restaurants, Browse an interactive menu. Bypass busy telephone signals to place an order online Get access to special foods, promotions, and restaurant giveaways Arrange electronic payment of your order

34 Prentice Hall, A method of doing business by which a company can generate revenue to sustain itself Spells out where the company is positioned in the value chain Business models are a component of a business plan or a business case Business Models

35 Prentice Hall, Business Plans & Business 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

36 Prentice Hall, The Content of a Business Plan Mission statement and company description The management team The market and the customers The industry and competition The specifics of the products and/or services Marketing and sales plan Operations plan Financial projections and plans Risk analysis Technology analysis

37 Prentice Hall, Structure of Business Models Transaction fees Subscription fees Advertisement fees Affiliate fees Sales Other models All business models must specify their revenue model (the description of how the company or an EC project will earn revenue) Revenue sources are Value proposition is the description of the benefits a company can derive from using EC

38 Prentice Hall, Typical Business Models in EC Online, direct marketing Electronic tendering systems Reverse auction is a tendering system sellers are invited to bid on the fulfillment of an order to produce a product or provide a service; the lowest bid wins Name your own price Find the best price

39 Prentice Hall, Typical Business Models in EC (cont.) Affiliate marketing is an arrangement whereby a marketing partner (business, organization or individual) refers consumers to the selling companys Web site Viral marketing is word-or-mouth marketing in which customers promote a product or service to friends or other people by using the Internet

40 Prentice Hall, Typical Business Models in EC (cont.) Group purchasing is getting many small buyers together to by in large quantities Online auctions Product and service customization Customization is the creation of a product or service according to the buyers specifications Electronic marketplaces and exchanges Vertical marketplace is a marketplace that concentrates on one industry; also called vertical portals or vortals Supply chain improvers

41 Prentice Hall, Exhibit 1.3 The Business Model of

42 Prentice Hall, The Benefits of EC Benefits to Organizations Expands the marketplace to national and international markets Decreases the cost of creating, processing, distributing, storing and retrieving paper-based information Allows reduced inventories and overhead by facilitating pull-type supply chain management

43 Prentice Hall, Benefits of EC (cont.) The pull-type processing allows for customization of products and services which provides competitive advantage to its implementers Reduces the time between the outlay of capital and the receipt of products and services Supports business processes reengineering (BPR) efforts Lowers telecommunications cost - the Internet is much cheaper than value added networks (VANs)

44 Prentice Hall, Benefits of EC (cont.) Benefits to consumers Enables consumers to shop or do other transactions 24 hours a day, all year round from almost any location Provides consumers with more choices Provides consumers with less expensive products and services by allowing them to shop in many places and conduct quick comparisons

45 Prentice Hall, Benefits of EC (cont.) Allows quick delivery of products and services (in some cases) especially with digitized products Consumers can receive relevant and detailed information in seconds, rather than in days or weeks Makes it possible to participate in virtual auctions Allows consumers to interact with other consumers in electronic communities and exchange ideas as well as compare experiences Facilitates competition, which results in substantial discounts

46 Prentice Hall, Benefits of EC (cont.) Benefits to society Enables more individuals to work at home, and to do less traveling for shopping, resulting in less traffic on the roads, and lower air pollution Allows some merchandise to be sold at lower prices, benefiting less affluent people Enables people in Third World countries and rural areas to enjoy products and services which otherwise are not available to them Facilitates delivery of public services at a reduced cost, increases effectiveness, and/or improves quality

47 Prentice Hall, Interorganization and Collaboration Orbis Corporation changes linear physical supply chain to an electronic hub

48 Prentice Hall, Orbis Corporation (cont.)

49 Prentice Hall, The Limitations of EC Technical limitations There is a lack of universally accepted standards for quality, security, and reliability The telecommunications bandwidth is insufficient Software development tools are still evolving There are difficulties in integrating the Internet and EC software with some existing (especially legacy) applications and databases. Special Web servers in addition to the network servers are needed (added cost). Internet accessibility is still expensive and/or inconvenient

50 Prentice Hall, The Digital Revolution and the Economic Impact of EC In the Digital Revolution the economy is based on digital technologies including: Digital communication networks Computers Software Other related information technologies Also called: Internet economy New economy Web economy

51 Prentice Hall, The Digital Revolution and the Economic Impact of EC (cont.) Digital networking and communication infrastructures provide a global platform where people and organizations: Interact Communicate Collaborate Search for information

52 Prentice Hall, The Digital Revolution and the Economic Impact of EC (cont.) The global platform includes these characteristics A vast array of digitizable products Consumers and firms conduct financial transactions digitally Microprocessors and networking capabilities embedded in physical goods

53 Prentice Hall, The Digital Revolution and the Economic Impact of EC (cont.) The term digital economy also refers to the convergence of computing and communication technologies on the Internet and other networks and the resulting flow of information and technology that is stimulating e- commerce and vast organizational changes

54 Prentice Hall, The Digital Revolution and the Economic Impact of EC (cont.) This convergence enables all types of information (data, audio, video, etc.) to be stored, processed, and transmitted over networks to many destinations worldwide Web-based EC systems are accelerating the digital revolution by providing competitive advantage to organizations

55 Prentice Hall, Exhibit 1.5 Cost Curve of Regular & Digital Products

56 Prentice Hall, Exhibit 1.6 The Economic Effects of EC

57 Prentice Hall, Economics of Digital Systems (cont.) Reach vs. richness Another economic impact of EC is the trade- off between the number of customers a company can reach (called reach) and the amount of interactions and information services they can provide to customers (called richness)

58 Prentice Hall, Exhibit 1.7 Reach vs. Richness

59 Prentice Hall, Contributions of EC to Organizations The New World of Business Business pressures Organizational responses The role of Information Technology (including electronic commerce)

60 Prentice Hall, Business Pressures The term business environment refers to the social, economic, legal, technological, and political actions that affect business activities Business pressures are divided into the following categories: Market (economic) Societal Technological

61 Prentice Hall, Exhibit 1.8 Major Business Pressures & the Role of EC

62 Prentice Hall, Organizational Responses Strategic systems Provide organizations with strategic advantages, enabling them to: Increase their market share Better negotiate with their suppliers Prevent competitors from entering into their territory

63 Prentice Hall, FedEx Solutions FedEx provides a host of Web-based logistics solutions to enterprise (business) customers providing services FedEx distribution centers Worldwide network of warehouses to provide ready-to-use warehousing services to businesses Allows for instant expansion of distribution capabilities Network is managed electronically All communication with the shippers and receivers is done online

64 Prentice Hall, FedEx Solutions (cont.) FedEx express distribution depots Provides a one-stop source of express distribution capabilities. Goods in these depots are available for delivery 24 hours a day. Service is targeted at time-critical businesses All communication is done online

65 Prentice Hall, FedEx Solutions (cont.) FedEx returns management FedEx NetReturn designed to streamline the process of returns Internet-based system to schedule pickup of packages from consumers and to obtain time-definite delivery Online status tracking and customized reporting

66 Prentice Hall, FedEx Solutions (cont.) Other value-added services Products can be shipped from a FedEx- operated warehouse instead of the business customers warehouse FedEx can provide a merge-in-transit service to customers that operate on rapid turnaround and delivery

67 Prentice Hall, Organizational Responses (cont.) Continuous improvement efforts Many companies continuously conduct programs to improve: Productivity Quality Customer service Business process reengineering (BPR) Strong business pressures may require a radical change Such an effort is referred to as business process reengineering (BPR)

68 Prentice Hall, Organizational Responses (cont.) Business alliances Alliances with other companies, even competitors, can be beneficial Virtual corporationelectronically supported temporary joint venture Special organization for a specific Time-limited mission Electronic markets Optimize trading efficiency Enable their members to compete globally Require the collaboration of the different companies and competitors

69 Prentice Hall, Organizational Responses (cont.) Reduction in cycle time and time to market Cycle time reductionshortening the time it takes for a business to complete a productive activity from its beginning to end Extremely important for increasing productivity and competitiveness Extranet-based applications expedite steps in the process of product or service development, testing, and implementation

70 Prentice Hall, Time-to-Market for New Drugs FDA must be extremely careful in approving new drugs; public pressure to approve new drugs quickly FDA requires: Extensive research Clinical testing Very bulky documentation is necessary Manual review process slows

71 Prentice Hall, Time-to-Market for New Drugs (cont.) Computer-Aided Drug Application Systems (software program) offers a computerized solution Network-distributed document processing system Enables the pharmaceutical company to scan documents into a database Saves time Information can be processed or printed at the users desktop computer

72 Prentice Hall, Time-to-Market for New Drugs (cont.) Remote corporate and business partners can also access the system The overall result: time-to-market of a new drug is reduced by up to a year ISIS Pharmaceuticals, Inc. ( developed an extranet-based system Uses CD-ROMs to submit reports to the FDA Opens its intranet to FDA personnel Save 6 to 12 months

73 Prentice Hall, Organizational Responses (cont.) Empowerment of employees and collaborative work Employees given the authority to act and make decisions on their own improves Productivity Customer relationship management (CRM) Empowered sales people and customer service employees: Make customers happy quickly Help increase customer loyalty

74 Prentice Hall, Organizational Responses (cont.) Supply chain improvements Help reduce supply chain delays, inventories and eliminate other inefficiencies Mass customizationproduction of large quantities of customized items Business problem is how to efficiently provide customization EC is an ideal facilitator of mass customization by enabling electronic ordering to reach the production facility in minutes

75 Prentice Hall, Putting It All Together The task facing each organization is how to put together the components that will enable the organization to gain competitive advantage by using EC

76 Prentice Hall, Putting It All Together (cont.) The first step is to put in the right connective networks The vast majority of EC is done on computers connected to: Internet Intranet--An internal 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

77 Prentice Hall, Putting It All Together (cont.) Major concern of todays companieshow to transform themselves to take part in digital economy Example:Toys, Inc. Uses intranet for internal communications, collaboration, dissemination of information Networked to e-marketspaces and large corporations Corporate portal for communication and collaboration with business partners

78 Prentice Hall, Exhibit 1.10 Networked Organizations

79 Prentice Hall, Is it real? How to evaluate the magnitude of the business pressures. Why is the B2B area so attractive? There are so many EC failureshow can one avoid them? What should be my companys strategy toward EC? How do we transform our organization into a digital one? Managerial Issues

80 Prentice Hall, 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 Benefits of EC to organizations, consumers, and society Limitations of EC The digital revolution and the economic impact of EC The role of EC in combating pressures in the business environment

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