1. Copyright 2004 John Wiley & Sons, Inc.16 - 1 Information Technology: Strategic Decision Making For Managers Henry C. Lucas Jr. John Wiley & Sons, Inc Dinesh Mirchandani University of Missouri – St. Louis

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3. Copyright 2004 John Wiley & Sons, Inc.16 - 3 Chapter 16 Electronic Commerce: Changing How Business is Done

4. Copyright 2004 John Wiley & Sons, Inc.16 - 4 Value Proposition Investments in electronic commerce provide value on a number of dimensions –New channels for sales –Reduction in personnel required to take orders and provide customer service –Reductions in the cost of transactions –Providing better customer service, e.g. electronic airline tickets and self-service check-in kiosks at airports –Broadening markets and providing more transparency of prices –Creation of new markets, e.g. E-Bay and auctions for surplus industrial products –Development of more efficient supply chains –Creation of more competitive markets for buyers

5. Copyright 2004 John Wiley & Sons, Inc.16 - 5 Metrics to Evaluate the Contribution of E-Commerce Percentage of electronic transactions Percentage of customers ordering online Percentage of electronic business with suppliers Cost per order received Percentage of repeat business (customer retention)

6. Copyright 2004 John Wiley & Sons, Inc.16 - 6 E-Commerce Electronic commerce is the use of technology, in particular the Internet, to conduct business In general e-commerce refers to buying or selling electronically, usually interactively

7. Copyright 2004 John Wiley & Sons, Inc.16 - 7 The Nature of Markets In a free market economy, transactions take place where the downward sloping demand curve intersects the upward sloping supply curve. –The intersection of these two curves determines both the price and the quantity sold Variations to the simple demand-supply model –Competition –Transactions cost theory –Auctions

8. Copyright 2004 John Wiley & Sons, Inc.16 - 8 The Law of One Price Bertrand Competition –price must equal marginal cost (where marginal cost includes a return on capital) –suggests that the price of similar products should converge to the same amount –e-commerce research shows mixed results some studies do not show convergence to one price –perhaps sellers avoid having their products sold as commodities

9. Copyright 2004 John Wiley & Sons, Inc.16 - 9 Transactions Cost Economics Transactions costs are the costs of obtaining goods and services in the market The theory tries to explain how firms are organized and how they govern themselves –E.g., utilization of markets versus hierarchies E-commerce can lower transactions costs

10. Copyright 2004 John Wiley & Sons, Inc.16 - 10 Auctions Auctions are efficient markets Common types of Auctions –English: auctioneer announces an opening price and bid increments, and encourages higher and higher bids from the audience –Dutch: the opening price is v high, and is lowered by small increments. The bidder “calling” out first wins the auction and gets the goods –Reverse: the buyer names the price, and sellers decide if they want to provide a good or service at that price Priceline.com (also called a “demand aggregator”) Internet auctions remove the constraints of place and time on an auction, and enable widespread participation

11. Copyright 2004 John Wiley & Sons, Inc.16 - 11 E-Commerce Considerations What products and service should we sell electronically? How should we design our online store? How do we avoid cannibalizing our existing sales channels? What incentives should we provide for cooperation between those responsible for traditional and electronic sales and distribution? How much should we invest in e-commerce? What is the likely return?

12. Copyright 2004 John Wiley & Sons, Inc.16 - 12 Business to Consumer (B2C) Electronic Commerce One reason for the failure of B2C business models was the inability to attain a critical mass of customers –With the maturation of e-commerce these failed business models will likely reappear Today buyers and sellers have Internet tools that facilitate price discovery –search engines –comparison sites

13. Copyright 2004 John Wiley & Sons, Inc.16 - 13 Business-to-Business (B2B) Electronic Commerce The value of B2B e-commerce is not in a relationship between one buyer and seller, but rather from transactions throughout the supply chain Options for participating in B2B E-commerce –arrangements with first tier suppliers and encouraging them to communicate demand to their suppliers in turn –following industry specific efforts to facilitate electronic commerce (e.g., RosettaNet) –purchasing software designed to integrate trading partners and their supply chains (e.g., i2; Manugistics)

14. Copyright 2004 John Wiley & Sons, Inc.16 - 14 Exchanges A form of B2B commerce that attempts to create a marketplace where buyers and sellers meet –may include a wide variety of firms, or it may focus on a single industry –Examples include Avendra and Covisint Reasons for the failure of early exchanges –lack of understanding of business purchasing –lack of trust

15. Copyright 2004 John Wiley & Sons, Inc.16 - 15 Intermediaries Early predictions were that the Internet would replace the intermediary leading to vast disintermediation –However it is likely that some intermediaries will continue to function on and off the Web, particularly those who solve customer or producer problems those that provide personalized service

16. Copyright 2004 John Wiley & Sons, Inc.16 - 16 E-commerce Successes Grainger Southwest Airlines Federal Express General Motors

17. Copyright 2004 John Wiley & Sons, Inc.16 - 17 Summary E-commerce is one of the most important innovations of the technology age Experts expect that the volume of B2B e- commerce will dwarf B2C sales Even traditional firms are embracing the Internet Supply chain integration can increase firm efficiency Through e-commerce a company can improve efficiency, reduce cost, and provide better customer service