Topic X Introduction

1
1. 2. 3. 4.

to E-commerce

LEARNING OUTCOMES
By the end of this topic, you should be able to: Differentiate between e-commerce and traditional commerce; Identify categories of e-commerce business models; Describe the success and failure of e-commerce in different eras; and Identify major themes underlying the study of e-commerce.

INTRODUCTION

What is meant by electronic commerce or more commonly known as e-commerce? Have you ever heard of the term?

Figure 1.1: Online shopping Source: http://www.cartoonstock.com

TOPIC 1

INTRODUCTION TO E-COMMERCE

To many people, e-commerce means shopping on the Internet or online shopping as illustrated in Figure 1.1. However, e-commerce is much broader and encompasses many business activities than just online shopping. This topic will provide a comprehensive description and definition of e-commerce. We will see the unique features of e-commerce and its difference from traditional commerce as well as describe categories of e-commerce business models. Then, the origin and growth of e-commerce will be explained and followed by the discussion of the three broad interrelated themes in e-commerce.

1.1

TRADITIONAL COMMERCE AND E-COMMERCE

Before we venture into e-commerce, it is good to learn about the activities that companies undertake manually when they do any kind of business, and then learn how these firms might undertake these activities electronically. Therefore, in the following sections, we will look into two types of commerce: traditional and electronic.

1.1.1

Traditional Commerce

Commerce or doing business is a negotiated exchange of valuable objects or services between two or more parties and includes all activities that each party undertakes to complete the transaction. We can examine any commerce transaction from either the buyer or the seller s viewpoint. Let us look at the activities involved in traditional commerce for buyers as shown in Table 1.1.
Table 1.1: Activities of Traditional Commerce for Buyers Activities Identify specific need Description A buyer begins by identifying a need. This may be a simple need, such as when an individual decides to buy a sandwich as he feels hungry or it may be a very complex need such as looking for the most suitable school. Once buyers h a v e identified their specific needs, they must find products or services that will satisfy those needs. In traditional commerce, buyers use a variety of search techniques. They may refer to catalogues, ask friends, read advertisements or examine directories. Buyers may consult salespersons to gather information about specific features and capabilities of the products they are considering.

Search for products or services that will satisfy the specific need

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Select a vendor

After buyers h a v e selected a product or service that will meet the identified need, they must select a vendor that can supply that product or service. Buyers in traditional commerce contact vendors in a variety of ways, for instance, by telephone, by mail and by meeting face-to-face at trade shows. After choosing a vendor, the buyer negotiates a purchase transaction. This transaction may have many elements, including delivery date, logistic information, method of shipment, price, warranty, payment terms and will often include detailed specification to be confirmed by inspection when the product is delivered or the service is performed. When the buyer is satisfied that the purchased product or service meets the terms and conditions agreed by the buyer and seller, the buyer pays for the purchase. After the sale is completed, the buyer may have further contact with the seller regarding warranty claims, upgrades and regular maintenance.

Negotiate a purchase transaction

Make payment

Perform regular maintenance and make warranty claims

Do you know that each action taken by a buyer engaged in commerce has a corresponding action that is taken by the seller? The activities involved in traditional commerce from a seller s viewpoint are as shown in Table 1.2.
Table 1.2: Activities of Traditional Commerce for Sellers Activities Conduct market research to identify customer needs Description Sellers often undertake market research to identify potential customers needs. Even businesses that have been selling the same product or service for many years look for ways to improve and expand their offerings. Firms conduct surveys, have salespeople to talk with customers, run focus groups and hire outside consultants to help them in this identification process. Once customer needs are identified, sellers create the products and services that they believe will meet those needs. This includes design, testing and production activities. The next step for the sellers is to make potential customers aware of the new products or services. Sellers engage in many different kinds of advertising and promotional activities to communicate information about their products and services to existing and potential customers.

Create product or service that will meet customers needs Advertise and promote product or service

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Negotiate a sale transaction, including delivery logistic, inspection, testing and acceptance

Once a customer responds to the sellers promotional activities, the two parties must negotiate the details of the purchase transaction. In some cases, this is simple; for example, many retail transactions involve nothing more than a buyer entering a sellers store, selecting and inspecting items to purchase and paying for them. In other cases, purchase transactions require prolonged negotiations to settle the terms of delivery, inspection, testing and acceptance. After the seller and buyer resolve t h e delivery logistics, the seller ships the goods or provides the service and sends an invoice to the buyer. In some cases, the seller requires payment before or at the time of shipment. However, most businesses sell to each other on credit base, so the seller must keep a record of the sale and wait for the customer to pay. Most businesses maintain sophisticated systems for receiving and processing customer payments. They want to track the amounts they are owed and ensure that payments they receive are credited to the proper customers and invoice.

Ship goods and invoice customer Receive and process customer payments

SELF-CHECK 1.1
What are the similarities between the activities of commerce from the viewpoints of a buyer and a seller ?

1.1.2

E-commerce

For decades, firms have used various electronic communication tools to conduct different kinds of business transaction. Banks have used Electronic Fund Transfers (EFT) to move customers money around the world. All kinds of businesses have used Electronic Data Interchange (EDI) to place orders and send invoices. Retailers have used television advertising to generate telephone orders from the general public for various types of merchandise. Are you aware that some people use the term e-commerce for activities that specifically uses the Internet to conduct business? In essence, e-commerce is characterised by several attributes as shown in Figure 1.2.

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Figure 1.2: E-commerce attributes

ACTIVITY 1.1
1. 2. In your own words, describe what you understand about e-commerce. Give some examples of e-commerce activities. You can search the Internet or any related books to find out.

Let us look at the detailed explanation for each attribute as depicted in Table 1.3.
Table 1.3: E-commerce Attributes E-commerce Attribute Exchange of digitised information between parties Technology-enabled Description This information exchange can represent communication between two parties, coordination of the flows of goods and services, or transmission of electronic orders. These exchanges can be between organisations, individuals or both. E-commerce uses technology-enabled transactions such as Internet browsers in the World Wide Web (WWW), Automated Teller Machine (ATM), and Electronic Data Interchange (EDI) between business-to-business partners, and electronic banking. Businesses used to manage such transactions with customers and markets strictly through face-to-face interaction; in e-commerce, such transactions can be managed using technology.

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Technology-mediated

Gradually, from technology-enabled transactions, e-commerce is moving into technology-mediated relationship. Buyers and sellers no longer meet to transact in the physical worlds marketplace but meet in the virtual worlds market-space. Business transactions and relationship with the customers in the market-space are largely managed by technology. Hence, the success of a business rests on how well the screens and machines manage customers and their expectations.

Based on the above table, e-commerce can be summarised as follows: E-commerce involves digitally enabled commercial transactions between and among organisations and individuals.

1.1.3

How is E-commerce Different from Traditional Commerce?

How to distinguish e-commerce from traditional commerce? The following are the elements that make e-commerce unique or different from traditional commerce as shown in Figure 1.3:

Figure 1.3: Elements of e-commerce

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There are eight elements of e-commerce. Each will be elaborated in Table 1.4.
Table 1.4: Elements of E-commerce Elements Core Strategic Decisions are Technology-Based Description The strategic decisions about the virtual storefront, customer service, and customer experience, and the content of site are co-mingled with the technological decisions. These decisions are related to the following: (i) (ii) (iii) Selection of service providers; Common business systems; and Approaches to web design.

In contrast to the traditional commerce, digital business cannot extract technological choices from the strategic decision-making process. This does not mean that technology is unimportant to traditional commerce; but rather their technological decisions are not as tightly linked to strategy. Ubiquitousness E-commerce is ubiquitous, meaning that it is available just about everywhere and at all times. The Web storefront is expected to be open seven days a week, 24 hours a day, and 365 days a year. This level of access has significant implications for the following parties: (a) Customers The customers are always able to do the following: (i) (ii) (iii) (iv) Gather information; Conduct product searches; Compare prices across multiple websites; Order products; and

Customers are also able to shop at home, at work, or even from the car by using mobile commerce or wireless digital devices such as hand phones, laptops and Personal Digital Assistants (PDA) to enable transactions on the Web (refer to Figure 1.4).

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Figure 1.4: Wireless digital devices Source: http://www.topnews.in (b) Firms For the firm, the level of access has forced businesses to adjust both tactical responsiveness to competitive moves and strategic responsiveness. It also reduces transaction costs and the cost of participating in a market. To transact, it is no longer necessary to spend time and money travelling to a market.

Real-Time Competitive Responsiveness

E-commerce storefronts are frequently engaged in dynamic dialogues on the public platform on the Web. Hence, it is easier for companies to duplicate their competitors success. In e-commerce markets, prices and costs become more transparent. Price transparency refers to the ease with which consumers can find out the variety of prices in the market. This does not mean that the e-commerce marketplace will eventually evolve to commodity-like status, with price being the only consideration. Quite the contrary, speed of innovation, branding, ease of use, operational effectiveness, product assortment and affiliate agreements can be used by companies to maintain or increase differentiation.

Technology-Based Customer Interface

In traditional commerce, customers conduct transactions either face-to-face or over the phone with store clerks, account managers, or other individuals. In contrast, the e-commerce customers interface in a screen-to-face interaction. This includes computerbased monitors, ATM machines, PDAs, or other electronics devices.

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These types of interfaces place enormous responsibility on the organisation to capture and represent the customer experience because there is often no opportunity for direct human intervention during the encounter. If the interface is designed correctly, the customer will have no need for simultaneous or follow-up phone conversation. Customer Controlled Interaction In most websites, the customer is in control during screen-to-face interactions. The customer controls the following elements: (i) (ii) (iii) (iv) (v) Search process; Time spent on various sites; Degree of price or product comparison; People with whom the customer comes into contact; and Decision to buy.

In a face-to-face interchange, the control can rest with the buyer, seller or community member. The virtual store can attempt to shape the customer experience with uniquely-targeted promotions, reconfiguration of storefronts to reflect past search behaviour, recommendation based on previous behaviour of other similar users, and access to proprietary information. However, the seller has much less power in the online environment due to the control and information flows that the online world puts into customers hands. Knowledge of Customer Behaviour While the customer controls the interaction, the firm has unprecedented access to observe and track individual consumer behaviour. Companies, through third-party measurement firms, can track a host of behaviours such as: (i) (ii) (iii) (iv) (v) (vi) Websites visited; Length of stays on a site; Content of wish lists and shopping carts; Dollar amounts or purchases; Repeat purchase behaviour; and Other metrics.

This level of customer behaviour tracking as compared with tracking consumer attitudes, knowledge, or behavioural intentions is not possible in traditional commerce.

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Permit Personalisation and Customisation

E-commerce technologies permit the following: (a) Personalisation Merchants can target their marketing messages to specific individuals by adjusting the message to a persons name, interests and past purchases. (b) Customisation Changing the delivered product or service based on a users preferences or prior behaviour. In sum, each of these differences from traditional commerce makes e-commerce business unique. The combination of screento-customer interfaces, real-time competitive responses, and oneto-one customisation lead to value increases for both customer and firm.

Global Reach

E-commerce technology permits commercial transactions to cross cultural and national boundaries far more conveniently and costeffectively than traditional commerce. As a result, the potential market size for e-commerce merchants is roughly equal to the size of the worlds online population. The total number of customers that can be obtained by an e-commerce business is a measure of its reach. In contrast, most traditional commerce is local or regional and it involves local merchants or national merchants with local outlets. Television, radio stations and newspapers, for instance, are primarily local and regional institutions with limited but powerful national networks that can attract a national audience. In contrast to e-commerce technology, these older commerce technologies do not easily cross national boundaries to a global audience.

1.1.4

Business Processes in Commerce

Do you know that since the introduction of e-commerce, many new terms have evolved to describe the various types of business? For example, look at the following terms: (a) Brick and Mortar Business A business that has a physical location, such as a store, which we can walk into and purchase merchandise; and Clicks and Brick Business A business that has a physical location and an online presence.

(b)

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However, in this section, we will look into the common business processes involved in commerce. In many cases, business processes use traditional commerce activities very effectively, and technology cannot improve upon them. Products that buyers prefer to touch, smell, or examine closely are difficult to sell using electronic commerce. For example, customers might be reluctant to buy high-fashion clothing and perishable food products as shown in Figure 1.5, such as meat and fruits, if they cannot closely examine the products before agreeing to purchase them.

Figure 1.5: Perishable food items Source: http://www.akumal-villas.com

Retail merchants have years of traditional commerce experience in creating store environments that help convince customers to buy. This combination of store design, layout and product display knowledge is called merchandising. In addition, many salespeople have developed skills that allow them to identify customer needs and find products or services that meet those needs. The arts of merchandising and personal selling can be difficult to practise remotely. On the other hand, some products are easier to sell on the Internet than others. As can be seen in Figure 1.6, products such as books or CDs are good candidates for e-commerce because customers do not need to experience the physical characteristics of the particular item before they buy it. Since one copy of a new book is identical to other copies, and since the customer is not concerned about fit, freshness or other such qualities, customers are usually willing to order a title without examining the specific copy they will receive.

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Figure 1.6: Books are potential e-commerce products Source: http://earth911.com

Let us look at Table 1.5 which shows examples of business processes. They can be divided as follows: (a) (b) (c) Processes well-suited to e-commerce; Processes better-suited to traditional commerce; and Processes well-suited to e-commerce and traditional commerce.
Table 1.5: Examples of Business Processes E-commerce Sale/purchaseofbooks, CDsandtravelservices Onlinedeliveryofsoftware Traditional Commerce Sale/purchaseofimpulse itemsforimmediateuse E-commerce and Traditional Commerce Sale/purchaseof automobiles

Sale/purchaseofperishable Onlinebanking foodproducts Roommatematching services

Salepurchaseofinvestment Smalldenomination andinsuranceproducts purchasesandsales Onlineshipmenttracking

Sale/purchaseofhighvalue Sale/purchaseofresidential jewelleryandantiques realestate

Of course, these suitability classifications depend on the current state of available technologies, and thus, might change as new tools emerge for implementing e-commerce. One business process that is especially well-suited to electronic commerce is the selling of commodity items.

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A commodity item is a product or service that is hard to distinguish from the same products or services provided by other sellers. Its features have become standardised and well- known. Gasoline, books, CDs office supplies, soap, computers, and furniture are all examples of commodity products or services.

A product that has a strong brand identity such as a Sony CD player is easier to sell on the Web than an unbranded item as the brands reputation reduces or increases the buyers concerns about the items quality. Other items that are wellsuited to e-commerce are those that appeal to small, but geographically dispersed groups of customers. Collectible comic books are an example of this type of product. A combination of traditional and e-commerce strategies works best when the business process includes both commodity and personal inspection elements. For example, many people are finding information on the Web about new and used automobiles, but only a few people would be willing to buy a used car without driving and personally inspecting it. In the above case, e-commerce provides a good platform for buyers to obtain information about available models, options, reliability, prices and dealerships. However, the variability in the condition of used cars makes the traditional commerce component of personal inspection a key part of the transaction negotiation. The next two sections summarise some advantages and disadvantages of e-commerce.

SELF-CHECK 1.2
In which business process does a combination of traditional and e-commerce strategies work best?

1.1.5

Advantages of E-Commerce

Do you know why firms are interested in e-commerce? Firms are interested in it because, quite simply, it can help increase the profits. All the advantages of e-commerce for businesses can be summarised in one statement as shown.

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E-commerce can increase sales and decrease costs.

The advantages of e-commerce are as shown in Table 1.6:

Table 1.6: Advantages of E-commerce Advantages Easily reach the target audience Description Well-planned Web advertising can get even a small firms promotional message out to potential customers in every country in the world. A firm can use e-commerce to reach narrow market segments that are geographically scattered. The Web is particularly useful in creating virtual communities, gathering of people who share common interests on the Internet, that become ideal target markets for specific types of products or services. A business can reduce the costs of handling sales inquiries, providing price quote and determining product availability by using e-commerce in its sales support and order-taking processes. Just as e-commerce increases sales opportunities for the seller, it increases purchasing opportunities for the buyer. Negotiating price and delivery terms is easier in e-commerce because the Internet can help companies efficiently obtain competitive bid information. E-commerce increases the speed and accuracy with which businesses can exchange information, which reduces costs on both sides of transactions. E-commerce provides buyers with a wider range of choices than traditional commerce because buyers can consider many different products and services from a wider variety of sellers. Some buyers prefer a great deal of information in deciding on a purchase; others prefer less. E-commerce provides buyers with an easy way to customise the level of detail in the information they obtain about a prospective purchase. Instead of waiting for days for the mail to bring a catalogue or product specification sheet, or even minutes for a fax transmission, buyers can have instant access to detailed information on the Web. Some products such as software, audio clips or images can even be delivered through the Internet, which reduces the time buyers must wait to begin enjoying their purchases.

Cost-effective

Great variety

Fast access

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Safe

Electronic payment can be easier to audit and monitor than payment made by cheque, providing protection against fraud and theft losses. E-commerce enables people to work from home and this brings the benefit of avoiding commuter-caused traffic and pollution. E-commerce can also make products and services available in remote areas. For example, distance education is making it possible for people to learn skills and earn degrees no matter where they live.

Availability

1.1.6

Disadvantages of E-commerce

We have looked at the advantages of e-commerce. Now, let us move on to the disadvantages of e-commerce. Most of the disadvantages stem from the newness and rapidly developing pace of underlying technologies. These disadvantages will disappear as e-commerce matures and becomes more available to and accepted by the general population. The disadvantages of e-commerce are as shown in Table 1.7.
Table 1.7: Disadvantages of E-commerce Disadvantages Difficulty in examining and selecting Description Some business processes may never adopt e-commerce. For example, perishable foods and unique high-cost items and antiques may be impossible to inspect adequately from a remote location, regardless of any technologies that might be devised in the future. Many products and services require that a critical mass of potential buyers be equipped and willing to buy through the Internet. Most online grocers focus their sales efforts on packaged goods and branded items. Perishable grocery products, such as fruit and vegetables, are much harder to sell online because customers want to examine and select specific items that are still fresh and appealing. Difficulty in calculating the cost Businesses often calculate return-on-investment numbers before committing to any new technology. Investments have been difficult to calculate in electronic commerce, because the costs and benefits have been hard to quantify. Costs, which are a function of technology, can change dramatically even during short-lived e-commerce implementation projects because the underlying technologies are changing so rapidly.

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Difficulty in recruiting and retaining employees Difficulty in integrating existing databases and software Difficulty in terms of cultural and legal aspects

Many firms have had trouble recruiting and retaining employees with the technological, design, and business process skills needed to create an effective e-commerce presence. Business also face the difficulty of integrating existing databases and transaction- processing software designed for traditional commerce into the software that enables e-commerce. Many businesses face cultural and legal obstacles to conducting e-commerce as some consumers are fearful of sending their credit card details to online merchants they have never met.

However, as more businesses and individuals find the benefits of e-commerce to be compelling, many of these technology and culture-related disadvantages will be resolved or seem less problematic.

1.1.7

Differences between E-commerce and E-business

The rapid advancement of technology and its application by business seem to be accompanied by similar rapid changes in terminology. The use of the term e-commerce has been supplemented by additional terms such as e-business. There is a debate among consultants and academicians about the meaning and limitations of both terms: e-commerce and e-business. Some argue that e-commerce encompasses the entire world of electronically based organisational activities that support a firms market exchanges including a firms entire information systems infrastructure. On the other hand, others argue that e-business encompasses the entire world of internal and external electronically based activities, including e-commerce. For the purposes of this module, we will use the term e-business to refer primarily to the digital enabling of transactions and processes within a firm, involving information systems under the control of the firm. For most of the part, e-business does not include commercial transactions involving an exchange of value across organisational boundaries. For example, a companys online inventory control mechanisms are a component of e-business, but such internal processes do not directly generate revenue for the firm from outside businesses or consumers, as e-commerce does.

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It is true; however, that a firms e-business infrastructure can also support e-commerce exchanges. And e-commerce and e-business systems can and do blend together at the business firm boundary, at the point where internal business systems link up with suppliers, for instance. E-business applications turn into e-commerce precisely when an exchange of value occurs. In simple words, we can conclude that e-commerce primarily involves transactions that cross firm boundaries. In contrast, e-business primarily concerns the applications of digital technologies to business processes within the firm.

ACTIVITY 1.2
1. Name one type of business process which is not listed in the topic that you believe would be a good candidate for e-commerce. Explain why. Surf the following websites which deal with business processes in e-commerce. Then, answer the questions below. http://www.mphonline.com (Books) http://www.cimbclicks.com (E-banking) http://www.airasia.com (Airline tickets reservation) http://www.parksononline.com (Department stores) (a) (b) What does the business deal with? What are other examples of business processes which involve e-commerce?

2.

EXERCISE 1.1
1. 2. What is e-commerce? By using your own words, explain how e-commerce is unique and different from traditional commerce.

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1.2

CATEGORIES OF E-COMMERCE

In this section, you will get to know the different categories of e-commerce. There are four major categories as shown in Figure 1.7: (a) (b) (c) (d) Business-to-consumer (B2C); Business-to-business (B2B); Consumer-to-consumer (C2C); Consumer-to-business (C2B).

Figure 1.7: Four categories of e-commerce Source: Adapted from Rayport, J. F., & Jaworski, B. J. (2008).

Introduction to e-commerce. Boston: McGraw-Hill

In the following sections, you will learn in depth of the categories of e-commerce and in addition, you will also learn on another type of category of e-commerce: m-commerce.

1.2.1

Business-to-Consumer E-commerce

What is business-to-consumer e-commerce? Refer below for the explanation. Business-to-consumer (B2C) e-commerce consists of the sale of product or services from a business to the general public or an end user.

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In this model, the seller is the business and the buyer is the consumer (public). Products for sale can be physical objects such as books, flowers, computers, groceries, prescription drugs, music, movies, and cars. They also can be intangible items. For example, an online magazine or download purchase software. Popular services offered by B2C businesses include online banking, stock trading, and airline reservations. Sellers that use a B2C business model can maximise benefits by eliminating the middleman. Businesses sell products directly to consumers without using traditional retail channels. This enables some B2C companies to sell products at a lower cost and with faster service than comparable traditional commerce. Consumers also derive benefits from the B2C business model. They have access to a variety of products and service without the constraints of time or distance. Consumers easily can make comparisons between shops to find the best buy. Many B2C websites provide consumer services such as access to product reviews, chat rooms and other product-related information. These services often attract and retain customers. Many B2C businesses personalise their websites to consumers by tracking visitors preference while they browse through the web pages. This enables the B2C business to target advertisement, determine customer needs, and personalise offerings to a customer s profile. You will learn more on B2C businesses in Topic 2. For now, we will move on to the second category of e-commerce: Business-to-Business (B2B).

1.2.2

Business-to-Business E-commerce

What is meant by business-to-business e-commerce? Look at the explanation below. Business-to-business (B2B) e-commerce consists of the sale and exchange of products and service between businesses. For example, a company that manufactures bicycles might use the Internet to purchase tires from its supplier.

The B2B market is expanding at a much faster rate than the B2C market. According to e-Marketer, a leading independent research firm, B2B e-commerce

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is predicted to be more than 6.3 trillion dollars by 2012, while B2C e-commerce will reach about 400 billion dollar in the US. Many businesses use the unique advantages of the Internet to communicate with business partners. For example, some companies provide services to assist a manufacturer with locating suppliers. The Internet enables all participants in a supply chain to relay information to each other. A supply chain consists of the interrelated network of facilities and a distribution method that obtains materials, transforms materials into finished products and delivers the finished products to customers. Most businesses that engage in B2C e-commerce also participate in B2B ecommerce. Thus, many companys websites also provide goods and services to other businesses. A company engages in B2B e-commerce when stocking its warehouse and engages in B2C e-commerce when selling goods in the warehouse to consumers. Basic examples of B2B e-commerce sites are vendor, service, broker and infomediary sites. A vendor B2B site, also called an e-procurement site, is a product supplier that allows purchasing agents to use a network to shop, submit request for quotes (RFQs), and purchased items. A service B2B site uses a network to provide one or more services to businesses such as financing, warehousing or shipping. A brokering B2B site acts as a middleman by negotiating the contract of a purchase and a sale. An info-mediary (acronym for information intermediary) B2B site provides specialised information about suppliers and other businesses.

1.2.3

Consumer-to-Consumer E-commerce

You have learnt on B2B and B2C; now let us figure out the meaning of C2C as shown below. Consumer-to-consumer (C2C) e-commerce consists of individuals using the Internet to sell products and service directly to other individuals.

The most popular vehicle for C2C e-commerce is the online auction. An online auction is similar to negotiating, in which a consumer auctions goods to other consumers. If you are interested in an item, then you will bid on it. The highest bidder at the end of the bidding period purchases the item.

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In C2C e-commerce, the consumer does the following: (a) (b) (c) Prepares the product for market; Places the product for auction or sale; and Relies on the market-maker to provide a catalogue, search engine and transaction-clearing capabilities so that products can be easily displayed, discovered and paid for. Websites like eBay (www.ebay.com.my) and lelong (www.lelong.com.my) are the perfect examples for C2C e-commerce.

Another form of C2C e-commerce is Internet peer-to-peer (P2P) as shown below.

Internet peer-to-peer (P2P) describes an Internet network that enables users with the same networking software to connect to each others hard disks and exchange files directly without having to go through a central web server. With the appropriate software and Internet connection, users can copy files from someone elses hard disk to their hard disks. Although music-sharing services are now fee based, these programmes initially stirred controversy related to musics copyright infringement. They allowed users to easily copy MP3 music files from one computer to another. Other activities in C2C e-commerce include: (a) (b) (c) (d) Classified ads (e.g. www.freeclassifields.com); C2c exchange (e.g. www.targetbarter.com) Personal service (e.g. www.match.com). Virtual property (e.g. www.mmorpg.com)

1.2.4

Consumer-to-Business E-commerce

What is meant by consumer-to-business e-commerce? It is explained below. Consumer-to-business (C2B) e-commerce is a complete reversal of the business-to-consumer (B2C) model. In a consumer-to-business model, a consumer offers goods or services to companies and the companies pay for them.

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These groups may be economically-motivated, as with demand aggregators, or socially-oriented, as with cause-related advocacy groups at SpeakOut.com. Examples of C2B are in the forms of affiliate marketing, answering online polls for companies, being a freelance developer, etc. For example, a shampoo-producing company sends you an online survey and asks you to fill it out. When you have filled in the survey, you will be paid a particular amount of money for your service in the form of answers given for the questions posed in the survey.

1.2.5

Mobile Commerce (M-commerce)

Even though it is not regarded as one of the main categories of e-commerce, mcommerce still plays a significant role in e-commerce. Mobile-commerce (M-commerce) takes traditional e-commerce models and leverages emerging new wireless technologies to permit mobile access to the web.

Traditional e-commerce provides access to anyone, anytime and anywhere via wireless devices such as the Internet. In essence, wireless networks utilise newly available bandwidth and communication protocols to connect mobile users to the Internet. While existing wireless networks have limited bandwidth capacity, soon their capacity will increase significantly. In general, wireless web technology will enable the extension of existing Web business models to service the mobile work force and consumer of the future. For instance, Amazon.com recently made its site accessible by wireless mobile devices. Currently, there are many more cell phone subscribers than there are Internet users. When cell phones become truly Web- ready, a development expected within the next several years, analysts predict an explosion of interest in m-commerce.

SELF-CHECK 1.3
What traditional barriers are almost eliminated by e-commerce? Discuss your answers.

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ACTIVITY 1.3
Visit these websites to get a clear view of each category of e-commerce below: x Business-to-consumer (B2C) http://www.amazom.com http:// www.yahoo.com Business-to-business (B2B) http://www.alibaba.com http://www.dell.com Consumer-to-consumer (C2C) http://www.ebay.com.my http://www.lelong.com.my Consumer-to-business (C2B) http://www.freelancer.com http://www.google.com/adsense Mobile Commerce (M-Commerce) http://www.cimbclicks.com.my/mobilebankinguide.htm

x x

After viewing each website, describe how the features of websites in each categories are different compared to others.

EXERCISE 1.2
1. 2. 3. How do B2C business models maximise their benefits? Describe B2B e-commerce. What is the role of the consumer in a C2C e-commerce?

1.3

ORIGIN AND GROWTH OF E-COMMERCE

Although e-commerce is a very recent phenomenon of the 1990s, it already has a history. The history of e-commerce can be divided into three periods: (a) (b) (c) Innovation (1995-2000); Consolidation (2001-2006); and Reinvention (2007-future).

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Let us look at the definition given for each period. Innovation era was a period of explosive growth, beginning in 1995 with the first widespread use of the web to advertise products, and ending in 2000 when stock market valuations for dot.com companies began to collapse.

Consolidation era began in 2001, by which time a sobering reassessment of e-commerce companies and the value of their stock had occurred. Emphasis was shifted to business-driven approach rather than technology-driven approach where large traditional firms learned to use the web to strengthen their market position.

Reinvention era began in 2007 and extends through the present day and into the uncertain future. This period involves the extension of Internet technologies, the discovery of new business models based on consumergenerated content, social networking and virtual-online lives.

Each of these e-commerce periods is characterised by a set of visions and driving forces. In the following sections, we will take a look at each period in detail.

1.3.1

Innovation (1995-2000)

The early years of e-commerce were a time where key e-commerce concepts were developed and explored. Thousands of dot.com companies were formed and backed by over $125 billion in financial capital in the United States. For computer scientists and information technologists, the earlier success of e-commerce was attributed to a powerful set of information technologies developed over 40 years, from mainframe computer to personal computer, Internet and networking technologies. The vision was that everyone in the world could afford inexpensive computer with access to Internet. For economists, e-commerce raised the realistic prospect of a perfect Bertrand market. Let us look at the definition provided.

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Bertrand market is a market where price, cost, and quality information is equally distributed, where a nearly infinite set of suppliers compete against one another, and where customers have access to all relevant market information worldwide. Merchants in turn would have equal direct access to hundreds of millions of customers. In this near-perfect information market-space, transaction costs would plummet because the costs of searching for prices, product descriptions, payment settlement, and order fulfilment would all fall drastically. New shopping bot programmes would automatically search the entire web for the best prices and delivery times. For merchants, the cost of searching for customers would also fall, reducing the need for wasteful advertising. Prices and even costs would be increasingly transparent to the customer, who could now know exactly, and instantly the worldwide best cost, quality, and availability of most products. In turn, the market middleman would disappear. The distributors, wholesalers and other factors in the marketplace that are intermediates between producers and consumers, each demanding a payment and raising costs while adding little value. Manufacturers and content originators would develop a direct market relationship with their customers. The resulting intense competition, the decline of intermediaries, and the lower transaction costs would eliminate products brands, and along with it, the possibility of monopoly profits based on brands, geography, or special access to factors of production. Prices for products and services would fall to the point where prices covered costs of production plus a fair, market rate of return on capital, plus additional small payments for entrepreneurial effort (that would not last long). Unfair competitive advantages (which occur when one competitor has an advantage that others cannot purchase) would be eliminated, as would extraordinary returns on invested capital. That vision was called friction-free commerce as explained below. Friction-free commerce is 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, and unfair competitive advantages are eliminated.

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For real-world entrepreneurs, their financial backers and marketing professionals in the Innovation period, the idea of friction-free commerce was far from their own visions. For these players, e-commerce represented an extraordinary opportunity to earn far above normal returns on investment, far above the cost of borrowing capital. The e-commerce market space represented access to millions of consumers worldwide that used the Internet and a set of marketing communications technologies (e-mail and web pages) that was universal, inexpensive and powerful. These new technologies permit marketers to practise what they have always done which is segmenting the market into groups with different needs and price sensitivity, targeting the segments with branding and promotional messages, and positioning the product and pricing for each group; but with even more precision. In this new market space, extraordinary profits would go to first movers. Let us look below to figure out who are first movers. First movers are firms which were the first to market in a particular area and which moved quickly to gather market share. First movers could establish a large customer base quickly, build brand name recognition early, build an entirely new distribution channel, and then inhibit competitors (new entrants) by building in switching costs for their customers through proprietary interface designs and features available only at one site. Online businesses using the new technology could create informative, community-like features unavailable to traditional merchants. The thinking was that once customers became accustomed to using a companys unique Web interface and feature set, they could not easily be switched to competitors. E-commerce was, after all, a totally new way of shopping that would have to offer some immediate cost benefits to consumers. However, because doing business on the Web was supposedly so much more efficient when compared to traditional commerce, and even when compared to direct mail catalogue business, and because the costs of customer acquisition and retention would supposedly be so much lower, profit would inevitably materialise out of these efficiencies. Given these dynamics, market share, the number of visitors to a site, and revenue became far more important in the earlier stages than earning or profits.

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Entrepreneurs and their financial backers in the Innovation period expected that extraordinary profitability would come, but only after several years of losses. Thus, the Innovation period of e-commerce was driven largely by visions of profiting from new technology, with the emphasis on quickly achieving very high market visibility. Overall, the Innovation period of e-commerce was characterised by experimentation, capitalisation, and hyper competition.

1.3.2

Consolidation (2001-2006)

The crash in stock market values for dot.com companies throughout 2000 is a convenient mark for ending that period. There were a number of reasons for that crash such as: (a) Rebuilding the Internal Business Systems A part of the run-up technology stocks was due to enormous information technology capital expenditure of large American firms who were rebuilding their internal business systems to withstand the challenges of the year 2000 problem (Y2K). The simple change from year 1999 to 2000 was believed to be a major threat to corporate systems. Once these systems were rebuilt, this information technology capital expenditure declined, sending the earnings forecasts of technology companies down. Built Excess Capacity in High-Speed Networks In early 2000, it became clear that the telecommunications industry had built excess capacity in high-speed fibre optic networks. Price wars were breaking out in telecommunications markets, and it was clear that earnings in this sector would fall dramatically, with many smaller firms going bankrupt and unable to pay debts incurred to build high-speed networks. Less Sales Growth The 1999 e-commerce Christmas season provided less sales growth than anticipated, and more importantly, demonstrated that e-commerce was not easy. Many dot-com retailers could not deliver in time and this hurt the credibility of B2C e-commerce in general. Rise in Valuations of Dot.Com and Technology Companies The valuations of dot.com and technology companies had risen so high that even supporters were questioning whether earnings of these companies could ever grow fast enough to justify the prices of the shares. Some hightech companies had stock values 400 times earnings. And as it turned out, most dot-com companies especially those specifically devoted to e-commerce in fact did not have any earnings!

(b)

(c)

(d)

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Most, in fact, were losing money while showing revenue growth. Even supporters of the e-commerce phenomenon began to wonder if the dot.com companies would ever become profitable. The stock market crash of dot.com companies led to a sobering reassessment of the prospects for e-commerce and the methods of achieving business success. While the Consolidation period continues in an extremely rapid pace of growth in customers and revenues, it is clear that many of the visions for e-commerce developed during the Innovation period have not been fulfilled. For instance, economists visions of friction free commerce have not been entirely realised. Prices are sometimes lower on the Web, but the low prices are primarily a function of entrepreneurs selling products below their costs. Consumers are less price sensitive than expected; surprisingly, the websites with the highest revenue also have the highest prices. There remains considerable persistent price dispersion on the web, and the concept of one world, one market, and one price has weakened as entrepreneurs discover new ways to differentiate their products and services. For instance, prices on books and CDs vary by as much as 50% and prices for airline tickets as much as 20%. Brands remain very important in e-commerce as consumers trust some firms more than others to deliver a high quality product on time. Search costs may have fallen, but the overall transactions costs of actually completing a transaction in e-commerce remains very high. About 65% of e-commerce purchases are terminated in the shopping cart stage because of these consumer uncertainties: (a) (b) (c) Will the merchant actually deliver? What is the time frame of delivery? Does the merchant really have stock on this item?

In many product areas, it is easier to call a trusted catalogue merchant than order on a website. Intermediaries may have not disappeared as predicted, and few manufactures or producers have actually developed a one-to-one sales relationship with their ultimate customers. If anything, e-commerce has created many new opportunities for middlemen to aggregate content, products, and services into portals and thereby introduce themselves as the new intermediaries. Yahoo.com and Amazon.com are two examples of this kind of new intermediaries. Nor have the visions of many entrepreneurs and venture capitalists for e-commerce during the Innovation period materialised exactly as predicted. First-mover advantage appears to have succeeded only for a small group of sites. Historically, first movers have been long-term losers, with the early-tomarket innovators usually being displaced by established fast follower

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firms with the financial, marketing, and legal and production assets needed to develop mature markets, and this has proved true for e-commerce as well. The overall costs of doing business on the Web including the costs of technology, site design and maintenance, and warehouses for fulfilment are no lower than the costs faced by the most efficient brick-and-mortar stores. The start-up costs can be staggering. Attempting to achieve profitability by raising prices has often led to large customer defections. If you want to know, from the e-commerce merchants perspective, the e in e-commerce does not stand for easy.

1.3.3

Reinvention (2007-Future)

E-commerce entered the Reinvention period in 2007 which extends through the present day and into the uncertain future. This is the period of reinvention involving the extension of Internet technologies, the creation of new business models based on consumer-generated content, social networking and virtual online lives, exemplified by the fast moving entrepreneurial firms such as Facebook, YouTube, MySpace, and Twitter. Even though, only few of the new models have been profitable from their huge audience, many still have the potential to be profitable in the future. Table 1.8 summarises the differences among the three periods of e-commerce evolution.
Table 1.8: Evolution of E-commerce Innovation (1995-2000) x x Technology-driven Revenue growth emphasis Venture capital financing x x Consolidation (2001-2006) Business-driven Earnings and profits emphasis Traditional financing x x Reinvention (2007-Future) Audience, customer and community driven Audience and society network growth emphasis Smaller venture capital financing, early small firms buyouts by large online players Extensive government surveillance Large pure web-based firms

x x

Ungoverned Entrepreneurial

x x

Stronger regulation and governance Large traditional firms

x x

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Disintermediation

Strengthening intermediaries

Proliferation of small online intermediaries renting business processes of larger firms Online market imperfections Return of pure online strategies in new markets; extension of mixed bricks and clicks in traditional retail markets First-mover advantages return in new markets as traditional web players catch up Services

Perfect markets

Imperfect markets, brands and network effects Mixed bricks and clicks strategies

Pure online strategies

First mover advantages

Strategic follower strength

Low complexity retail products

High complexity retail products

Source: Laudon, K. C., & Traver, C. G. (2009). E-commerce: Business, technology, society (5 th ed.). Boston: Addison Wesley.

1.3.4

Predictions for the Future

The future of e-commerce is now clearer, although not certain. There are six main factors that will help define the future of e-commerce and they are: (a) Rise on Overall Revenues, Technology Products, and Customers There is a little doubt that the technology of e-commerce, the Internet, the Web, and the growing number of wireless Internet appliances will continue to propagate through all commercial activities. The overall revenues from e-commerce will continue to rise on a very steep growth path, most likely in the range 12% to 18% per year through 2012. The number of products and services sold on the web and the size of average purchase order are both growing at double-digit rates. There has been a significant broadening of online product mix compared to the earlier years when books, computer software and hardware are the main products sold online. The faster growing e-commerce categories include home products, office supplies, sporting goods and apparel/accessories.

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(b)

Rise in the E-Commerce Prices E-commerce prices will rise to cover the real costs of doing business on the web and to pay investors a reasonable rate of return on their capital. When a company or a business model managed to attract consumers towards it, costs such as tax, governments regulation and other additional costs will be imposed on it. Thus, the increase in price will cover the imposed costs and make it possible to cover the costs of conducting the business. Rise in the E-Commerce Margins and Profits E-commerce margins (the difference between the revenues from sales and the costs of goods) and profits will rise to levels more typical of all retailers. However, there is a possibility that the profit margin will reduce in the case of tight competition with other online businesses. Radical Change in the Cast of Players The cast of players will change radically. In the B2C and B2B market spaces, traditional well-endowed, experienced online companies such as AirAsia will continue to play a growing and dominant role in e-commerce while new start-up ventures will gain large online audiences for new products and services not dominated by large players. Large Number of Successful Integrated Firms The number of successful pure online companies will remain smaller than integrated firms that adopt mixed click-and-brick strategies, combining traditional sales channels and online efforts. Examples of integrated firms are as follows: (i) (ii) Amazon. com will increasingly use printed catalogues; Procter & Gamble will continue to develop informative websites such as Tide.com; and

(c)

(d)

(e)

(iii) Major automotive companies will continue to improve the content and value of their websites even if they do not enter into direct sales relationships with consumers but instead use the web to assists sales through dealers which thereby strengthens the traditional intermediaries and channels. In summary, the future of e-commerce will be a mixture of traditional retail extending their brands to online markets. E-commerce firms in the earlier period such as Amazon and eBay will strengthen their financial results and dominant positions. New entrepreneurs and venture capitalist e-commerce firms have the potential to be in the prominent position by developing new audiences from the growth of social network and community based activities.

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To get more information on history and growth of e-commerce, please check the following websites: http://www.internetworldstats.com/ http://www.ecommerceland.com/history_ecommerce.html

SELF-CHECK 1.4
What is the difference between market space and marketplace?

EXERCISE 1.3
1. 2. Discuss the ways in which the E-commerce era can be considered both a success and a failure. What factors will help define the future of e-commerce over the next 4 - 5 years?

1.3

UNDERSTANDING E-COMMERCE: ORGANISING THEMES

E-commerce as shown in Figure 1.8 involves three broad interrelated themes as follows: (a) (b) (c) Technology; Business; and Society.

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Figure 1.8: E-commerce three broad interrelated themes

Technologies develop first, and then those developments are exploited commercially. Once commercial exploitation of the technology becomes widespread, a host of social, cultural, and political issues arise. In the following sections, we will explore more on the three themes.

1.4.1

Technology

The development and mastery of digital computing and communications technology is at the heart of the newly emerging global digital economy that we call as e-commerce. To understand the likely future of e-commerce, you need a basic understanding of the information technologies upon which it is built. E-commerce is a technologically driven phenomenon that relies on a host of information technologies as well as fundamental concepts from computer science developed over a 50 year period. At the core of e-commerce are the Internet and the World Wide Web (WWW). Behind these technologies, there are a host of complementary technologies, personal computers, local area networks, relational databases, client/server computing, and fibre optic switches, to name just a few. These technologies lie at the heart of sophisticated business computing applications such as enterprisewide computing systems, supply chain management systems, and customer relationship management systems. E-commerce relies on all these basic technologies and not just on the Internet. The Internet, while representing a sharp break from prior corporate computing and communications technologies, is nevertheless just the latest development in the evolution of corporate computing and part of the continuing chain of computerbased innovations in business.

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To truly understand e-commerce, then you will need to know something about client/server computing, packet-switched communications, and protocols such as TCP/IP, Web servers, and HTML. All of these topics are described fully in Topic 3.

1.4.2

Business

While the technology provides the infrastructure, it is the business applications the potential for the extraordinary returns on investment that create the interest and excitement in e-commerce. New technologies present businesses and entrepreneurs with new ways of organising production and transacting business. New technologies change the strategies or plans of existing firms: Old strategies are made obsolete and new ones need to be invented. New technologies are the birthing grounds where thousands of new companies spring up with new products and services. To truly understand e-commerce, you will need to be familiar with some key business concepts, such as the nature of electronic markets, information goods, business models, firms andindustry value chains, industry structure, and consumer behaviour in electronic markets.

1.4.3

Society

Increasingly, e-commerce is subject to the laws of nations and global entities. You will need to understand the pressures that global e-commerce places on contemporary society in order to conduct a successful e-commerce business or understand the e-commerce phenomenon. The primary societal issues that will be discussed are intellectual property, individual privacy, and public policy. Because the cost of distributing digital copies of copyrighted intellectual property tangible works of minds such as music, books and videos are nearly zero on the Internet, e-commerce poses special challenges to the various methods societies have used in the past to protect intellectual property rights. Since the Internet and the Web are exceptionally adept at tracking the identity and behaviour of individuals online, e-commerce raises difficulties for preserving privacy, the ability of individuals to place limits on the type and amount of information collected about them, and to control the uses of their personal information. The global nature of e-commerce also poses public policy issues of equity, equal access, content regulation, and taxation. If some societies choose to ban selected

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images, selected commercial activity (i.e., online sports betting) or political messages from their public media, then how can that society exercise content and activity control over a global e-commerce site? What rights do nation-states and their citizens have with respect to the Internet, the web, and e-commerce?

ACTIVITY 1.5
Is it ethical and legal to download copyrighted music to your computer for personal use? Give reasons for your answer. To get more information on computer and society, visit these websites: http://www.copyright.gov/ http://www.myipo.gov.my/ http://www.uspto.gov/trademarks/index.jsp http://www.privacy.org/ http://www.sigcas.org/

EXERCISE 1.4
List and briefly explain the major themes underlying the study of e-commerce.

x x

Commerce, the negotiated exchange of goods and services, has been practiced in traditional ways for thousand of years. E-commerce is the application of new technologies; particularly Internet and web technologies, to help individuals, business and other organisations to better conduct business. There are four major categories of e-commerce and they are: (i) (ii) Business-to-consumer; Business-to-business;

(iii) Consumer-to-business; and (iv) Consumer-to-consumer.

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There are four main attributes of e-commerce and they are: (i) (ii) Intra and inter-organisational activities that support the exchange; Technology-enabled;

(iii) Technology-mediated; and (iv) Exchange of digitised information between. x There are eight elements of e-commerce and they are: (i) (ii) Core strategic decisions are technology-based; Ubiquitousness;

(iii) Real-time competitive responsiveness; (iv) Technology-based customer interface; (v) Customer controlled interaction;

(vi) Knowledge of customer behaviour; (vii) Permit personalisation and customisation; and (viii) Global reach.

B rickandmortar Business process Business-to-Business Business-to-consumer Clicks-and-Brick Consolidation Consumer-to-business Consumer-to-consumer

E-commerce First movers Friction-free Innovation Internet peer-to-peer Reinvention Traditional commerce M-commerce