Beruflich Dokumente
Kultur Dokumente
of e-business
A. Cordella, A. Martin, M. Shaikh S. Smithson
IS3167, 2790167
2011
Undergraduate study in
Economics, Management,
Finance and the Social Sciences
This subject guide is for a 300 course offered as part of the University of London
International Programmes in Economics, Management, Finance and the Social Sciences.
This is equivalent to Level 6 within the Framework for Higher Education Qualifi cations in
England, Wales and Northern Ireland (FHEQ).
For more information about the University of London International Programmes
undergraduate study in Economics, Management, Finance and the Social Sciences, see:
www.londoninternational.ac.uk
This guide was prepared for the University of London International Programmes by:
S. Smithson, PhD, FBCS, Senior Lecturer in Information Systems, Department of Management,
London School of Economics, University of London, www.lse.ac.uk
A. Cordella, PhD, Lecturer in Information Systems, Department of Management, London
School of Economics, University of London, www.lse.ac.uk
A. Martin, Research Student, Department of Management, London School of Economics,
University of London, www.lse.ac.uk
M. Shaikh, PhD, Researcher, Department of Management, London School of Economics,
University of London, www.lse.ac.uk
This is one of a series of subject guides published by the University. We regret that due to
pressure of work the author is unable to enter into any correspondence relating to, or arising
from, the guide. If you have any comments on this subject guide, favourable or unfavourable,
please use the form at the back of this guide.
Contents
Contents
Chapter 1: Introduction ......................................................................................... 1
Aims and objectives ....................................................................................................... 2
Learning outcomes ........................................................................................................ 3
How to use this subject guide ........................................................................................ 3
Structure of the guide .................................................................................................... 4
Syllabus ......................................................................................................................... 6
Essential reading ........................................................................................................... 7
Further reading.............................................................................................................. 8
Online study resources ................................................................................................... 8
Other resources ............................................................................................................. 9
Using the essential textbook ........................................................................................ 10
Examination structure .................................................................................................. 11
Examination advice...................................................................................................... 12
Chapter 2: E-business technology and infrastructure ......................................... 13
Aims of the chapter ..................................................................................................... 13
Learning outcomes ...................................................................................................... 13
Essential reading ......................................................................................................... 13
Further reading............................................................................................................ 13
Additional resources .................................................................................................... 14
Introduction to e-business technology .......................................................................... 14
Networks and the internet ........................................................................................... 14
Networking standards ................................................................................................. 15
The web ...................................................................................................................... 15
Web 2.0 ...................................................................................................................... 16
Peer-to-peer networks ................................................................................................. 17
Cloud computing ......................................................................................................... 18
Mobile computing and m-commerce ............................................................................ 19
Technologies for supply chain management ................................................................. 20
Security technologies for e-business ............................................................................ 21
Conclusion .................................................................................................................. 22
A reminder of your learning outcomes.......................................................................... 22
Self-test questions ....................................................................................................... 23
Chapter 3: Economic theories of e-business ........................................................ 25
Aims of the chapter ..................................................................................................... 25
Learning outcomes ...................................................................................................... 25
Essential reading ......................................................................................................... 25
Further reading............................................................................................................ 25
Additional resources .................................................................................................... 26
Introduction ............................................................................................................... 26
The transaction cost model .......................................................................................... 27
Types of transaction costs ............................................................................................ 28
ICT and disintermediation ............................................................................................ 30
Infomediaries .............................................................................................................. 31
Case study .................................................................................................................. 32
Myths of the dot.com boom ......................................................................................... 32
Conclusion .................................................................................................................. 33
i
Contents
Further reading............................................................................................................ 61
Additional resources .................................................................................................... 62
Introduction ............................................................................................................... 62
B2B structures ............................................................................................................. 63
Key attributes of e-marketplaces .................................................................................. 66
E-procurement ............................................................................................................ 67
Procurement participants ............................................................................................. 67
Benefits of e-procurement .......................................................................................... 68
Problems and risks of e-procurement ........................................................................... 68
Case study examples ................................................................................................... 69
Conclusion .................................................................................................................. 70
A reminder of your learning outcomes.......................................................................... 70
Self-test questions ....................................................................................................... 71
Chapter 7: Supply chain management ................................................................. 73
Aims of the chapter ..................................................................................................... 73
Learning outcomes ...................................................................................................... 73
Essential reading ......................................................................................................... 73
Further reading............................................................................................................ 74
Additional resources .................................................................................................... 74
Introduction to supply chain management .................................................................... 74
Information and uncertainty ......................................................................................... 76
Push and pull supply chain models ............................................................................... 77
Restructuring supply chains with e-business technology ............................................... 78
Value chains and value networks ................................................................................. 78
Vendor-managed inventory .......................................................................................... 79
Case study .................................................................................................................. 80
Virtual organisation .................................................................................................... 80
Third party logistics ...................................................................................................... 80
Implementation of integration ..................................................................................... 82
SCM strategy ............................................................................................................... 83
Conclusion .................................................................................................................. 84
A reminder of your learning outcomes.......................................................................... 84
Self-test questions ....................................................................................................... 84
Chapter 8: Web 2.0 in business and society ........................................................ 85
Aims of the chapter ..................................................................................................... 85
Learning outcomes ...................................................................................................... 85
Essential reading ......................................................................................................... 85
Further reading............................................................................................................ 86
Additional resources .................................................................................................... 86
Introduction ................................................................................................................ 86
Collaborative components of web 2.0 .......................................................................... 87
Business interest in web 2.0 ........................................................................................ 91
Enterprise 2.0? ........................................................................................................... 92
A reminder of your learning outcomes.......................................................................... 93
Self-test questions ....................................................................................................... 93
Chapter 9: New forms of organisation ................................................................ 95
Aims of the chapter ..................................................................................................... 95
Learning outcomes ...................................................................................................... 95
Essential reading ......................................................................................................... 96
Further reading............................................................................................................ 96
Additional resources .................................................................................................... 96
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iv
Chapter 1: Introduction
Chapter 1: Introduction
167 Management and innovation of e-business is a 300 course
offered on the Economics, Management, Finance and the Social Sciences
(EMFSS) suite of programmes.
It is a subject which provides students with insights and an understanding
of the past, present and future of e-business systems. In less than two
decades, e-business has grown from a hobby for computer geeks to
become an essential channel for:
Communication, with the growth of email and instant messaging for
internal and external business communications.
Marketing, by giving firms the opportunity for one-to-one marketing.
Sales, such that the online travel business makes up around 50 per cent
of the US market.
Advertising: Googles 2008 advertising revenue was $21.1 billion.
Distribution of digital goods, with the huge growth of music downloads.
Recruitment: Monster UK hold three million CVs = 13 per cent of the
UKs working population.
And many, many more functions.
As early as 1999, it was widely claimed that the internet is ushering
in an era of change that will leave no business untouched and, unlike
much of the hype surrounding new technology, it is hard to deny that
this proposition is correct. During the course of one of our e-business
research projects (Clegg et al., 2005), one of the interviewees told us
that: E-business is like an octopus: it has tentacles in all a companys
operations. This is a powerful image and in this course we will show
how e-business stretches throughout the organisation and along the
whole value chain from raw materials to the final consumer. Along the
way e-business has transformed organisations and their relationships with
customers and trading partners.
The web is now indispensable in both business and everyday life as we use
it to search for information on anything from cinema times to share prices
and medical information. And now (in 2010), web 2.0 offers the prospect of
taking all these developments a stage further with social networking, wikis
and blogs. For virtually all of us, e-business has quite simply changed our lives.
Many students approaching this course may think that it is going to be
a technical course but, while you do need to understand the technology
(and this is covered in Chapter 2), most of this course is concerned with
the management, business and social aspects of e-business. We treat
the technology as a tool and prefer to study the impact of its use, rather
than how to build the tools. Common misunderstandings are that either
e-business is somehow an amateur activity that takes place in garages
or else its a licence to print money. Neither is correct. Large companies
expend considerable resources on their e-business systems and, with
relatively few exceptions, websites and their associated systems are now
highly professional. Similarly, although some individuals (for example,
Larry Page and Sergey Brin, co-founders of Google; Mark Zuckerberg,
Dustin Moskovitz and Chris Hughes, co-founders of Facebook) have
become very rich through e-business, the strong tradition is that
information on the web is free. Many of the products sold on the web are
highly discounted which has meant that high profits and excess rents are
1
few and far-between and new business models are being widely explored
to leverage the power of the technology for profit.
What you will take away from this course is an understanding of how
and why e-business developed so quickly and where it fits within modern
business and society. It is a particularly relevant course for those of you
who want to go on to careers in customer-facing or coordinating activities
as e-business has transformed much of the retail sector as well as the ways
that organisations function internally, in addition to how they collaborate
with their trading partners.
We teach a very similar course at LSE where it is offered as a Summer
School course. Our particular interests are in both B2C (business-toconsumer) and B2B (business-to-business) systems, and we also have
an interest in the subject from the perspective of innovation. Our
background is in management and economics, and it is theories from
these disciplines that we employ in analysing e-business. We feel that, due
to its pervasiveness in business and organisational life, it has links with
all management and social science course offered by the International
Programmes, from the principles of marketing to sociology. E-business
also represents an important evolution from the days when computerbased information systems were mostly internal to the organisation to
today, when e-business provides both a shop window, through websites,
and a transaction and coordination mechanism, through payment
systems and supply chain management. Thus, e-business represents a
practical culmination of information systems thinking from the past four
decades and this course links theoretically and in practice with all other
information systems courses.
We hope that you enjoy studying this course and encourage you to engage
fully with the topic as it is significant to both your career and everyday life.
Chapter 1: Introduction
Learning outcomes
By the end of studying this course, you should have achieved certain key
learning outcomes. By a learning outcome we mean an area of the subject
in which you have acquired knowledge and skills, and are able to present
relevant information, alternative analyses, reasoned arguments and
exercise your own judgment.
Upon completion of this course, you should be able to:
explain the history of e-business from the dot.com boom to the present
day
critically discuss successful and failed e-business ventures
assess the role of innovation in e-business
explain the key elements of e-business technology including websites,
inter-organisational networks and social networks
describe the social and legal context within which e-business has
prospered
explain the growth of social networks and their impact on e-business
analyse and criticise the business models underlying e-business
proposals and existing e-business systems
discuss the changing structure of business-to-business e-business and
the shifting role of intermediation
apply economic theories, such as transaction cost analysis, to explain
the economics of e-business
explain the interaction between the needs of business and the potential
of e-business technology to produce new organisational structures
and different ways of working (e.g. outsourcing, mobile working and
teleworking)
discuss the key innovations in business models, products and processes
and how e-business contributes to innovation through, for example,
open source development and open innovation.
This set of learning outcomes is provided here as a high-level overview of
the positive outcomes of your study. As you tackle the course you should
return to this list from time to time and note down those that you feel
you have made progress with and those that you need to work on more.
You must also remember that the overall aim of the subject is to develop a
critical and reflective appreciation of the impact of e-business technology
and innovation on business activities.
the syllabus and guide you through the textbook. It outlines what you are
expected to know, understand and apply for each area of the syllabus and
suggests relevant readings, including references to the textbook, to help
you to understand the material.
It is important that you appreciate that different topics are not self
contained. There is a degree of overlap between them and you are guided
in this respect by the cross-referencing between chapters. In terms of
studying this subject, the chapters of this guide are designed as selfcontained units of study but, for examination purposes and to understand
the realities of e-business fully, you need to have a good understanding of
the subject as a whole. This includes both technological and management
issues, as well as organisational, social and (a few) legal issues. Business
is fundamentally about people and e-business is about the utilisation of
particular technologies in business.
You should also understand the connections to other courses you have
studied, including units from management, sociology and economics.
The implementation of e-business technology has resulted in changes in
organisations, society and the global economy through, for example, virtual
organisations, social networking and global supply chain management. As
you read about these topics in the guide, you should reflect on how these
changes link to your understanding of these disciplines.
At the end of each chapter you will find a checklist of your learning
outcomes, which is a list of the main points that you should understand
once you have covered the material in that chapter and the associated
readings.
Chapter 1: Introduction
behaviour, these tools offer businesses a new way to engage with their
employees, trading partners and customers. This chapter describes the
various tools and discusses how they are being used and how they are
changing many aspects of everyday life.
Syllabus
This course covers a broad spectrum of todays management opportunities
and risks in virtual markets, including:
history and foundations of online business
the use of transaction cost theory to explain the economics of e-business
e-business models: business-to-business (B2B) and business-toconsumer (B2C) business models and strategies for e-business global
supply chain management, electronic markets
B2B systems, intermediation, e-procurement and IT in supply chain
management
B2C strategies online consumer behaviour, regional and cultural
differences and e-marketing
6
Chapter 1: Introduction
Essential reading
The main text is:
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601].
Further reading
Please note that as long as you read the Essential reading you are then free
to read around the subject area in any text, paper or online resource. You
will need to support your learning by reading as widely as possible and by
thinking about how these principles apply in the real world. To help you
read extensively, you have free access to the virtual learning environment
(VLE) and University of London Online Library (see below).
Other useful texts for this course include:
Farhoomand, A. Managing (e)business transformation: a global perspective.
(Basingstoke; New York: Palgrave Macmillan Houndmills, 2004) [ISBN
9781403936042].
Schneider, G. Electronic commerce. (Boston, MA: Thomson Course Technology,
2010) ninth annual edition [ISBN 9780538469241].
Turban, E., J. Lee, D. King, T. Peng Liang and T. Turban Electronic commerce:
a managerial perspective. (Upper Saddle River, NJ; London: Pearson
Education, 2009) sixth edition [ISBN 9780137034659 (pbk)].
The VLE
The VLE, which complements this subject guide, has been designed to
enhance your learning experience, providing additional support and a
sense of community. It forms an important part of your study experience
with the University of London and you should access it regularly.
Chapter 1: Introduction
Other resources
You should also make a habit of regularly consulting weekly and
monthly journals and newspapers and in this way keeping up with trends
in the area. You must remember that new ideas, new technologies and
new applications of technology are usually first reported in newspapers
and magazines, sometimes years before they find their way into textbooks
or journal articles. Reading such contemporary accounts will also help you
to develop your sense of judgment about all sorts of e-business issues. Bear
in mind, however, that you should not believe everything you read. You
must always take a critical perspective on what you read.
10
Chapter 1: Introduction
Examination structure
Important: the information and advice given here are based on the
examination structure used at the time this guide was written. Please
note that subject guides may be used for several years. Because of this
we strongly advise you to always check both the current Regulations for
relevant information about the examination, and the VLE where you
should be advised of any forthcoming changes. You should also carefully
check the rubric/instructions on the paper you actually sit and follow
those instructions.
Remember, it is important to check the VLE for:
up-to-date information on examination and assessment arrangements
for this course
where available, past examination papers and Examiners commentaries
for the course which give advice on how each question might best be
answered.
The assessment for this course is based wholly on an unseen written
examination. The examination paper is three hours in duration and
you are expected to answer three questions, from a choice of six.
You should ensure that you answer all three questions, allowing an
approximately equal amount of time for each question, and attempting all
parts or aspects of a question.
The Examiners attempt to ensure that all of the topics covered in the
syllabus and subject guide are examined. Some questions could cover
more than one topic from the syllabus since the different topics are not self
contained and will require you to refer to many aspects of the syllabus. A
Sample examination paper appears at the end of this subject guide.
The Examiners commentaries contain valuable information on how to
approach the examination and so you are strongly advised to read them
carefully. Past examination papers and the associated commentaries are
valuable resources when preparing for the examination.
11
Examination advice
Answer the question asked
Your answer needs to address the question asked and not another that you
have seen on a past exam paper or that you would prefer to answer. To
avoid this mistake, it is useful to clearly identify the precise question you
are answering from the outset. Similarly, you should also define the key
terms relating to that question. It is helpful to the Examiners if, in the first
paragraph, you briefly indicate what your answer to the question will be;
the main points you will put forward in support of this position; and the
order in which these will be discussed (this is often called signposting; for
more on this tactic see Structure below).
Support ideas with examples
Wherever possible, provide concrete examples and illustrations so that
your answer is based upon solid empirical evidence. This evidence can
be provided by, among others: defining key terms and concepts; citing
a particular event, decision, policy, etc. to back up a generalisation;
providing dates whenever possible; and, of course, referring to the
relevant material provided in the Essential reading.
Structure
To the Examiners, the structure and coherence of your argument are just
as important as your knowledge and understanding of the syllabus. To
help organise your thoughts quickly, it is always sensible to compose an
essay plan before you actually begin writing. In this way you will know
in advance what you are going to say and in what order, which will make
the writing easier. Your answers should always include an introduction
that identifies the question, defines key terms or concepts, and provides
signposts so that the Examiners can follow your argument in the main
body; a main body which develops your answer by discussing the key
points on which it is based and supporting these with examples; and a
conclusion which recaps your answer and offers final reflections (why the
question is important, further implications of your answer, etc.).
12
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
identify the different types of networks and explain their functions, as
well as discussing the importance of network standards
explain the structure and functioning of the web (in conceptual terms),
including the technologies underpinning web 2.0
discuss the concepts underlying cloud computing and mobile
computing and explain how these relate to the internet
explain the principles of the ICTs that are used to support supply chain
management
describe the (software) technologies that provide the security function
in e-business systems.
Essential reading
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 3.
Further reading
Angeles, R. RFID technologies: supply chain applications and implementation
issues, Information Systems Management 22 (1) 2005, pp.5165.
13
The Chaffey textbook covers the material in sufficient depth but the
following textbooks are alternatives:
Bocij, P., D. Chaffey, A. Grasely and S. Hickie Business information systems:
technology, development and management. (London: Financial Times Pitman,
2008) fourth edition [ISBN 9780273716624 (pbk)] Chapters 3, 4 and 5.
Curtis, G. and D. Cobham Business information systems: analysis, design and
practice. (New Jersey: Pearson Education, 2008) sixth edition [ISBN
9780273713821 (pbk)] Chapters 1, 3 and 4.
Additional resources
There are a number of UK magazine websites that you can use to keep upto-date with technical developments and find out more about the detail of
technology:
Computer Weekly (mobile computing): www.computerweekly.com/
Home/mobile-computing.htm
Computer Weekly (network infrastructures): www.computerweekly.
com/Home/network-infrastructure.htm
Computing (IT security): www.computing.co.uk/categories/security
14
Networking standards
The internet and similar networks are based on a set of technical
communications protocols, where a protocol is a highly restricted form of
language shared by computers which enables them to communicate with
each other. While you are not expected to learn the detail of the technical
side of e-business, a basic understanding of certain protocols is necessary in
order to appreciate what makes e-business possible and how it is changing.
The most important of these protocols are the Transmission Control
Protocol (TCP) and the Internet Protocol (IP). These are usually written
together as TCP/IP as they operate very closely together. The Transmission
Control Protocol layer of TCP/IP breaks files into efficiently sized chunks
of data, known as packets. Packets are units of data that are routed
between an origin (often a server) and a destination (such as a client) on
the internet. The Internet Protocol communicates these chunks of data
using a technique known as packet-switching. Once they all arrive
at their destination they are re-assembled into the original file (by the
Transmission Control Protocol). Some important applications of TCP are
email, file transfer and the web.
The web
It is important to understand that the internet and the web are not the
same thing. The web is part of the internet a very important part but
theres more to the internet than just the web. The web is based on the
Hypertext Markup Language (HTML) standard, which is how we publish
information on web pages. HTML has many different functions, including
hyperlinks, which allow users to move easily from one document or web
page to the next.
15
For users to experience the web, they must have what is known as a web
browser installed on their computer. This is a software application that
permits them to connect to servers to access and view content online. Web
browsers are becoming increasingly important applications because they
are seen as being central to the future of the users computing experience.
In the past, web browsers were just one of many different software
applications, including word processors and media players. However, the
move towards what has been termed cloud computing means that
activities such as word processing or the creation of databases are done
through the browser, on servers in the cloud. We further explore the
cloud computing trend below.
The Hypertext Transfer Protocol (HTTP) is a standard for transferring
requests for the delivery of web pages from servers to browsers. The
transfer involves sending and receiving packets of data. You will probably
be familiar with HTTP from your experiences of surfing online, as all web
addresses start with http://. The technical name for web addresses is a
Uniform (or universal) Resource Locator (URL). What follows the http://
is known as a domain name. For example, the domain name for the
London School of Economics and Political Science is www.lse.ac.uk.
Domain names are important because they provide a shortcut to websites
online. All domain names map onto what are known as Internet Protocol
(IP) addresses. For example, the IP address for the LSE is 158.143.96.8.
URL: http://www.lse.ac.uk
Domain name: www.lse.ac.uk
IP address: 158.143.96.8.
You will probably agree that it is much easier to remember your favourite
sites domain names than it is to memorise the numerous IP addresses,
which is what makes domain name mapping so important. This mapping
takes place as part of the Domain Name System (DNS) and is fundamental
to the internets architecture.
Domain names are also important for companies from a marketing point
of view. Many companies view their portfolios of domain names as brand
assets. Imagine how many domain names Coca-Cola, a global company
with a very recognisable brand, must register in all the different countries
in which it operates (e.g. http://www.coca-cola.co.uk; http://www.cocacola.com.sg; http://www.coca-colaindia.com; http://www.coca-cola.com.
cn, and so on).
Activity
Go to http://www.lookupserver.com and find the IP address that corresponds to your
favourite websites domain name (e.g. facebook.com). This is called a forward DNS
lookup. The reverse of this process is called, as you might have guessed, a reverse DNS
lookup. What other information is made available in this process?
Web 2.0
Recently there has been much discussion about the emergence of a new
version of the web web 2.0. Proponents argue that there are important
differences between the original web, first popularised in the 1990s,
and web 2.0. The original web was typically composed of static pages,
written by a sites owners or administrators, and infrequently updated. In
contrast, web 2.0 is said to run on dynamic, user-generated content. It is
supposedly more interactive and participatory than the old web, although
16
Peer-to-peer networks
The traditional internet architecture is the client/server relationship
described above, whereby user clients rely on servers to transfer data
across networks. However, there are other ways to configure network
relationships online. One such innovative architecture is known as peerto-peer (P2P) networking. P2P networks are composed of users, known
as peers, who share their computing resources with other peers, without
the involvement of intermediaries such as network hosts or servers. Peers
are thus both suppliers and consumers of resources. P2P networks are
ad-hoc networks in the sense that new nodes (peers) can be added or
existing ones removed without a significant impact on the performance
of the network. These architectures are dynamic and distributed. Their
distributed nature means that they are more robust than client/server
configurations as there is no single point of failure in the system. Figure
2.1 below shows the basic difference between the client/server and
peer-to-peer architectures. How do you think each model affects how
organisations communicate, operate and coordinate work?
17
P2P networking was first popularised during the Napster1 period, when
file-sharing first took off, and has yet to lose pace. History shows us that
these new internet architectures arguably revolutionised the entertainment
industry. While the use of peer-to-peer technology as a platform for
distributing content such as music and video is very significant to
e-business (see Chapter 11 of this subject guide), we must also consider
the other business models and technology applications that can take
advantage of peer-to-peer architectures. For example, Skype, the successful
start-up company providing a free software application to make voice calls
over the internet, runs on a P2P model. It uses P2P networks to transfer its
Voice over Internet Protocol (VoIP) data from caller to caller.
Cloud computing
Related to peer-to-peer networking is the emerging concept of cloud
computing. Cloud computing enables users to access and use web
applications that reside in vast data centres located around the world
instead of on their own personal computers. It is called cloud computing
because most network diagrams denote the internet as a cloud (see Figure
2.2 below). These applications based in the cloud are supposed to benefit
from massive on-demand scalability and can be dynamically provisioned
to achieve economies of scale, saving businesses money. Importantly, these
resources are provided as a service over the internet and are often billed
like utilities.
1
Napster was originally an
online music file-sharing service
which operated from June
1999 to July 2001. It was shut
down over legal claims that it
infringed copyright. Its demise
led to new, decentralised P2P
models for sharing files. The
Napster brand was later sold to
a file-sharing company offering
a pay service.
Activity
Consider the different computing technologies that we as consumers have access to,
including desktop computers, laptops, netbooks, e-readers, smart mobile phones, MP3
players and digital cameras, and even recent gizmos such as the iPad. What are the main
differences between these various technologies? How did you choose these points of
difference? In what ways are these technologies similar to one another? Are we gradually
moving towards technological convergence, whereby different gadgets perform the
same computing tasks, or are there still important differences between technologies?
Remember that our mobile phones are increasingly sophisticated devices, equipped with
computer processors, digital cameras and internet capacity.
Conclusion
This chapter provides an overview of the main technological architectures
for e-business. It describes the basic technological infrastructures which
enable network technologies and explains how different protocols
enable and support these architectures. Specific emphasis is given to the
discussion of supply chain management technologies and to emerging
phenomena, such as web 2.0. Security challenges and problems are
introduced.
Most of the aspects discussed in this chapter will be complemented by
additional material presented in the following chapters. This chapter
provides an introduction to the background technological knowledge
needed to understand more specific aspects of e-business discussed
elsewhere in the subject guide.
22
Self-test questions
1. Discuss the similarities and differences between the internet and cloud
computing. What are the main business opportunities offered by cloud
computing?
2. Mobile technologies offer new business opportunities. Discuss, with
examples, whether mobile technologies can be a real substitute for
traditional wired technologies.
Note: these self-test questions are not Sample examination questions.
They are intended to help you test your understanding of the issues
discussed above. Sample examination questions tend to drawn on your
knowledge of the issues covered in different chapters, whereas the self-test
questions test your knowledge of the chapter in which they appear.
23
Notes
24
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
explain transaction cost theory and identify the main types of
transaction costs
analyse the impact of e-business technology on transaction costs
explain how and why disintermediation occurs in electronic markets
discuss the impact of e-business technology on the organisation of
markets with examples from the real world
explain the myths that were current during the dot.com boom.
Essential reading
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 2.
Cordella, A. Transaction costs and information systems: does it add up?,
Journal of Information Technology 21(3) 2006, pp.195202.
Howcroft, D. After the goldrush: deconstructing the myths of the dot.com
market, Journal of Information Technology 16(4) 2001, pp.195204.
Malone, T.W., J. Yates and R.I. Benjamin Electronic markets and electronic
hierarchies, Communications of the ACM 30(6) 1987, pp.48497.
Picot, A., C. Bortenlanger and H. Rohrl The organization of electronic markets:
contributions from the new institutional economics, Information Society
13(1) 1997, pp.10723.
Further reading
Ciborra, C.U. Teams, markets and systems: business innovation and information
technology. (Cambridge: Cambridge University Press, 1996) [ISBN
9780521574655] Chapters 1 and 6.
Hagel, J. and J. Rayport The new intermediaries, McKinsey Quarterly (4) 1997,
pp.5470.
Williamson, O.E. The economic institutions of capitalism. (New York: Free Press,
1985) [ISBN 9780684863740].
25
Additional resources
BNET (http://resources.bnet.com/topic/transaction+costs.html) is
quite a good resource for practitioner-oriented white papers and case
studies, with various items on transaction costs.
The Ronald Coase1 Institute (http://coase.org/linksandresources.htm)
offers various papers on new institutional economics and transaction
cost theory.
Introduction
The purpose of this chapter is to introduce the most common theories
that have informed the management and economics of e-business. The
chapter will mainly focus on transaction cost theory and conceptual
approaches to intermediation and disintermediation. In order to match the
literature on the theories, in this chapter we refer to e-business technology
as ICT (information and communication technology) and hence you
should treat these terms as being synonymous.
The main economic theory you need to understand is the transaction
cost model. Examining how markets are organised and how and why ICT
can be designed and implemented to facilitate the functioning of market
mechanisms, we discuss the fundamental factors that produce electronic
markets. We therefore present and discuss a limited version of transaction
cost theory, focusing on those factors that affect the exchange of goods and
services in a market context. We discuss the circumstances under which
ICT can make market mechanisms more efficient. For a more detailed
presentation of transaction cost theory, you can refer to Ciborra (1993)
and Williamson (1985). Cordella (2006) presents a useful discussion of
the application of transaction cost theory to information systems and we
recommend that you read this article.
The basic assumption of transaction cost theory is that economic
agents (buyers and sellers) face costs to make the exchange of goods and
services possible (see Picot et al., 1997). These costs are not necessarily
reflected in the price at which goods and services are exchanged. These
costs, called transaction costs, are mostly related to information processing
costs: not all the information needed by buyers and sellers about the
object of the exchange is available; it is costly to process the available
information, etc. We identify the different types of information processing
costs that individuals face, namely search costs, contracting costs
and control costs. We also elaborate on how ICT might contribute to
lower transaction costs, which, in turn, makes the exchange of goods and
services more efficient, and therefore improves the overall efficiency of the
economic system within which these exchanges take place.
After introducing the basic elements of transaction costs, we discuss
how ICT can affect the roles of the different economic agents involved
in the exchange of goods and services. Disintermediation is a typical
example: this is the process by which the number of economic agents
involved in an exchange (i.e. resellers, wholesalers and mediators)
is reduced. Disintermediation typically occurs because ICT does for
free what intermediaries do for a fee. Following the transaction costs
argument, ICT provides better opportunities to process information
related to the exchange, reducing the need for support for buyers and
sellers in managing the essential information needed for the exchange.
26
1
Note: Ronald Coase
was an International
Programmes student!
ICT therefore reduces the need for third party services and hence the costs
faced by buyers and sellers. The first reason why disintermediation occurs
is therefore rooted in transaction cost theory. Moreover, building on Picot
et al. (1997), we discuss how and when ICT-led disintermediation occurs.
27
28
29
Infomediaries
Intermediaries are profoundly affected by the adoption and diffusion of ICT in
markets. ICT changes the way in which information is accessed and therefore
allows agents to bypass traditional intermediaries to execute transactions.
It must, however, be noted that a new form of intermediation is emerging
alongside the wide adoption of ICT. Electronic markets are characterised
by a very rich information setting which, in certain circumstances, makes it
difficult to find the right information needed by the agents. If you are looking
for information on a specific product, you will find it difficult to identify the
right website to support your search without the use of a search engine such
as Google. Search engines are intermediaries which reduce the cost of gaining
access to and using information. These intermediaries, given the nature of
their task, are defined as information brokers or infomediaries (Hagel and
Rayport, 1997). Chaffey (2009) Chapter 2 discusses the role of these new
intermediaries and describes in detail their different forms and business
models. You should refer to Table 2.5 in his book, where he distinguishes the
various types of portal and electronic marketplace. Here we discuss in greater
detail the reason why the importance of these intermediaries is increasing in
the digital economy while, in the same context, traditional intermediaries are
becoming disintermediated.
In the previous section, we discussed how ICT can reduce transaction
costs by reducing search, contracting and control costs. However, we also
argued that ICT can lead to situations where the increased amount of
information being communicated might increase the information processing
costs that the transacting parties need to endure. This is the context where
infomediaries become very important and gain business opportunities.
ICT in fact generates new transaction costs which have to be borne by the
economic agents in the e-business context. These new transaction costs are
generated by the increasing amount of information that has to be processed
to conclude a transaction. In e-business the number of buyers and sellers is
normally greater than in the traditional market. Buyers can buy from any
digital seller so that place and time boundaries become irrelevant. Similarly,
sellers can access buyers located all around the word. This increases the
search, contracting and control costs. Thus, many potential buyers and
sellers have to match their interests, negotiate the terms of the exchange
and enforce forms of control in order to be sure that what has been agreed
upon is effectively exchanged.
ICT therefore has a twofold effect. On one side, ICT reduces the need for
traditional intermediaries but, on the other hand, it creates opportunities
for new intermediaries such as infomediaries. It is in fact possible
for specific intermediaries to reduce transaction costs facilitating the
exchange, retrieval and processing of the information needed to exchange
goods and services in electronic markets. These intermediaries act as
infomediaries (information intermediaries) as they intermediate the
exchange, use of and access to information. By reducing the information
costs they provide valuable support to electronic markets.
31
Case study
Chaffey (2009) in Chapter 2 includes a short case study of lastminute.com
(Case Study 2.2). This is a good description of who set up lastminute.com,
why and how. It tells of the vagaries involved in setting up a new venture
but, of more interest here, it also discusses transaction value. lastminute.
com was an inspirational idea that reduced transaction costs for consumers
while at the same time providing an avenue of revenue for supplier
companies that was not possible before intermediaries like lastminute.com.
Read the case study and then flip to Table 2.5 in Chaffey (2009). Skim
through the various intermediary types listed in the table and think
through where you would place lastminute.com and why. Is it a search
engine if yes, then what sort? Or do you think it is more a marketplace?
Does it help you to compare prices? Look at the examples provided in the
same table by Chaffey (2009) to give you some help. It might help to think
about what service and value this site brought to its customers: was it
simply lower prices or some other added value?
Activities
1. Identify examples of infomediaries that you regularly use or have come across do
not just copy the ones listed by Chaffey (2009). What roles do these infomediaries
play? How important are those roles to e-business?
2. Consider the impact of online grocery shopping on the value chain. Does it
disintermediate? Or has it brought forth new intermediaries (or infomediaries)?
3. Identify examples of where ICT does not disintermediate the value chain. Why is this
so?
32
Conclusion
This chapter provides the theoretical background to the study of many
aspects of e-business. It ties in with the ideas of transaction cost economics
and disintermediation to provide an analytical framework for the study of
the economic impact of ICT on markets. The chapter explains, from a macro
level perspective, the impact of ICT on the value chain and explains how and
why disintermediation occurs. It will be clear as you work through the rest of
this subject guide that these concepts underpin many e-business strategies.
Self-test questions
1. In the context of a B2B transaction, what are the main classes of
information processing costs? Give specific examples of each of these
costs, using the example of a shop buying Christmas trees from a
supplier. When, and how, might they be incurred in this case?
2. How can transaction cost theory explain disintermediation and
infomediation?
3. Outline the myths that circulated during the dot.com boom. Which
of these do you believe were completely unfounded, and could never
become a reality?
33
Notes
34
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
identify the business models and revenue models of individual B2C
companies, as a prelude to further analysis
analyse the revenue strategy issues that pertain to any given B2C
operation
identify the roles of website visitors to any particular site
analyse why some websites are successful in terms of consumer
adoption and purchases, while others are less successful
distinguish the quality of different websites in terms of their usability
from the perspective of consumers
advise B2C start-up companies concerning the factors that are
important for success in this highly competitive field.
Essential reading
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601]. See chapter
references in the text below.
Lohse, G.L. and P. Spiller Electronic shopping, Communications of the ACM
41(7) 1998, pp.8187.
Riggins, F.J. A framework for identifying web-based electronic commerce
opportunities, Journal of Organizational Computing and Electronic
Commerce 9(4) 1999, pp.297310.
35
Further reading
Fomin, V.V., J.L. King, K.J. Lyytinen and S.T. McGann Diffusion and impacts
of e-commerce in the United States of America: results from an industry
survey, Communications of the Association for Information Systems 16(28)
2005.
Ives, B. and G. Piccoli Custom made apparel and individualized service at
Lands End, Communications of the AIS 11 2003, pp.7993.
Phan, D.D., J.Q. Chen and S. Ahmad Lessons learned from an initial
e-commerce failure by a catalog retailer, Information Systems Management
Summer 2005, pp.713.
Treiblmaier, H. Web site analysis: a review and assessment of previous
research, Communications of the AIS 19(39) 2007, pp.80643.
Additional resources
For papers on various topics in e-business, including B2C, see the MIT
website: http://ebusiness.mit.edu
The European Commission maintains a useful website with reports
on B2C (and B2B) implementation within the European Union: www.
ebusiness-watch.org
One of the leading writers on web usability is Jakob Nielsen, whose
publications are available at www.useit.com/jakob/publications.html
Introduction
The start of commercial web-based e-business is usually dated back
to 1995 at the very beginning of the dot.com boom. The business-toconsumer (B2C) retail market was the first to be targeted. The glamour
of online retail beckoned and e-business entrepreneurs flocked to try to
grab a piece of the action, backed by thousands of investors. In that year,
companies like Amazon, eBay and Yahoo began operations and, at the
time of writing (2010), these old giants are still forces to be reckoned
with in the market, albeit in varying degrees of financial health.
As B2C dates back to the mid-1990s, we can no longer say that it is a new
phenomenon, although in many parts of the world it began much later.
However, we would argue that it is not a mature commodity, like much
of IT (e.g. personal computers). Rather, it is well established but still
evolving. It is a recognised sales and marketing channel for, among others,
air tickets, books, computers, groceries and share trading, such that it is
the first port of call for many consumers in these markets.
How big a slice of the total retail market belongs to e-business? This
is a difficult question, as statistics vary. It all depends on what you
consider comprises the total retail market and how you count it as well
as the e-business part. The figures currently given for the UK and USA
vary between around 5 per cent and 17 per cent but, even at the lower
end of the scale, you can see that e-business makes up a substantial
proportion, although the forecasts swirling around the dot.com era that
by 2015 it would account for over half of all retailing are likely to remain
pipedreams. Nevertheless, the statistics from Data Monitor (2009) shown
in the table below are impressive (see also Fomin et al., 2005).
36
USA
UK
$142 bn
$29 bn
24%
35%
Forecast (2012)
$277 bn
$90 bn
96%
205%
Market segmentation
19% electronics
Alliances
Online retailers may have considerable expertise in the design and
operation of websites, and perhaps in one particular product line (e.g.
Amazon and books), but they have the capacity to sell other product lines
(e.g. electronics). A common strategy is for the online retailer to partner
with a category manager with expertise in, say, electronics. Similarly,
order fulfilment involves the online retailer providing the customers
while the partner attends to distribution and logistics.
Customer acquisition
Unlike conventional stores that have a physical presence on the high
street and can attract passing trade, B2C e-business relies on extensive
advertising and marketing efforts to attract customers to the website.
Understanding shoppers
In any retail operation, it is essential to understand shoppers (or
consumers), but B2C e-business is arguably slightly different from
conventional retailing. For example, website visitors may be less likely
to purchase products or services, compared to most conventional shops.
Just because people visit a website does not mean they are likely to buy
a product. These visitors have various roles, partly because accessing a
website is much easier than having to spend time and energy travelling to
a conventional shop.
www.useit.com/
alertbox/20030825.html
The web is not mass media, nor is it exactly personal contact it falls
somewhere in-between.
Design goals vary according to the context but may include:
Creating an impression consistent with the organisations desired
image, which could be youthful or well-established, exciting or secure,
zany or efficient, etc.
Allowing visitors to experience the site in different ways and at
different levels (e.g. it should cater for both regular customers and
first-time visitors).
Providing visitors with a meaningful, two-way (interactive)
communication (i.e. it should provide relevant information to visitors
but also obtain data about them for marketing purposes).
Sustaining visitor attention and encouraging return visits.
Offering easily accessible information about products and services and
how to use them.
Encouraging trust and loyalty.
To achieve the aim of increased sales, certain design guidelines are often
recommended. We sum them up here again:
ensure simple, fast access to information
provide simple, clear, consistent navigation
avoid jargon and excessive propaganda
acknowledge the need for multiple languages (including navigation) as
not everyone speaks English
avoid unpleasant colour combinations, too small text and irritating
pop-ups.
Design decisions typically imply trade-offs, usually between originality,
simplicity and functionality. For example, functionality (especially
excessive functionality) often implies complexity (the opposite of
simplicity), while originality (implying unfamiliarity) may not be simple or
particularly functional.
Chaffey (2009) Chapter 11 categorises website design under three
different forms: site, page and content design.
Page design
This refers to the layout of each page. Attention must be given to the
title, navigation and content. Chaffey (2009) explains that page elements,
the use of frames, resizing, consistency and printing are issues that the
designer needs to keep in mind when creating the e-business B2C website.
Content design
The key point here is never to include too much information on one page,
use hyperlinks to give the reader a choice about exploring content further
without unnecessarily crowding the page with too much content, and set
out content in small, readable chunks of text that can be scanned easily.
Any new website design should be prototyped and tested with real users,
just to evaluate their reactions. Ives and Piccoli (2003) demonstrate how
a good knowledge of users can inform website design, while Treiblmaier
(2007) discusses the evaluation of websites. Although there are many,
often fairly obvious, design guidelines (see Usability 101, Nielsen), it
must be remembered that artists break the rules. In other words,
exceptional website designers can and do fail to follow what appear to
be obvious guidelines and yet, through their design talents, they still
manage to produce exceptionally attractive and innovative designs (e.g.
www.agencywork.com.my/nokia2600; www.nexteinstein.org; and www.
adultswim.com/music/ghostlyswim/index.html)
Activity
Look up a few different B2C websites (perhaps include a supermarket) and try to find one
particular piece of information on each site. Then assess how many clicks it takes you to
find the answer, and also classify the site as narrow and deep or broad and shallow.
Try a simple question like What is the companys postal address? or something more
complicated like How many choices of a particular product (e.g. breakfast cereals) are
currently available?.
Case studies
The best way to become familiar with B2C is by getting to know the
companies and their websites. As the market is directed at us, the
consumers, this could not be easier. There are no passwords to worry
about and it is recommended that you spend some time just browsing
around B2C websites that interest you. As many of these companies have
quite a long history (in internet time), it is also very worthwhile reading
about how they started, the story of their growth and the particular value
propositions that they offer customers. These stories are well documented
in Chaffey (2009).
A good case to start with is Amazon.com. Here, in Case study 12.1,
Chaffey (2009) emphasises how Amazon makes extensive use of metrics
to drive their whole business. Remember also that Amazon is an excellent
example of long tail economics, the shift from mass markets to niche
markets (Chaffey, 2009, Chapter 8). Because the company does not have
to hold physical stocks of books, it can offer a vast catalogue of titles
(much larger than even the largest traditional bookshop) and previously
unprofitable transactions become profitable using e-business. Whereas
even a large conventional bookstore only offers 130,000 top titles, at
one point, one-third of Amazons book sales came from outside these
top 130,000. Note also how Amazon has branched out from books to
music, electronics, clothing, web services and even (in the USA) luxury
42
B2C failures
In addition to high-profile success stories, B2C has also been characterised
by business failures. Chaffey (2009) describes the problems of Boo.com
in Case study 5.3. Another failure was the US company Fingerhut (see
Phan et al., 2005 for a clear narration of the story), which had been a very
successful mail-order catalogue retailer since the 1950s. Part of its success
was due to its sophisticated use of IT, including extensive data mining and
database marketing. Its move into B2C e-business and credit cards in 1998
was welcomed by Fortune magazine, which regarded the company as
one of the ten companies that get it. Shortly afterwards it was acquired
by Federated Stores, a US chain, but then things started to go wrong.
Fingerhuts traditional customers were largely sub prime (low income)
and at the time they were not e-business users. Nor were they particularly
creditworthy, which affected their ability to use credit cards. At the same
time, Fingerhut lost control of its IT systems, such that IT failures began to
hit order fulfilment, peaking during the crucial retail period of Christmas
1999. The company lost trust and credibility, sales dropped and the
business closed down in 2002, although it was revived later.
Another interesting failure was UKeU, a UK e-learning initiative launched
in 2000. Most of the 50m investment was spent developing the software
for the learning platform and insufficient attention was paid to developing
a business strategy. This type of operation has high fixed costs, payable
up-front, and the failure to attract more than 900 students, against a
target of 5,600, saw the project scrapped.
43
B2C problems
Unproven business models
Any business has to have a reliable revenue stream and eventually to make
profits it took companies like Amazon a number of years before they
showed a profit. Investors will not wait forever.
Discount environment
Consumers expect discounts and bargains through B2C and in this
environment, large sales volumes and strict cost control are needed.
Cost-efficiency problems
B2C is not necessarily efficient and cost effective, compared to traditional
retail. Much depends upon the product market. Nowadays consumers
expect attractive websites, backed up by superior support and distribution
networks and these are not cheap. Hence, compared to the dot.com boom,
entry costs (and operating costs) are no longer low.
Innovation
In most cases, B2C is competing against traditional retail operations
and, in order to encourage customers to switch away from the familiar
traditional channels, the new B2C operation must offer something extra
and innovative. This could be the personalisation and reviews offered by
Amazon, the build-to-order of Dell or the convenience and discounts of
easyJet. In addition to these well-known cases, there are myriad smaller
companies, offering innovative solutions in highly niche markets, from
Chinese cosmetics to concert tickets and from violin repairs to virtual pets.
Understanding shoppers
44
Conclusion
B2C e-business is growing and maturing; in industries like travel, this
has happened rapidly. Nevertheless, opportunities for innovation remain,
although many of these have taken on the flavour of web 2.0, social
networking and user-generated content (discussed in Chapter 8 of this
guide). Furthermore, growth can be unpredictable, as can be seen from
Amazons diversification away from books, eBays move into fixed-price
new goods and Googles transformation from a search engine into the
worlds largest advertising agency (see the following chapter of this
guide). This implies that B2C retailers need to be flexible and agile,
especially when the critical success factors are often hidden and may
reside more in logistics and manufacturing than IT (see the cases of
Amazon and Dell referred to above).
45
Self-test questions
1. Why do you believe that business-to-consumer (B2C) e-business has
grown steadily in countries such as the UK? Illustrate your argument
with examples.
2. Companies engaged in business-to-consumer (B2C) e-business need
to understand shoppers, technology and their industry. Discuss with
examples.
3. In business-to-consumer (B2C) e-business the critical success factors
may be hidden and the growth path unpredictable. Discuss with
examples.
46
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
discuss the basic concepts of marketing including segmentation, the
customer lifecycle, customer relationship management, and advertising
and branding
analyse a marketing mix using the 4 Ps framework
discuss the balance between CRM technology and strategy
identify the techniques used in new media marketing
recognise the role played by search engines in marketing and advertising
recognise the potential contributions from affiliate marketing and viral
marketing
explain the problems of integrating multiple marketing, sales and
distribution channels
recognise the role of e-business in dynamic pricing
discuss the potential benefits and privacy dangers of consumer profiling.
Essential reading
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapters 8 and 9.
Further reading
Rigby, D.K., F.F. Reichheld and P. Schefter Avoid the four perils of CRM,
Harvard Business Review 80(2) 2002, pp.10109.
Rust, R.T., V.A. Zeithaml and K.N. Lemon Customer-centered brand
management, Harvard Business Review 82(9) 2004, pp.11018.
47
Additional resources
Up-to-date information on marketing from both the academic and
practitioner perspectives is available at the following websites:
The UK Chartered Institute of Marketing: www.cim.co.uk/home.aspx
Marketing research resources from the Wharton School of the
University of Pennsylvania: http://knowledge.wharton.upenn.edu/
category.cfm?cid=4
A video of a lecture on e-marketing and new business models from the
Tepper School of Business, Carnegie Mellon University: www.tepper.
cmu.edu/alumni/lifelong-learning/speaker-presentations/e-marketingand-new-business-models/index.aspx
Introduction to marketing
The discipline of marketing is a huge area of study, but it is essential that
you grasp the basic concepts in order to appreciate the increasing role that
e-business is playing in an area that is key to competitive advantage in
many industries and product markets.
If you input the term marketing into any search engine, you will see that
it has many definitions. There are commonalities and differences among
all of them. We find the definition provided by the UKs Chartered Institute
of Marketing helpful: Marketing is the management process responsible
for identifying, anticipating and satisfying customer requirements
profitably.
This definition shows us that the customer is central to business objectives,
with the understanding, of course, that profitability is also important.
However, as with all definitions, there are alternatives. Nonetheless,
marketing is a set of customer-oriented strategies and practices.
As with most aspects of business, marketing pre-existed what we now refer
to as e-business. So it is important to explore briefly the fundamentals
of traditional marketing before looking at how e-business changes it.
Here we focus on a few basic concepts and models, including customer
segmentation, the 4 Ps, the customer lifecycle, and customer relationship
management.
Case study
In Chapter 9 of Chaffey (2009), Case study 9.5 discusses the CRM strategy
of a company called Toptable, which is an online service for booking
restaurants. Originally, Toptable relied on sending undifferentiated, mass
emails to their consumers. However, over time this strategy became less
and less effective. Recognising the limitations of this approach to CRM,
Toptable partnered with a marketing company in order to improve their
communications and customer relations.
Read through the case study and explore the four key areas that Toptable
and its partner focused on. How did they target defectors and lookers?
What problems did Toptable face in successfully delivering email messages
to potential clients, and how did their new partner overcome these
problems? Think critically about these issues, and then consider: in what
ways might their strategy be likened to spam operations?
50
51
Affiliate marketing
Another way in which businesses can increase their revenue online is
through affiliate marketing, which is a model made possible by the
tracking permitted by internet technology. This is how it works: you (the
customer) visit what is referred to as an affiliate site. If the affiliate can
persuade you to click an advertisement which links to the merchants site
and you purchase a product, then the affiliate will be paid a commission
by the merchant. Actually, some merchants will even pay affiliates if the
sale isnt finalised. They sometimes pay for the click-through because
it can generate future leads. As all this activity can be tracked online,
the merchant now has a better idea of how effective its advertising is,
especially compared to the offline world where marketers have wondered
for decades about the effectiveness of advertising.
Online advertising
From the early days of the dot.com boom, advertising has been seen as
an important revenue stream for websites. This was usually in the form of
banner or pop-up adverts, on which many of the more reckless ventures
of the time depended for revenue. However, unless the site has a large
number of visitors (e.g. portals like Yahoo) or enough visitors from a specific
marketing segment or niche (e.g. a site that specialises in mountaineering
information), few advertisers will be interested. Furthermore, as the novelty
wore off, users began to be irritated by the adverts and click-through rates
fell from 2 per cent in the mid-1990s to 0.3 per cent a decade later.
54
Viral marketing
Another form of e-marketing that is enabled by the internet is called viral
marketing, which relies on pre-existing social networks to increase brand
awareness or sales through self-replicating viral processes. This is basically old
school, word-of-mouth communication enhanced by the network effects of
the internet and related new media. The process is called viral as an analogy
to how viruses spread during epidemics. Recently there have been some very
successful viral marketing campaigns, which often rely on online video clips.
The main idea of viral marketing is that an advertisement or other
marketing content spreads from user to user so that it reproduces
exponentially (see Watts and Peretti, 2007, for a detailed discussion).
The marketing agency does not steer the spread of the message, but
rather relies on users to do the work. Many viral marketing campaigns
are supplemented with other forms of marketing communications such as
traditional public relations and advertising.
As with most aspects of marketing, there is a downside to viral marketing
as well. For one, it has proved difficult to create successful viral concepts.
Some argue that it is merely a fad. There is also a risk that the brand may be
damaged if unsolicited messages run amuck. There have also been cases of
successful viral marketing campaigns that were actually ironic in origin. Take
the example of the Three Wolf Moon T-shirt: the shirt itself is not particularly
stylish and has a reputation for being worn by rural people in the USA
(rednecks), but after a few users jokingly left positive reviews for the shirt on
Amazon that spread virally around the internet, sales increased by 2,300 per
cent over a few weeks in 2009. At one point the shirt was the top-selling item
in the Amazon clothing store. If youre interested in seeing the t-shirt yourself,
follow this link: http://personal.lse.ac.uk/martinak/wolf_tee.jpg
55
However, the company that designs the shirts was not enthusiastic about
the user comments left on Amazon. These sorts of comedy reviews are
becoming increasingly common. This issue is an interesting one because
it shows that marketing is very much a social phenomenon and that firms
cannot control what is said about their brands or products.
Activity
Search online for information on a recent viral marketing campaign. Try to identify how
much the campaign cost the sponsoring company, how the message was spread, what
media were used (e.g. video, funny image, etc.) and what sites were involved. Was
the campaign deemed successful or unsuccessful? Why? Were there any unexpected
problems with the campaign?
At this juncture we would like to bring your attention to Table 9.3 in
Chaffey (2009), which summarises the strengths and weaknesses of
the various new media marketing channels, including search engine
optimisation, affiliate marketing and viral marketing as well as many
others.
Multi-channel integration
With all these different ways of marketing, using both offline and online
channels, and targeting newer and more specific customer segments,
comes what has been called the proliferation challenge. As well as the
various marketing techniques, marketers often use a variety of channels,
including text-messaging and telephone sales/call centres. The vast
amount of customer information that has become available has led to
an increasing number of customer segments, calling forth additional
brands and products. With the advent of web 2.0, in the shape of social
networking sites, blogs, wikis and Twitter (see Chapter 8 of this subject
guide), the complexity of the problem has mushroomed.
Interm ediary
S oc ial m edia
Com pany
T ex t m es s age
T elephone
P os t
P ers on
56
Custom er
The result is a major headache for marketing managers who, faced with
a bewildering choice, must devise a marketing strategy that is effective
but stays within budget and is consistent across channels (see Figure
5.1). For example, increased spending on AdWords implies less spending
on TV advertising, which may make sense for some products (e.g. digital
cameras) but not for others (e.g. washing powder). Consistency includes
product descriptions and prices, except perhaps where channels can be
sufficiently differentiated and incentives or constraints can be applied. For
example, one retailer with excellent distribution and warehousing facilities
but limited showrooms may focus on online price promotions whereas
another, which wants to increase footfall in their stores but suffers from
poor logistics, will choose the opposite strategy.
As discussed in the case study on easyJet in Chaffey (2009) Chapter 8,
while the company sells 98 per cent of its tickets online, it still uses other
channels (e.g. newspapers) for advertising. The case study on Dell in the
same chapter discusses how the company uses various media to market
its computers. Watson et al. (2000) talk further about integrated internet
marketing.
Dynamic pricing
What is the maximum price you are willing to pay for your favourite
shampoo? How valuable is that good to you? These are questions that
companies interested in dynamic pricing ask. Unlike fixed pricing, with
which we are all familiar, dynamic pricing is the dynamic adjustment of
prices depending on the value that customers assign to the good. Advances
in information technology make this approach to marketing much more
feasible than in the past, as companies require access to lots of information
about customer preferences and values as well as demand levels for it to
work.
In a sense, dynamic pricing isnt new. Price discrimination has been
around for decades, if not centuries. Movie theatres, buses, trains, airlines
and even amusement parks and restaurants offer different prices to
children, students and senior citizens. Indeed, airlines have grown very
sophisticated in their price differentiation schemes, segmenting business
travellers from non-business travellers, who are more flexible in their
itineraries and more price-sensitive. Even without e-business, there has
been an element of dynamic pricing in the shape of cheap standby tickets
for the theatre or cinema and end-of-season fashion sales.
The internet has changed the game, however. It facilitates the simple and
rapid transformation of list prices while allowing companies to gather
and analyse customer data quickly. For example, airlines operate highly
sophisticated yield management systems that price tickets for a particular
flight based on the sales so far, such that if the flight is half-empty the
price drops and if it is nearly full the price increases. This access to data
on actual customer behaviour enables companies to micro-manage their
marketing and pricing strategies to the extent that every sales offer can
be customised. Some argue that its not just companies that benefit from
these technologies, but also customers. The emergence of shopping
comparison websites (e.g. www.kelkoo.com) and shopping bots used to
track competitive prices can empower customers to combat the potentially
exploitative practices of dynamic pricing. Indeed, as a relatively recent
pricing innovation, dynamic pricing opens up certain ethical and legal
questions that will surely be debated in the coming years.
57
Activity
Consider a product that is subject to dynamic pricing (e.g. airline seats, fashion clothes)
and outline the costs and benefits of the practice for both the seller and the buyer. Does
dynamic pricing change the behaviour of buyers? Under what circumstances might it not
change their behaviour?
Conclusion
Marketing is a fundamental part of most businesses and, as markets
become more competitive, firms are becoming more customer-centric. As a
marketing channel, e-business and e-marketing are becoming increasingly
important through techniques such as personalisation, affiliate marketing
and viral marketing. Meanwhile, Google has revolutionised advertising
through its AdWords service. Thus, e-business and new media have
contributed hugely to modern marketing and much e-business activity falls
58
Self-test questions
1. What is customer segmentation? How does e-marketing contribute to
segmentation? Justify your answer using examples.
2. Why is customer relationship management important? How is
e-marketing used within customer relationship management? What are
the dangers of customer relationship management?
3. What is viral marketing? What are the benefits and dangers for
companies intending to use viral marketing as part of a conventional
marketing campaign?
59
Notes
60
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
distinguish between B2C and B2B e-business systems
explain how B2B and B2C systems overlap in certain cases
discuss the strategies behind B2B systems
explain how e-business technology supports B2B systems
explain the basic concepts behind e-procurement
apply B2B models to real world marketplaces.
Essential reading
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 7.
Riggins, F. J. and S. Mitra An e-valuation framework for developing netenabled business metrics through functionality interaction, Journal
of Organizational Computing and Electronic Commerce 17(2) 2007,
pp.175203.
Further reading
Picot, A., C. Bortenlanger and H. Rohrl The organization of electronic markets:
contributions from the new institutional economics, Information Society
13(1) 1997, pp.10723.
Porter, M.E. and E.V. Millar How information gives you competitive advantage,
Harvard Business Review 63(4) 1985, pp.14974.
Presutti, W.D. Supply management and e-procurement: creating value added
in the supply chain, Industrial Marketing Management 32(3) 2003,
pp.21926.
Turban, E., J. Lee, D. King, T. Peng Liang and D. Turban Electronic commerce:
a managerial perspective. (Upper Saddle River, NJ; London: Pearson
Education, 2009) sixth edition [ISBN 9780137034659 Chapter 5.
61
Additional resources
Forbes.com has useful information on B2B markets in various industry
sectors, which you can find at www.forbes.com/bow/b2b/main.jhtml
Practitioner-oriented articles on procurement can be found on the
following websites:
www.ft.com/multimedia: mostly items related to current business news
www.cips.org: the UKs Chartered Institute of Purchasing and Supply is
the professional organisation that deals with procurement and as such
is a good up-to-date source
www.atkearneypas.com/knowledge/articles.html: a US consultancy
that offers articles and research papers on procurement.
Introduction
Business-to-business (B2B) e-commerce involves the sale of goods and
services between businesses. B2B covers a spectrum of applications that
enable an enterprise or business to form electronic relationships with their
distributors, suppliers and other partners. Examples of B2B e-commerce
include websites such as alibaba.com, mySAP.com and ariba.com
B2B strategies are largely of two types:
Application of IT to pre-existing relationships This is represented
by B2B developments designed to reduce the costs of performing existing
business transactions. In this case, ICTs support existing economic
relationships. They enable a company to reduce the costs of doing business
and hence increase the volume of business possible and its profitability.
Creation of new marketplaces by using IT support systems
Here ICTs are designed to create business transactions which did not exist
before. In this case they create a new economic environment, often called a
marketplace. By exploiting the power of ICTs in distributing, managing and
sharing information, a marketplace can make possible sustainable economic
relationships which could not have been coordinated without the use of ICT.
The crucial point about B2B is that it relies on the internet and other
networking technologies to either sustain or enable economic relationships
between business organisations. Since these technologies increase the
total amount of information, the upshot is that they normally reduce
the search costs associated with the identification of the parties with
which one wishes to conduct the transaction. Therefore, they slash the
transaction costs and lead to a more intensive use of electronic markets
rather than electronic hierarchies (see Chapter 3 of this subject guide). In
other words, B2B may be viewed as the result of the wide adoption of the
internet and other ICT infrastructures which, by reducing the transaction
costs, make electronic transactions more efficient than those conducted in
the physical market (such a claim is valid, yet we know from Picot et al.
(1997) that it is just as possible to use ICTs to reduce transparency and
thus increase transaction costs see Chapter 3 for more details).
You may also conceptualise the implementation of B2B as a process
aimed at changing the organisation of exchange processes. B2B thus
decouples the exchange of products from the business transaction that
defines the contractual agreements which, in turn, define the details of the
transaction. In traditional transactions, suppliers and buyers had to meet
in the same place and at the same time in order to conduct the exchange.
B2B marketplaces operate as virtual marketplaces where suppliers are
62
B2B structures
Looking at the way in which electronic marketplaces are organised
we can identify three main B2B marketplace orientations:
supplier oriented market
buyer oriented market
intermediary oriented market.
The orientation of the marketplace is normally determined by
the organisation (or organisations) that finance the investment in
implementing and running the technological platform which supports the
B2B marketplace (see Chaffey, 2009, Chapter 2).
We have to keep in mind that an investment in setting up electronic links
is normally justified in financial terms by the possibility of modifying the
market structure to a companys advantage (Porter and Millar, 1985). It
is, in fact, very expensive and demanding to implement and maintain a
B2B marketplace and these costs are only justifiable if they are generating
economic advantages for the company. Thus, the different orientations
of B2B marketplaces have to be examined in the light of the financial
objectives of their backers.
In the case of supplier oriented marketplaces, the suppliers of
the goods invest in ICT to create new business opportunities. Such
marketplaces are associated with large powerful suppliers like Dell.
For more on how Dell provides a supplier oriented marketplace, please
see Chaffey (2009) Chapter 5. In this case, the investment is made to
create a marketplace which is structurally very similar to traditional B2C
marketplaces (see Chapter 4 of this subject guide).
Firms invest in ICT to facilitate the purchase of their goods by existing
buyers, and to make it easier for potential buyers to find their products.
In so doing, they try to exploit the potential provided by ICT to reduce
search, contracting and control costs (for their own goods and services by
others) and therefore to create a more efficient market which, by reducing
transaction costs, is generating more revenue for them (examples include
Cisco and Dell).
63
Buyer 1
Buyer 2
Supplier
Buyer 3
Suppliers
products
catalogue
Customers
order
information
Supplier 1
Supplier 2
Buyer
Supplier 3
Buyers
products
catalogue (RFQ)
Suppliers
bid
information
Given the nature of these marketplaces, only firms which have large
procurement needs can invest in these B2B platforms. In fact, only large
procurement volumes can justify the costs of running such platforms and
generating such advantages (see, as an example, GE Lightnings Trading
Process Network (TPN) (Presutti, 2003)).
Intermediary oriented marketplaces are where a third party
invests in ICT to create a neutral marketplace where buyers and sellers can
trade.
Buyer 1
Buyer 2
Supplier 1
Supplier 2
Third Party
Supplier 3
Buyer 3
Customers
order
information
Shared
product
catalogues
Suppliers
product
information
65
the cost of processing an order is high relative to products are commodities or nearcost of item
commodities
specialised products are involved
Activity
Choose a company, again either from Chaffey (2009) or from other readings and, using
your answers for the first activity in this chapter of the subject guide, think about the
following:
a. What sort of transaction costs are reduced, and for which company?
b. What sort of transaction costs increase, and for which company?
c. What sort of challenges can companies face when they set up this particular
marketplace?
66
E-procurement
As Chaffey (2009) Chapter 7 points out, management literature did not
focus on procurement until fairly recently and its relevance has grown
with the rise in e-procurement. Procurement, very simply, means all
the steps that a company takes in order to purchase goods and services
from its suppliers. E-procurement is defined in Chaffey (2009) as the
electronic integration and management of all procurement activities
including purchase request, authorisation, ordering, delivery and payment
between a purchaser and supplier (p.381).
While Chaffey (2009) tends to use the terms B2B and e-procurement
interchangeably, we prefer greater clarity, such that e-procurement refers
to a buyers view of a B2B market. However, we agree with Chaffey (2009)
that a good way of understanding e-procurement is to question what is
bought and how it is bought.
What is bought? This can be categorised as either production-related
or operational procurement. The former relates to procurement by a
company of supplies for the production of its own products. Operational
procurement is the purchasing of goods and services needed in order to
run the business, such as stationery, furniture and office supplies.
How are goods or services bought? Again, Chaffey (2009)
suggests two methods: systematic sourcing and spot sourcing. Systematic
sourcing implies long-term relationships through contracts with known
and/or regular suppliers. Spot sourcing is when a company needs
something urgently and/or the good or service concerned is generic
(or a commodity) that can be bought from any supplier with few
repercussions. Also, take a look at the Cambridge Consultants case study
on e-procurement in Chaffey (2009) (Case study 7.1).
Procurement participants
Procurement sounds straightforward enough but it is a very complex
process, partly because of the number of participants involved in a
process and their interconnections. Riggins and Mitra (2007) discuss eight
different kinds of partners, starting with traditional manufacturers, direct
sales manufacturers, value-added procurement partners, online hubs,
knowledge experts, online information services and online retailers all
the way to portal communities. The first seems self-explanatory but, as you
go through the list, the rising level of complexity will dawn on you. To get
a better idea of the various participants, you should study the Riggins and
Mitra (2007) paper and its summary by Chaffey (2009).
However, as examples, here we examine two of the partner types briefly to
provide you with a flavour of the roles of different intermediaries. Valueadded procurement partners are intermediaries that connect various
partners and provide some added value through bringing trust, reliability,
security or some other added service, for example a travel agent. Portal
communities are electronic interfaces that bring together many services
and a range of information in a customised fashion. Some of the categories
of partners mentioned are quite similar from their descriptions but there
are subtle differences in their focus or the sort of functionality they offer.
The complexity that comes with e-procurement may well be difficult to
manage, yet on the whole the advantages tend to outweigh the problems.
This helps to explain the growing popularity of e-procurement.
67
Benefits of e-procurement
Chaffey (2009) identifies the following benefits:
Shortening or reduction in purchasing cycle time and cost traditional
intermediaries are no longer needed because they are replaced by
technology. This helps the buyer to cut costs and cycle time as much of
the work can be automated.
Improved control over the budget with greater use of technology
there is more transparency and the buyer can see better where funds
are being used and the areas where an association with another
intermediary would help to cut costs.
Reduction in administrative errors again, technology and the
transparency it brings help to identify problems quicker and often
technology will prompt the user to make sure the action taken is
indeed what is needed.
Enabling an improvement in buyers productivity the buyer, if
technology is used well, can smooth the flow of supplies such that time,
warehouse space and effort are not wasted.
Driving down prices through standardisation of products the products
and the intermediary connections are standardised so that both suppliers
and buyers can choose their partners and are not locked-in. This forces
the cost of buying supplies down, as it improves the choice available to
buyers (with the increased number of interchangeable suppliers).
Better management of information technology is able to retain,
manage, organise and archive information much better than humans
using paper formats.
Greater integration of payment systems again, technology is very
useful as it connects various other electronic systems and allows them
to speak to each other and improve the speed of work through better
integration.
Riggins and Mitra (2007) provide a framework which serves to evaluate
the sort of benefits that can be gained at various dimensions or stages,
and the sort of steps a company can take in order to achieve them. This is
an interesting framework and quite useful because it provides a pictorial
view of where value is created (and what kind efficiency, effectiveness
or strategic) in relation to the dimension of e-procurement (e.g. planning,
development, etc).
not always true and sometimes for good reason (e.g. security risks).
Such an investment needs to be justified in terms of real benefits, in
both the short and long term. There can also be problems of resistance
to change.
Technological risks include a lack of integration among B2B and
internal systems that can create pools of information that are not used,
and the duplication of records, waste, etc. In principle, technology
helps to improve the integration of systems but not all systems are
compatible. Incompatible systems can increase the cost of coordination
and, at the same time, increase security risks (through the need for an
added interface or layer of software).
Business risks, such as the loss of preferential terms from a
traditional supplier which, through B2B, makes those same terms
available to competitors. Similarly, buyers may not wish to invest in a
technology whereby their competitors gain disproportionate benefits.
On the other side, suppliers may find their profit margins reduced as
well as having to bear the costs of producing and constantly updating
their electronic catalogues.
www.alibaba.com
www.covisint.com
69
Conclusion
This chapter provides a background to B2B and allows you to compare and
contrast it with the ideas and characteristics of B2C. The strategies of B2B
employed by companies are explained, as well as the motivation behind
the choice of each strategy. This chapter employs transaction cost theory
(discussed in Chapter 3 of this guide) in the B2B e-business context and
introduces the notion of e-procurement, focusing on the buyer side of B2B.
These concepts provide a conceptual foundation for the following chapter,
which deals with the practical implementation of supply chain management.
Self-test questions
1. B2B buyer, supplier and intermediary oriented marketplaces reflect
different power relationships in electronic markets. Discuss, with
examples, how and why these power relationships are shaped and
maintained.
2. Discuss how and why disintermediation occurs. Discuss, with examples,
whether ICT based disintermediation is always sustainable.
71
Notes
72
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
recognise the various types and components of supply chains and
appreciate their purposes and functions
analyse the role of information and e-business technologies within the
supply chain
discuss the importance of SCM in the context of value chains and value
networks
recognise the various actors within the supply chain and appreciate
their roles
discuss the various levels of integration that are required to facilitate
SCM
analyse the strengths and weaknesses of particular SCM strategies.
Essential reading
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 6.
Lee, H.L. Aligning supply chain strategies with product uncertainties,
California Management Review 44(3) 2002, pp.10519.
Lee, H.L., V. Padmanabhan and S. Whang The bullwhip effect in supply chains,
Sloan Management Review 38(3) 1997, pp.93102.
Sull, D. and S. Turconi Fast fashion lessons, Business Strategy Review 19(2)
2008, pp.511.
73
Further reading
Angeles, R. RFID technologies: supply chain applications and implementation
issues, Information Systems Management 22(1) 2005, pp.5165.
Croom, S.R. The impact of e-business on supply chain management,
International Journal of Operations and Production Management 25(1) 2005,
pp.5573.
Gunasekaran, A., K.H. Lai and T.C.E. Cheng Responsive supply chain: a
competitive strategy in a networked economy, Omega 36 2008, pp.54964.
Norrman, A. and A. Jansson Ericssons proactive supply chain risk management
approach after a serious sub-supplier accident, International Journal of
Physical Distribution & Logistics Management 34(5) 2004, pp.43456.
Porter, M. and Millar, V. How information gives you competitive advantage,
Harvard Business Review 63(4) 1985, pp.14974.
Additional resources
Up-to-date information on SCM from both the academic and practitioner
perspectives is available at the following websites:
The UK Chartered Institute of Logistics and Transport: www.ciltuk.org.uk
The MIT Center for Transport and Logistics: http://ctl.mit.edu
The University of Washington Library: www.lib.washington.edu/
business/guides/sup.html
Supply chain brain: www.supplychainbrain.com/content/index.
php?id=331
However, wherever the goods flow, information must flow as well. In order
to make these supply chains work efficiently, good SCM is essential and
it is seen now as a key factor in improving organisational effectiveness
and competitiveness. In a special supplement published in 2006, The
Economist referred to supply chains as the physical Internet, which means
that it should be as easy to move goods around the world as it is to access
websites around the world. Furthermore, the ideas behind SCM are now
also being applied to services as particular service processes (e.g. call
centres, the checking of insurance claims, etc.) are being moved offshore
in what is termed business process outsourcing.
In todays highly competitive markets, customers expect a wide range of
cheap goods to be constantly available, which implies that the objectives of
supply chains comprise: speed, reliability, control, flexibility to change, low
cost, quality and the minimisation of inventory. However, these objectives
tend to conflict; for example, flexibility and reliability can be improved by
holding more inventory but this adds to the cost. Speed can be increased
by sending goods by air, but again the cost increases.
Perhaps the most important trade-off is between service and efficiency.
Firms like to give their customers a high level of service (e.g. delivery
arrangements) but this can be expensive. Furthermore, suppliers (for
example, of groceries) may wish to give their best customers (the
large supermarkets) a better service (e.g. delivery on a Sunday) than
their average customers. This adds to the complexity of supply chain
management.
Traditional supply chains include suppliers, manufacturers, distributors,
retailers and consumers. Figure 7.1 depicts this traditional arrangement.
Note that in this figure, information flows from the customer up the supply
chain (i.e. upstream).
Raw material
supplier
Tier 2 supplier
(where materials
are processed)
Tier 1 supplier
(where goods
are manufactured)
Flow of goods
End customer
Warehouse
(where goods
are stored)
Retailer
Flow of information
Quantity
Bullwhip effect
Time
Orders placed
Actual sales
Figure 7.2: Higher variability in orders from dealer to manufacturer than actual
sales
76
Its not just demand that may be uncertain. Supply chain uncertainty
can also vary depending on the type of product and the stability of both
its supply and demand. Certain products have a stable and predictable
demand (e.g. basic groceries), while others face high demand uncertainty
due to the nature of the product (e.g. innovative computer technology
with a small consumer base). Likewise, supply uncertainty can differ
depending on the stability of the supply process and how well established
it is. New and evolving supply processes can involve high uncertainty, as
well as variable weather in the production of crops for food. For further
discussion, see Lee (2002). Figure 7.3 provides examples.
Demand uncertainty
Supply uncertainty
Low
High
Low
Processed food,
basic clothing, oil
Fashion clothing,
smart mobile phones
High
Activity
Where in the above uncertainty framework would you place the following products?
natural gas
books
refrigerators
solar panels.
Consider other products and where they could be placed in the framework. Are products
likely to move from one cell to another? Why?
77
78
Vendor-managed inventory
A good example of the changes taking place in relationships between
trading partners is vendor-managed inventory (VMI). This close
collaboration, facilitated by SCM technology, involves the buyer (typically
a retailer) handing over the responsibilities of managing its inventory
(including when to order and how much to order) to the supplier. The
supplier is able to manage this through information sharing between the
two. The key ideas of VMI are:
The supplier manages inventory/orders, not the retailer, and this
produces an integrated and optimised supplier/retailer value network.
There are benefits (for the retailer), which include reduced inventory
and faster replenishment, and improved collaboration in areas such as
joint promotions (special offers).
Potential drawbacks (for the retailer) include loss of autonomy and
increased dependence upon the supplier.
The implementation of VMI is usually driven by large organisations; for
example, Procter and Gamble and Wal-Mart in the FMCG industry. In this
industry, VMI forms part of initiatives known as continuous replenishment
and efficient consumer response, where the underlying facilitator is
the electronic exchange of inventory information and orders using EDI
networks. The retailer provides the supplier with its inventory information,
and the supplier calculates a proposed order (based on past trends and
current marketing promotions) and sends it to the retailer for approval
before supplying the goods.
79
Case study
In Chapter 6 of Chaffey (2009), you will find Case study 6.1 on the supply
chain management strategy of Shell Chemicals. Since implementing
a system called SIMON (Shell Inventory Managed Order Network) to
manage their supply chain relationships, the company has moved to an
online portal known as Elemica. SIMON was based on vendor-managed
inventory SCM processes.
Read the passage to understand how SIMON worked in practice. What
types of information did it handle? How is Elemica different from SIMON?
Why did Shell Chemicals switch from SIMON to the Elemica portal?
Virtual organisation
The underlying concepts of value networks and VMI are part of a
wider trend towards what is known as the virtual organisation.
As parts (processes and functions) of an organisations business are
increasingly outsourced to partners, interesting questions arise regarding
the boundaries of the business. Is it more meaningful (or interesting)
to consider an entire supply chain, made up of separate companies
collaborating closely together to provide goods to consumers, as opposed
to the activities of an individual member company within the chain? How
do we conceptualise businesses with reduced physical assets and whose
presence and relationships with partners are almost entirely electronic?
We discuss virtual organisations in detail in Chapter 9 of this subject guide,
as there are many important issues that transcend the realms of SCM,
which is still rooted in the production and distribution of physical goods.
Nevertheless, it is worth starting to think about the concept here and
Chaffey (2009) provides a useful introduction. In particular, his definition
of a virtual organisation is as follows:
an organisation which uses information and communications
technology to allow it to operate without clearly defined physical
boundaries between different functions. It provides customised
services by outsourcing production and other functions to third
parties. (p.354)
80
Advantages of 3PL
The client company can focus on core competency and outsource all
non-core activities to external experts.
There are cost related advantages through economies of scale.
Labour costs are shared between client and provider.
Offshore suppliers can be managed and trained by 3PL providers.
Capacity utilisation can be optimised.
Outsourcing to external experts can increase the satisfaction of
customers through the ability to pay greater attention to their needs.
It can provide access to international distribution networks.
It is a technique that enables risk sharing with an external expert.
It provides access to state of the art technology.
It allows for inventory reduction.
There is more flexibility to cope with changing demand.
Disadvantages of 3PL
As with all outsourcing, 3PL can lead to a loss of in-house
expertise.
Logistics itself can be a core competency that is better not
outsourced.
Overdependence on external expertise can lead to loss of control.
It can cause a breakdown of responsiveness to customer needs (think
about reverse logistics like returns, repairs, etc. from customers).
There is the potential of an inability to provide customised products
through a breakdown of communication channels between the
client company and its customers.
Contracts, as in all outsourcing arrangements, need to be carefully
specified and are often prone to abuse.
Cost reduction promises are often not met.
There is an inability to form sustainable and trusting relationships
between 3PL providers and clients.
Performance measurement seems to be the only accurate manner
of measuring 3PL success, but this only rates aspects such as delivery
timeliness, order fill rates and inventory turns, and ignores issues such
as trust and long-term relationships, thus making 3PL success difficult
to assess accurately.
81
Implementation of integration
So far, we have discussed vertical and virtual integration at a rather
strategic level. However, in practice, it is essential that supply chains
operate seamlessly on an everyday, 24-7 level and this means that the
various components within the supply chain people, processes and
technology must be tightly integrated. In other words, they have to fit
together well, all the way along the supply chain, regardless of whether
the strategy is one of vertical or virtual integration.
At the people level, it is essential that organisations (and their staff) trust
each other and can collaborate together across organisational boundaries
to ensure the success of the overall supply chain. In the past, suppliers
would send salesmen to take orders from customers and sometimes this
selling was particularly aggressive and trust was lacking. However, with
VMI, the ordering process can be almost automated, but supplier-customer
relationships become more important. Typically, large suppliers will now
form account teams to interact with their customers, not to discuss
individual orders, but rather to work together to improve service levels,
logistics, distribution, returns and promotions for the benefit of both
parties. As soon as something starts to go wrong, there should be clear
channels between the trading partners to solve the problem.
Activity
Do you agree with the approach to managing supply chains described above?
Integration between the business processes and the technology is also
very important. An effective supply chain doesnt just mean using state-ofthe-art technology; it requires organisations to pick and choose particular
technologies to provide advantages for specific processes, keeping in mind
the context of the company (in terms of culture, governance structure,
specifics of product/service, etc). A nice example of this is provided by the
case of Zara (see below).
Finally, at the lowest level, the various technologies themselves have to fit
together well, both within individual organisations and among the supply
chain partners. As noted in Chapter 2 above, this technological integration
within companies can be achieved through the purchase of integrated
ERP software packages. In SCM, this integration is often taken a stage
further, such that the ERPs of individual organisations are customised
to link together, or talk to each other, in addition to the integration
achieved through common RFID standards (see Chapter 2 of this subject
guide). The network links between the trading partners are provided by
EDI systems (or their equivalent), which offer standard message formats
and protocols. The linking together of these technologies is not trivial but
much experience has been gained in this area through SCM, and such
integration is now commonplace in many industries.
Activity
Select a large (local or international) company and through researching on the web, try
to discover how its supply chain works. Try to identify the component processes and who
carries them out, and also what strategy the company employs. Explain how the company
uses e-SCM technology.
82
SCM strategy
Although we have emphasised the importance of the integration of the
various components of a supply chain, this does not mean that all supply
chains are the same, or that there is one best way in terms of strategy. We
have already distinguished between the strategies of vertical integration,
vertical disintegration and virtual integration, and the discussion of the
different combinations of supply and demand uncertainty in the paper by
Lee (2002) suggests further differentiation of supply chains.
These comprise:
Efficient supply chains otherwise known as lean supply chains,
where both supply and demand uncertainty are low and thus the
member firms can focus on reducing costs and increasing efficiency.
Risk-hedging supply chains where supply uncertainty is the
main problem and hence it is worthwhile for firms to maintain shared
pools of stock that they can call upon when supply is disrupted.
Responsive supply chains where demand uncertainty is the
main problem and hence the supply chain needs to very flexible in
responding to sudden changes in demand. Sales data need to be passed
back up the supply chain very quickly and all member firms need to be
prepared to adjust their production and other activities. The Zara case,
outlined below, is a good example of this.
Agile supply chains where both supply and demand are uncertain
and where the supply chain needs to be both responsive and risk-hedging.
The case of Zara (see Sull and Turconi, 2008) is a particularly good example
of a successful responsive supply chain. Zara has been so successful that in
2008, according to some measures, it became the worlds largest clothes
retailer with first quarter sales of 1.7 billion. Much of this success is
attributed to its particularly nimble supply chain that produces approximately
22,000 new products per annum, taking only 15 days to move from the
idea of a new item to actually supplying it to the stores. These figures are
much better than the industry average and enable Zara stores to constantly
introduce new designs without being left with unwanted stock on hand. This
has been achieved through an SCM strategy based on four principles:
Limited outsourcing or offshoring, such that much of the work
is performed in-house, backed up by centralised new product
development.
Shared situation awareness based on real-time information
from the stores. Store managers use handheld PDAs to record customer
behaviour (e.g. clothes tried on but not purchased; customer enquiries
and comments) and this qualitative data is combined with actual sales
data from the EPOS tills and sent daily to Zara headquarters for analysis.
A proprietary e-SCM system specifically produced for Zaras needs.
This was an expensive solution but Zara does not use industry standard
tools, such as costly ERP or CRM systems, and their total IT spend is
low for the industry.
The organisational culture of Zara aims to reduce hierarchy and
increase face-to-face interaction, not just between the customer and
staff but also between various levels of Zara staff, and this makes their
business strategy unique and challenging for competitors to imitate.
This is not to downplay the role of technology but it does signify the
importance of people within the supply chain.
83
Conclusion
Supply chains, comprising a combination of companies, people and
technologies, are a very important part of the practice of e-business. They
represent efficient and powerful supply channels and often competition
in a market is between competing supply chains, rather than individual
companies. However, they require high levels of integration, collaboration
and coordination, which places heavy demands on both the technology
and the relationships between organisations. There are various trade-offs,
in terms of strategy, especially between lean supply chains and ones that
are more responsive to uncertainties or changes in supply and demand.
Self-test questions
1. In what ways can computer-based information systems facilitate supply
chain management? What is a vendor managed inventory and why is it
important?
2. Why is supply chain management of growing importance in many
industries? What are the problems with traditional supply chain
management? Discuss how computer-based information systems are
used to address these problems.
3. Discuss, with examples, the supply chain strategies employed by
companies to deal with the uncertainties of supply and demand.
84
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
explain the differences between web 1.0 and web 2.0
describe and use the main components of web 2.0
explain how web 2.0 facilitates collaboration and participation among
users
discuss the potential benefits and risks that web 2.0 offers to business
organisations.
Essential reading
Boyd, D.M. and N.B. Ellison Social network sites: definition, history and
scholarship, Journal of Computer-Mediated Communication 13 2008,
pp.21030.
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 1,
pp.2225.
OReilly, T. What is web 2.0: design patterns and business models for the
next generation of software, Communications and Strategies, First Quarter
2007, pp.1737. Available online: http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1008839
85
Further reading
Cormode, G. and B. Krishnamurthy Key differences between web 1.0 and web
2.0, First Monday 13(6) 2008. Available online: http://firstmonday.org/
htbin/cgiwrap/bin/ojs/index.php/fm/article/viewArticle/2125/1972
Smith, H.A. and J.D. McKeen Developments in practice XXXI: social
computing: how should it be managed?, Communications of the Association
for Information Systems 23(1) 2008, pp.40918.
Zimmer, M. The externalities of Search 2.0: the emerging privacy threats when
the drive for the perfect search engine meets web 2.0, First Monday 13(3)
2008. Available online: http://firstmonday.org/htbin/cgiwrap/bin/ojs/
index.php/fm/article/viewArticle/2136/1944
Additional resources
Wikipedia article on Web 2.0: http://en.wikipedia.org/wiki/Web_2.0
Guardian newspaper site dedicated to Web 2.0 topics: www.guardian.
co.uk/technology/web20
ZDNets Enterprise Web 2.0 blog: http://blogs.zdnet.com/Hinchcliffe
Introduction
One of the most exciting recent developments in e-business is the emergence
of what is termed web 2.0. It is seen as the second generation of the web
and, as such, a stepwise enhancement of earlier ways of doing e-business.
Whereas web 1.0 design emphasised transactions and simple access to
information, web 2.0 stresses user interaction and large-scale participation.
Pioneering websites, such as Facebook, YouTube and Twitter, are being
valued in billions of dollars, but have yet to show a profit, leading
pessimists to fear a repeat of the dot.com boom (and eventual bust). Is
web 2.0 the real thing or is it yet another case of technology hype? In
Chapter 2 we briefly explored some of the technologies, such as Javascript
and AJAX, which make developments in web 2.0 possible. In this chapter
we will examine further the emergence of the concept of web 2.0, the
most popular applications and their business prospects, as at 2010.
The term web 2.0 was famously first used at a conference in 2004
by technologist Tim OReilly to describe new developments in web
technology see OReilly (2007) for a good introduction to web 2.0. These
developments have had significant implications for the use of the web
within e-business. Some of these changes include:
Understanding the network as a platform rather than just a bunch of
connections
Instead of being a relatively dumb network linking the computers of users
and companies, web 2.0 can be understood as a general-purpose computer
application, or platform, which resides externally to users machines. This
means that data and applications are stored out there rather than locally.
Harnessing the collective intelligence of users
This platform, which is cheap and easy to use, together with users growing
familiarity with the web, has led to a major shift from passive consumption
to active participation by users. Instead of just retrieving information or
purchasing items from online catalogues, users actively provide content
(such as text and video) and interact socially using the web. One could
argue that the first glimmers of this trend were apparent in web 1.0 sites
such as eBay, Napster, dating sites and multi-user games, but it was web 2.0
that brought about a massive increase in participation.
86
88
One of the most interesting and enticing current problems for social
networking sites is how to monetise them (i.e. how to make a profit
from the huge numbers of people taking advantage of their free services).
There are a number of difficult questions related to the profitability of
social networking technologies that managers of these sites are currently
facing:
How can they make money without alienating users through excessive
advertising?
Is there a way to balance users privacy with the tendency to use their
personal information for targeted advertising? The failure of Facebooks
Beacon recommendation marketing system speaks to this issue of
balance.
Is advertising the only way to turn a profit?
What sort of investments should be made to upgrade sites to keep them
attractive to users? For example, MySpace lost users and, consequently,
advertising revenues after it failed to upgrade its site properly.
Activity
Go online and investigate the reasons for the failure of Facebooks Beacon
recommendation marketing system. Then connect this case to the Activity on Amazons
recommendation engine, from the end of Chapter 5 of this subject guide. What privacy
concerns do they have in common?
Various business models have been put forward to try to solve the
monetisation problem. These include:
clever, more focused marketing and advertising, including affiliate
marketing (see Chapter 5 of this subject guide)
taking a commission on sales of goods and services
charging developers to load applications onto sites
selling software as a service
offering premium services and using the proceeds from these to
subsidise free users (e.g. the Googlemail strategy)
selling users data to other companies interested in profiling and selling
to them these sites hold massive amounts of user data which could
be quite valuable (e.g. Facebook manages more than 25 terabytes of
user data every day, which is equivalent to 1,000 times the volume
of post delivered daily by the US Postal Service). Of course, there are
huge privacy questions surrounding the resale of these data.
However, there are other issues in social networking. If these
sites become the new public square, what does this mean for individuals
(and, to a lesser extent, firms)? What sort of an impression should we, as
individuals, give online? To our friends, we may wish to appear devil-maycare party people, but to future employers we may wish to appear more
serious (Zimmer (2008) explores the privacy issues further). It is too
early to comment on the highs and lows of creating and maintaining
online social relationships. To date, it appears that social networking sites
tend to support conventional offline friendships. In addition to privacy
issues, mentioned above, there are the issues of fakesters (people who
maintain totally inaccurate profiles) and online bullying. While fairly
harmless for most adults, these can be problematic for younger, more
vulnerable users.
89
Activity
We take for granted that the webs most popular sites are successful businesses, but this
is not always the case. Take YouTube as an example. It has huge operating costs (it takes
a lot of money to stream video on demand to millions of users. Advertising is an option,
of course, but advertisers are wary about including their ads alongside user-generated
content (for various reasons). Go online and research YouTubes business model. Try to
find out whether it is profitable and how it makes its money. What changes has YouTubes
business model undergone over time to make it a more sustainable business?
Wikis
Wikis are websites that facilitate the simple creation and editing of
any number of connected web pages. Their most popular use is for
collaborative and community websites. They constitute the notion of
crowdsourcing whereby users can contribute and share their knowledge
of a topic or issue. Wikipedia, the online open source encyclopedia, is the
most well known wiki but there are many more, often highly specialised,
wikis. Their success relies on design principles including openness,
incremental development, convergence of ideas and the interlinking of
topics, as well as the overriding need for quality control of input through
careful editing to ensure that the credibility of a site is maintained.
Content-sharing sites
Content-sharing sites allow web users to share content such as photos
and videos. In addition, users can tag content, provide feedback on the
quality of information, and rate it as well. Sites such as Flickr and YouTube
are prime examples of these types of sites. YouTube in particular is very
popular, attracting large numbers of visitors, but it has yet to find a viable
business model, even though it was acquired by Google for $1.65 billion in
2006. It requires careful control of user contributions to avoid content that
is pornographic, defamatory, harassing or illegal in terms of copyright.
Related to the legal content-sharing sites are the mostly illegal peerto-peer networks or file-sharing sites. These highly decentralised
networks comprise nodes that share processing and storage and are mostly
associated with sharing music and video files (e.g. KaZaa, Pirate Bay,
Gnutella). They are constantly prosecuted for copyright violation by music
and film companies.
User tagging, rating and reviewing
While web 2.0 embodies user participation and collaboration, this is not
limited to the contribution of complete articles, music files or videos. Just as
important are the reviews and feedback that users give on products, services
and opinions. These provide useful indications to firms (such as Amazon
and various restaurant and travel sites) and consumers. They are the views
of ordinary people and merit a place beside the opinions of expert critics.
In addition to giving ratings, users can also categorise (tag) items
regarding their content and share these tags through sites such as del.icio.
us, producing folksonomies (or social classifications). Again, this is the
voice of ordinary people classifying products, articles, events or services in
a way that may be very different to that of an expert.
Mashups
Mashups combine data from more than one source to produce something
new, typically a new information service. They are facilitated by standard
application programming interfaces (APIs), common to web 2.0. Examples
often involve maps, typically extracted from Google Maps, on which data is
90
offer good potential for informal networking with current and future
trading partners. These sites are also potentially valuable for internal
team building, in terms of building up a modern and cohesive esprit de
corps, which is particularly relevant for teams that are spread throughout
the world and lack physical contact. These issues are discussed further
in Chapter 9 of this subject guide. Finally, social networking sites offer
companies potential opportunities for recruitment (e.g. the LinkedIn site,
mentioned above).
Wikis offer companies a convenient mechanism for sharing knowledge
with their trading partners (both customers and suppliers) and hence offer
the prospect of enhancing these relationships in an efficient and cheap
fashion. While complex negotiations and urgent problems will probably
always be the preserve of conventional meetings or dinners, wikis offer a
handy medium for everyday collaboration. They are particularly valuable
where, for example, a customer is beta-testing some new software and the
supplier and customer need to work closely together to iron out any bugs.
Blogs also offer a new communication channel for external public
relations and internal morale-boosting and cultural shaping. For example,
a staid old company that wishes to update its image, or change its sleepy
organisational culture to an energetic can-do culture, may well switch
its press releases and internal newsletters to a blog format. If they are
attractively produced and written in a lively fashion, they could represent
a (relatively cheap) first step towards changing the company. Employees
outside the public relations function may be paid specifically to produce
favourable blogs.
Similarly, user-generated content and open source development
are of great interest to companies that are searching for cheap and
innovative content or further development.
Activity
Consider a local company or organisation with which you are familiar and which does
not use web 2.0 technologies. Draw up a list of ways in which it could use particular web
2.0 technologies to achieve its goals. Which parts of the business (marketing, PR, finance,
etc.) would best utilise these technologies? How? What might be the value proposition
(i.e. the benefits, costs and risks)?
Enterprise 2.0?
At the time of writing, large companies such as General Electric, Procter
& Gamble, Shell and Airbus are said to be integrating social networking
into their corporate strategies in a trend described as Enterprise 2.0.
Organisations are using these technologies to encourage internal and
external communication and collaboration, to increase productivity, spur
innovation and enhance value.
However, this is not entirely straightforward as some companies face
huge cultural obstacles. It is often difficult for business leaders to accept
the openness and free-flow of information that these technologies make
possible. However, some argue that, sooner or later, organisations will be
forced to accept at least some of the technologies and think strategically
about how they can restructure work, knowledge sharing and expertise.
Using these technologies in an organisation normally requires certain
adaptations. Companies seek the immediacy and ease-of-use that web 2.0
technologies provide, while redesigning them to offer functionality such as
audit capabilities and access and version controls.
92
Self-test questions
1. In what ways are web 2.0 technologies different to those of the first
generation? Discuss, with examples.
2. Social networking sites are purely for leisure purposes and companies
should ban their use during working hours. Discuss the validity of this
statement.
3. Why is it difficult for popular content sharing sites to be profitable?
Discuss the relevance of potential business models.
93
Notes
94
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
describe traditional organisational forms, such as bureaucratic
hierarchies, and the main characteristics of organisations
explain the problems of structuring organisations, especially as a result
of changing work practices
discuss the role technology plays in changing work practices
recognise different new organisational forms
discuss the contribution of e-business technology to changing
organisational structures
describe how e-business technology can be used to restructure
organisations
describe virtual organisations and virtual teams, as well as their
benefits and drawbacks
analyse a new organisational form in terms of its shared principles of
membership
explain the benefits and drawbacks of offshoring activities and the role
of technology
describe teleworking and mobile working, and explain the challenges
for the management of these approaches
discuss open source production and recognise the contexts in which it
is appropriate
distinguish between various forms of organising such as mobile work,
virtual forums and open source development
explain the problems and benefits of the various forms of organising.
95
Essential reading
Bughin, J., M. Chui and B. Johnson The next step in open innovation, The
McKinsey Quarterly June 2008, pp.19.
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] pp.35455.
Kasper-Fuehrer, E.C. and N.M. Ashkanasy The interorganizational virtual
organization, International Studies of Management and Organization 33(4)
2004, pp.3464.
Ljungberg, J. Open source movements as a model for organizing, European
Journal of Information Systems 9 2000, pp.20816.
Further reading
Bryan, L.L. and C.I. Joyce Better strategy through organizational design,
McKinsey Quarterly 2 2007, pp.2129.
Cooper, W.W. and M.L. Muench Virtual organisations: practice and literature,
Journal of Organizational Computing & Electronic Commerce 10(3) 2000,
pp.189208.
Economist The new organization, The Economist, 19 January 2006.
Hinds, P.J. and D.E. Bailey Out of sight, out of sync: understanding conflict in
distributed teams, Organization Science 14(6) 2003, pp.61532.
Holland, C.P. and A.G. Lockett Mixed mode network structures: the strategic
use of electronic communications by organisations, Organization Science 8
1997, pp.47588.
Larsen, K.R.T. and C.R. McInerney Preparing to work in the virtual
organization, Information & Management 39 2002, pp.44556.
Miles, R.E. and C.C. Snow Causes of failure in network organisations,
California Management Review Summer 1992, pp.5372.
Perens, B. The open source definition in DiBona, C., S. Ockman and M. Stone
(eds) Open sources: voices from the open source revolution. (Cambridge, MA:
OReilly, 1999) [ISBN 1565925823].
Raymond, E.S. The cathedral and the bazaar. (Cambridge, MA: OReilly, 2001)
[ISBN 9780596001087].
Rockart, J.F. and J.E. Short The networked organisation and the management
of interdependence in Scott Morton, M. (ed.) The Corporation of the 1990s.
(New York: Oxford University Press, 1991) [ISBN 9780195063585] Chapter
7, pp.189219.
Additional resources
MIT Open Source Repository: http://opensource.mit.edu/online_
papers.php
Resource for workshop papers on open source: http://opensource.ucc.ie
Professor Eric von Hippels website where you can access his papers
and online books: http://web.mit.edu/evhippel/www/index.html
Marketing
and Sales
Division
Marketing
Group
Sales
Group
Advertising
Group
http://en.wikipedia.
org/wiki/Fast_moving_
consumer_goods
part of the washing powder team see Figure 9.2. This aimed to capture
the best of both worlds, such that functions, like advertising, could be
well managed across the firm but also sufficient attention could be given
to individual product lines. However, it is not ideal, especially when the
two managers have different priorities and these result in conflicting
instructions and confusion. An additional complication for multinational
corporations is that the regional dimension has to be added to the
functional and the product dimensions, resulting in a complex threedimensional structure.
Marketing
Function
Sales
Function
Advertising
Function
Washing
powder
Baked
beans
Cakes
Virtual organisations
One particular NOF is the virtual organisation, which is a highly dynamic
network organisation where the requirements are split from the satisfiers
and all are linked through an IT switch (see Cooper and Muench, 2000).
For example, one person detects a need for, say, a new type of software and
s/he puts together a virtual organisation of people in different locations
who can work together to develop the new software. Such an organisation
lacks the traditional organisational attributes in that there is no common
workplace, no security of employment and no self-sufficient production line.
The members, usually decentralised, market-based e-lancers (electronic
freelancers), come together for that particular project, remain as long as they
are providing a useful function and then leave at the end of the project.
The entire project is performed regardless of physical location. The manner
in which ICTs are used to create and coordinate a virtual organisation has
been explained by Kasper-Fuehrer and Ashkanasy (2004). The relevance
of this idea is to understand better ICT as an enabler of such new forms of
organising. Virtual organisations are discussed briefly by Chaffey (2009)
Chapter 6; for a more detailed treatment, see Larsen and McInerney (2002).
of the world. The latter firms have set up facilities in places like India
and taken the activity concerned off-shore. However, it is important to
integrate the off-shored activity into the rest of the company, leading to the
notion of virtual teams and virtual dispersed working, with some members
of a team being in, say, London and others in, say, Bangalore.
In the context of off-shoring, the problems of virtual teams refer mostly to:
Differing cultures which may involve differing working styles and
approaches to learning, authority and deadlines. For example, it
appears that Asians have more respect for authority than Europeans do,
which can mean that Asians are less likely to question the decisions of
managers, for better or worse.
Collaboration and coordination while it is relatively straightforward
to share explicit knowledge (through documents), assuming there
is a common language, the sharing of tacit knowledge (which is not
written down) is much more difficult at a distance.
Building trust between members of a team thousands of miles apart.
The issues noted above are exacerbated by the lack of shared physical
presence and socialisation. Minor misunderstandings or cultural
niceties can often easily be sorted out on the spot in a conventional
workplace, but they can build up to major proportions when the only
communication is asynchronous across time and space.
Excessive dependence upon the technological infrastructure (e.g.
the network), in terms of reliability and compatibility. Also, if the
documents being exchanged are particularly large, then bandwidth can
be problematic. These problems are more likely to be encountered in
developing countries than in the west.
The conflict in virtual teams that often results from these problems is
discussed further by Hinds and Bailey (2003).
Mobile working
The widespread introduction of e-business technology, in the shape of
laptops, wireless networks, PDAs, Blackberries, teleconferencing and
3G mobile phones, has dramatically increased the number of potential
workplaces, from just the office and the home to the possibility of
working anywhere. Many workers, especially consultants and salespeople,
have become nomads, working in client sites, hotels and airports and
rarely needing to go back to their official offices.
Most of the benefits and drawbacks are similar to teleworking but in
addition we find:
the advantages of being able to work more closely with clients and
trading partners
the ability to work any time, anywhere offers a form of flexible freedom
however, work becomes more dependent upon telecommunications,
leading to problems when the network is down, as well as the
difficulties of real-time communication between different time zones
working any time, anywhere can become working all the time,
everywhere, leading to excessive stress, alienation and motivational
problems as the social life of employees disappears.
102
principle behind open source is that the more people that can see, read
and modify the code the better the software will be, which in turn will
benefit all users (for more details see Raymond, 2001). There is a need
then to encourage many people to contribute to the code base so that the
software grows and becomes more useful to more users.
The tricky element of open source production is how to manage a
group of people that rarely meet face-to-face, so that they all work on
the same software in a productive and gainful manner over time (see
Ljungberg, 2000). Most, if not all, of the communication in open source
production is carried out via some form of technology, such as discussion
forums, email, IRC, etc. The question then becomes: is this really an
organisation? If you revisit the ideas discussed above when making
sense of virtual organisations and mobile work, you will notice that open
source development communities have much in common. Open source
communities:
communicate via technology
come together with the mutual goal of creating some software
(technology is the motivating and inspiring factor)
have a flatter, decentralised structure
have varying hierarchy layers and leadership models ranging from
highly democratic to dictatorships
seek to control community members via technology such as version
control software; but there is also a strong social element to control
which is applied through flaming 1 of developers, ridicule and tough
peer review of bug fixes
are dynamic and changing where the developers enter and leave the
community freely (within the scope of their talent and expertise)
are independent of the physical location of developers anyone with
skills and bug fixes can contribute (at least in principle)
exhibit a culture and work ethic built on reputation and trust
relationships.
These characteristics provide the workforce with an ability to evolve, be
agile and flexible, and can lead to a highly scalable production process
that is difficult for traditional organisations to match. However, open
source production also has to deal with many issues:
Flaming is a hostile
and insulting interaction
between internet
users. Flaming usually
occurs in the social
context of a discussion
board, Internet Relay
Chat (IRC), by email
or on video-sharing
websites see http://
en.wikipedia.org/wiki/
Flaming_(Internet)
Case study
Read Mini Case Study 3.4 on Twitter in Chaffey (2009) Chapter 3 and
complement this with your own exploration of the Twitter site. More
specifically, find the About Us section and read this through. Try to find
out how Twitter is supporting and being supported by open source. The
Status section is of particular interest as it facilitates user feedback and
104
https://secure3.verticali.
net/pg-connectionportal/ctx/noauth/
PortalHome.do
quick bug fixing on the part of Twitter. Twitter was created in 2006 by
Jack Dorsey (@jack), Biz Stone (@biz) and Evan Williams (@ev). For its
initial history and a very interesting article please read the LA Times 3 piece
by David Sarno.
The first part of the article by Sarno explains how Twitter was created,
the original idea and the first design. Read this as background, but the
second 4 half of the article will bring you to the intriguing questions of
how Twitter is being enjoyed by individuals as a way to interact and by
companies to advertise, collect marketing information, gather feedback
from users and behave as a platform to bring all sorts of people together,
be it for communication (mostly one-way, but reciprocal communication
is possible through features such as reply and direct message) or simply
gathering information.
http://latimesblogs.
latimes.com/
technology/2009/02/
twitter-creator.html
http://latimesblogs.
latimes.com/
technology/2009/02/
jack-dorsey-on.html
http://an.kaist.ac.kr/
traces/WWW2010.html
Activity
Read the essential readings on traditional organisations and open source, and then list
all the potential issues that you can think of when two such diverse forms of organisation
are encouraged to merge together. Think along the lines of control, communication,
structure of both forms, and incentive and sanctions methods.
Conclusion
E-business offers a significant opportunity for change in both social and
organisational structures, in particular regarding how and where work
is done and organised. As such, the technology and associated practices
offer tools to address the chronic problem of organisational structure with
potentially huge benefits in terms of effectiveness and efficiency. However,
despite the promise of healthier organisations, there is also a danger
that poorly considered implementation of the technology could lead to
fragmented organisations, made up of stressed and alienated individuals.
As is often the case with information technology, the technology is
relatively neutral and the impact depends overwhelmingly on the
significant human and organisational enablers and constraints.
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Self-test questions
1. Why are organisations increasingly considering new forms of
organisation (e.g. network organisations, teleworking)? What are the
problems in implementing them?
2. What are the characteristics of most new organisational forms (e.g.
virtual organisations, off-shoring)? Describe a new organisational form
that you are familiar with, highlighting its opportunities and risks.
3. What features and characteristics of virtual communities do you think
create an environment where open source production can flourish?
Justify your answer.
107
Notes
108
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
identify and explain the major security threats
explain security protocols and practices
distinguish between technical and human and organisational security
threats
discuss the strategic nature of security polices
distinguish between the various authentication technologies and
discuss their strengths and weaknesses.
Essential reading
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 11,
pp.65275.
Further reading
Adams, A. and A. Sasse Users are not the enemy, Communications of the ACM
42(12) 1999, pp.4046.
West, R. The psychology of security, Communications of the ACM 51(4) 2008,
pp.3440.
Additional resources
Security expert Bruce Schneiers blog: www.schneier.com/blog
The New School of Information Security blog: http://
newschoolsecurity.com
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Introduction
E-business security deals with the matter of planning and managing
security within and around computer systems in e-business contexts.
It is therefore both a technical and a managerial matter. In fact, to
truly understand potential security threats to their businesses, security
managers must understand both the technological glitches and threats
that might occur, as well as the social and organisational weaknesses that
arise. To date, researchers and practitioners have mainly concentrated
on the technical aspects of security (such as encryption, firewalls, viruses
and data protection), paying less attention to the human component.
This is despite all the evidence that shows that the greatest threats to
organisations information systems come from within the organisations
themselves; that is, as a result of poor policies and practices. We must thus
consider people as a key factor in managing e-business security, in addition
to the technological factors see also West (2008).
E-business security is therefore both a technical and a social issue. This
chapter discusses these two dimensions and presents the main instruments
and techniques used to manage the complex security environments around
and within information systems that make e-business possible. As the
problems of e-business security are very similar to those of most largescale information systems, we use the terms e-business and information
systems security synonymously in this chapter.
Technological dimensions
From a technological viewpoint, many distinctions can be made when
addressing the problem of security. The first and most simple distinction
is between the technical layers that are taken into account when the
security strategy is designed. There are different ways of layering
110
114
1.
2.
3.
4.
5.
6.
7.
8.
9.
User authentication
Another major issue for organisations, especially in online environments,
is how to control access to certain systems that might contain confidential,
privileged or business-sensitive information. This is the authentication
problem alluded to in the section on the goals of information systems
security.
Various technologies exist for authentication. A good way of classifying
them is in terms of their relation to the user:
1. authentication with something you possess
2. authentication with something you know
3. authentication with something you are or something you do.
The best example of the first type of user-authentication (possessionbased) is the use of tokens or ID cards by employees. Employees who need
to access a private company network are often required to enter a code
from a secure token that generates random codes at regular intervals.
Likewise, employees trying to access rooms in company buildings
where sensitive information is stored on servers are regularly required
to authenticate themselves using an access card. The main problem
with these technologies is that they are easily lost and can be used by
unauthorised agents. Anyone who gains possession of the token or ID card
has the right to access the system or facility, which creates a weakness in
the authentication process.
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Conclusion
This chapter discusses the major aspects associated with security in
e-business. The chapter presents and discusses the major security threats.
Perhaps the main theme that underlies the whole chapter is the distinction
between technological and human and organisational aspects of e-business
security.
116
Self-test questions
1. Discuss the role of technology in enforcing information systems
security. Explain why more investment in IT does not always lead to
more secure information systems.
2. Discuss how and why biometrics can solve many security related IT
problems. Explain, with examples, whether there are any shortfalls in
biometric security based systems.
117
Notes
118
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
integrate the previous nine chapters into an all-round understanding of
e-business
explain how the various components of e-business fit together in the
context of a commercial company
discuss the nature of strategy
explain how companies use a strategy to adopt e-business
explain how the underlying economics of e-business is transformed into
a strategy
discuss examples of e-business strategies.
Essential reading
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 5.
Chu, C. and S. Smithson E-business and organizational change: a
structurational approach, Information Systems Journal 17(4) 2007,
pp.36989.
Clegg, C.W., C. Chu, et al. Sociotechnical study of e-business: grappling with
an octopus, Journal of Electronic Commerce in Organizations 3(1) 2005,
pp.5371.
Further reading
Ciborra, C.U. Teams, markets and systems: business innovation and information
technology. (Cambridge: Cambridge University Press, 1996) [ISBN
9780521574655] Chapters 1 and 6.
Giddens, A. The constitution of society. (London: Polity, 1986) [ISBN
9780745600079].
Green, M. Napster opens Pandoras box: examining how file-sharing services
threaten the enforcement of copyright on the internet, Ohio State Law
Journal 63(2) 2002, p.799.
119
Additional resources
Various management journals regularly feature articles on strategy and,
because of the importance and pervasiveness of e-business, many of these
articles deal with e-business strategy. We suggest that you check recent
issues of:
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E-business then is clearly very important for organisations but also very
complex and difficult to deal with. What should organisations do? Clearly
they need a strategy to deal with this phenomenon. Weve already talked
in some chapters, for example Chapter 7, about individual strategies for
that particular area but, given the nature of e-business, organisations need
to develop an overall e-business strategy.
E-business strategy
Chaffey (2009) devotes a whole chapter (Chapter 5) to e-business strategy
and you should read it carefully. The first point to note is the nature of a
strategy. Chaffey defines it as the definition of the future direction and
actions of a company defined as approaches to achieve specific objectives
(p.259). It is a companys sense of purpose or direction and it should not
be confused with a plan. A strategy is at a much higher level than a plan
and normally a strategy will lead to a number of plans; the strategy sets the
direction for more detailed step-by-step plans. Note that a strategy must
contain specific objectives but needs to incorporate considerable flexibility in
order to cope with a fast-changing environment. A strategy is needed in order
to seize opportunities, avoid organisational drift, to ensure a single direction
for the company and to reduce uncertainty, conflict and duplication.
We are happy to subscribe to Chaffeys definition of e-business strategy as:
definition of the approach by which applications of internal and external
electronic communications can support and influence corporate strategy.
Because of the importance and pervasiveness of e-business, the e-business
strategy needs to be an integral part of the corporate strategy. It follows that
the e-business strategy document is often not a long document as it does
not contain detailed plans or timelines. It is the overall direction (the what)
whereas the plans set out detailed implementation (the how) of the strategy.
When considering an e-business strategy, it is important to highlight the
underlying economics of e-business as it is these fundamental aspects that
must be leveraged for the company to benefit. It is surprisingly easy to
forget these key forces when trying to develop an e-business strategy for a
traditional marketplace. As we argue in Chapter 4, e-business is all about
innovation (in products, services, processes or business models) and being
able to translate the underlying, fairly abstract, economics into a feasible
strategy that will receive the support of managers, staff, customers, trading
partners and investors.
Earlier articles that discuss the difficulties of designing strategies that
somehow combine business, innovation and information systems include
Ciborra (1996), Jarvenpaa and Ives (2009) and Lee and Clark (2009),
while Porter (2001) and Porter and Millar (1985) tend to be more
optimistic. However, it is important to note that the latter texts were
written before e-business became the everyday tool that it is today.
attracting more than 26 million users, who felt exploited by the record
companies. Some artists, who felt equally exploited, approved of Napster
while others sided with the companies. However, after just two years it
was shut down by a court ruling, following pressure from the companies,
claiming copyright infringement. Nevertheless, in this short time span
Napster changed how both customers and artists (including composers)
viewed the purchase and consumption of music (Green, 2002). It led
the way to numerous peer-to-peer file distribution programs like KaZaA,
Gnutella and BitTorrent, which were also pursued by the companies.
Napster re-emerged as a legal music distribution site and its situation circa
2008 is described in Chaffey (2009) Chapter 8.
However, a year after Napster first closed, Apple introduced its iPod,
followed a further year later by iTunes and the iTunes store. Sales of
conventional CDs were now in freefall. According to The Guardian (3
September 2009) global revenue from CD and DVD sales in 2004 was
close to $32bn but this fell drastically to $22bn in 2008 and is expected to
continue tumbling. With an iPod we are all able to hold, and use, digital
music and video files. Users are thus empowered in a manner that they
were not previously. Digital goods are more amenable to being mixed and
matched, shared, changed and distributed than other older formats. This
can be seen in the amount of music and user activity involving web 2.0
platforms, such as niche blogs and social networking sites like MySpace
(see Chapter 8 of this subject guide), as well as commercial sites such as
Spotify in Europe.
Meanwhile, the record companies are currently consolidating and scrambling
to find new business models that match the new reality. However, the
issue of copyright and the need to reward artists has not gone away. In
2009 there was a dispute in the UK between YouTube owner Google and
the PRS (the Performing Right Society which represents the copyright
owners) that, although resolved, shows that controlling content online is
not straightforward. But there is a bigger idea here. Studies have found that
piracy and online music releases can lead to an increase in legal sales. This
can be explained by borrowing ideas from marketing (see Chapter 5) where
piracy can be used by companies as a marketing tool. Microsoft used a
similar strategy in China, and other developing countries, where the company
initially turned a blind eye to the rampant pirated copies of its software
and then threatened to sue if legal versions were not purchased. Users had
become used to Microsoft products, and to wean themselves off such software
would hurt businesses too much so they were forced to pay.
The music industry example offers insight into how users, customers
and, very importantly, musicians and artists have been empowered by
technology. Technology has disintermediated (see Chapter 3 of this guide)
the process of music distribution, threatening the position of record
companies. New technologies have led to the emergence of new business
models that provide a means for artists to profit from their labour. One
example of such a technology is the iTunes store. The software is freely
available, even though Apple invested heavily in developing this innovative
product. Apple understands shoppers and spotted the opportunity to use
free software to lock them into what has become an indispensable channel
for sales and sharing. Each week iTunes releases a free song for download,
thus whetting the appetite of customers. Customers who download the
free song are presented with a range of other songs in which they might be
interested, in the style of profiling used by Amazon.
126
iPods are a durable good which are rarely replaced by customers. Keeping this
in mind (the product), and the needs of the industry, Apple innovated with
technology, in this case iTunes, to re-intermediate not just music distribution
but also films, software, applications, etc. Apple makes money from drawing
customers back into using its software to buy such products. A portion of the
profit goes to the creator of the work and the rest is taken by Apple.
The technology used by Apple iTunes is proprietary software that
cannot be changed, which implies that its competitors, like Nokia, depend
on Apple for software applications to make iTunes compatible with Nokia
handsets (which is what Apple used to do but then refused to continue).
Nokia finds it difficult to compete with the iPhone and iTunes lock-in and so
has attempted to supply its customers with the necessary software to make
Nokia products compatible with iTunes use.
The music example shows how business models adapt to changes in
technology. Technology can be used to tie customers into particular products
or services and, as in the case of digital products, Napster and peer-to-peer
networks, can lead to innovations in product, business model and use.
Activity
Apple is a company with a growing number of customers. The customer base is growing
but Apple also releases newer versions of its products on a more regular basis than most
other companies, which may indicate that the customer base is happy to buy new versions
of old products.
What sort of customers does Apple attract? Are they interested in new functionality,
keeping up with fashion or do they consider Apple products to be luxury goods and so
a status symbol ? Think about why you have an iPad, iPhone, iTouch, Nano, iMac,
MacBook Pro?
Now that you understand who makes up the largest part of your customer base, if you
were Steve Jobs, or a key Apple employee, what sort of strategy would you propose
Apple takes for the next two to three years? Choose one product, or answer
keeping in mind a bundle of Apple products and services (iTunes). Pay special attention
to your competitors, resources needed, threats, and of course the strengths of your
products and brand name. (Hint: you could use Porters five forces model.)
Do you see Apple collaborating with another large company (e.g. Google, which owns
YouTube) as a marketing device for selling songs, software, videos, as another avenue
to sell its products, or a way to kill competition? Explain where and how Apple would
add value with such a collaboration, reduce costs, manage risks or create a new
business model.
There are no right answers to most of these questions but, by thinking about the issues
and sketching out the arguments, you will learn a lot about e-business strategy.
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You should read the article carefully, especially the narrative of the case,
but without worrying too much about the theoretical aspects. The article
uses tools from structuration theory (Giddens, 1984), which is a social
theory concerned with the way societies change. In particular, the article
uses Giddens notion of structure to talk about organisational structures in
terms of relationships between individuals across three dimensions:
Domination power relationships based on the control of resources.
Legitimation the importance of social norms of behaviour.
Signification the power of language and symbols in communication.
The underlying narrative of the case is quite straightforward. At the height
of the dot.com boom, managers, staff and shareholders of large traditional
corporations felt uncertain and confused by the apparent revolution of
e-business and the knowledge economy. AutoCorps new CEO, an avid
proponent of e-business, offered a tantalising vision of the future, whereby
e-business would transform AutoCorp from being a rather stuffy old
manufacturer into a highly customer-focused company.
He set about this by introducing a new high-profile division, named EBD
in the article, with a lot of resources (and hence power), into the large and
ungainly multinational structure of AutoCorp. This caused considerable
political problems, of legitimation and signification, with the rest of the
company. The European brands did not like being pushed around by the
American headquarters and the traditional IT division felt threatened by
this new upstart. The CEO transgressed longstanding norms of behaviour by
recruiting senior managers for EBD from outside the company, by investing
in joint ventures with start-up companies and by encouraging EBD to adopt
an entrepreneurial attitude to the rest of the company. Symbolically he
closed down one of the historic manufacturing plants and installed EBD in
fashionable new offices.
Reflecting the apparent urgency of e-business, the CEO authorised a big
bang strategy whereby EBD would grow very quickly and take on projects
throughout the company. In the medium term, he expected this venture to
be so successful that EBD could be spun off as a separate company, boosting
the value of AutoCorps shares. Unfortunately, but perhaps not surprisingly,
this strategy didnt work as EBD staff, who had little experience with the
new technology and practices, had to develop procedures and methods from
scratch while selling e-business to the rest of the company. Their salesmanship
and evident lack of expertise caused serious problems and antagonised many
of their internal customers. This led to friction and a drop in morale within
EBD. Around the same time, the joint ventures also began to unravel.
However, it was a major engineering failure, and nothing to do with
e-business, that finally led to EBDs closure. This failure, which cost
AutoCorp many millions of dollars in recalls, together with a sharp decline
in profits, built on the general discontent within the company and the CEO
was fired. By then, the dot.com boom had turned to bust and numerous
investors had lost fortunes in speculative hi-tech ventures. Against this
backdrop, the replacement CEOs call for a back to basics strategy of
focusing on quality control and engineering was heartily welcomed by most
of the company and EBD was closed down. Since then, the company has
developed numerous e-business systems successfully but it did so in a much
more carefully controlled manner.
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Activity
Read the Chu and Smithson (2007) paper carefully, think about the issues and answer
the following questions:
What were the alternatives to the internal big bang strategy? What sort of
incremental strategy could have been followed? Was the joint venture approach a
bad idea altogether or did the CEO choose the wrong partners?
Should EBD have been set up initially as a separate division? Or, should it have been
allowed to develop within a parent division? If so, which one? IT? Marketing?
Was the CEO merely unlucky? Or, just foolhardy?
There are no right answers to most of these questions but, by thinking about the issues
and sketching out the arguments, you will learn a lot about e-business strategy.
Conclusion
In this chapter, we summarised briefly the preceding chapters of the
subject guide and argued that e-business:
presents companies with both opportunities and risks
is a complex mixture of technological and non-technological issues that
interact together to create uncertainty for companies
is highly pervasive, affecting entire organisations and their value
chains.
On this basis, we argued that companies need an e-business strategy and
we discussed the nature of such a strategy and the processes that most
companies follow to formulate the strategy. We then argued that strategic
issues can best be appreciated by referring to case studies.
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Self-test questions
1. Why do companies formulate e-business strategies? Briefly outline how
companies usually go about formulating these strategies. What are the
main problems involved in e-business strategy formulation?
2. E-business is a contemporary example of organisational change.
Discuss this statement with reference to a case study with which you
are familiar.
3. What is an e-business strategy? Which aspects of a companys business
should it cover? Who should be involved in its preparation? Justify
your answer.
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131
Notes
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