Chapter 1

Foundation of Electronic Commerce

Learning Objectives

Define electronic commerce (EC) and describe its various categories Distinguish between electronic markets and interorganizational systems Describe and discuss the content and framework of EC

Learning Objectives (cont.)

Understand the forces that drive the widespread use of EC Describe the benefits of EC to organizations, consumers, and society Describe the limitations of EC Discuss some major managerial issues regarding EC

Electronic Commerce: Definitions and Concepts

The Internet has emerged as a major, perhaps eventually the major, worldwide distribution channel for goods, services, managerial and professional jobs This is profoundly changing economics, markets and industry structure, products and services and their flow, consumer segmentation, consumer values, consumer behavior, jobs, and labor markets The impact may be even greater on societies and politics, and on the way we see the world and ourselves in it

Electronic Commerce: Definitions and Concepts (cont.)

e-business: a broader definition of EC, which includes:

buying and selling of goods and services servicing customers collaborating with business partners conducting electronic transactions within an organization

Electronic Commerce Terms

E-business EC defined from these perspectives

Communications Business process Service Online Collaborations Community

Electronic Commerce: Definitions and Concepts (cont.)

E-commerce defined from the following perspectives:

Communications: delivery of goods, services, information, or payments over computer networks or any other electronic means Commercial (trading): provides capability of buying and selling products, services, and information on the Internet and via other online services

Electronic Commerce: Definitions and Concepts (cont.)

Business process: doing business electronically by completing business processes over electronic networks, thereby substituting information for physical business processes Service: a tool that addresses the desire of governments, firms, consumers, and management to cut service costs while improving the quality of customer service and increasing the speed of service delivery

Electronic Commerce: Definitions and Concepts (cont.)

Learning: an enabler of online training and education in schools, universities, and other organizations, including businesses Collaborative: the framework for inter- and intraorganizational collaboration Community: provides a gathering place for community members to learn, transact, and collaborate

Electronic Commerce Terms (cont.)

Internet vs. Non-Internet EC

VANs LANs Click and Mortar

Electronic Commerce Terms (cont.)

Pure vs. Partial EC: based on the degree of digitization of

Product Process Delivery agent

Traditional commerce: all dimensions are physical Pure EC: all dimensions are digital Partial EC: all other possibilities include a mix of digital and physical dimensions

Exhibit 1.1: The Dimensions of Electronic Commerce

The EC Framework, Classification, and Content

Two major types of e-commerce:

business-to-consumer (B2C) : online transactions are made between businesses and individual consumers business-to-business (B2B): businesses make online transactions with other businesses
intrabusiness EC: EC conducted inside an organization (e.g., business-to-employees B2E)

The EC Framework, Classification, and Content (cont.)

Computer environments
Internet: global networked environment Intranet: a corporate or government network that uses Internet tools, such as Web browsers, and Internet protocols Extranet: a network that uses the Internet to link multiple intranets

EC Framework

EC applications are supported by infrastructure and by five support areas:

People Public policy Marketing and advertising Support services Business partnerships

Exhibit 1.2: A Framework for Electronic Commerce

Interorganization Information Systems

Interorganizational information system (IOS) involves information flow among two or more organizations Major objective is efficient routine transaction processing, such as transmitting orders, bills, and payments using EDI or extranets Scope: Unified system encompassing two or several business partners Typical IOS includes a company, its suppliers, and and/or customers

Classification of EC by Transactions or Interactions

business-to-consumer (B2C) : online transactions are made between businesses and individual consumers business-to-business (B2B): businesses make online transactions with other businesses e-tailing: online retailing, usually B2C

Classification of EC by Transactions or Interactions (cont.)

business-to-business-to-consumer (B2B2C): e-commerce model in which a business provides some product or service to a client business that maintains its own customers consumer-to-business (C2B): e-commerce model in which individuals use the Internet to sell products or services to organizations or individuals seek sellers to bid on products or services they need

Classification of EC by Transactions or Interactions (cont.)

consumer-to-consumer (C2C): e-commerce model in which consumers sell directly to other consumers peer-to-peer (P2P): technology that enables networked peer computers to share data and processing with each other directly; can be used in C2C, B2B, and B2C e-commerce

Classification of EC by Transactions or Interactions (cont.)

mobile commerce ((m-commerce): e-commerce transactions and activities conducted in a wireless environment location-based commerce (lcommerce): m-commerce transactions targeted to individuals in specific locations, at specific times

Classification of EC by Transactions or Interactions (cont.)

intrabusiness EC: e-commerce category that includes all internal organizational activities that involve the exchange of goods, services, or information among various units and individuals in an organization business-to-employees (B2E): ecommerce model in which an organization delivers services, information, or products to its individual employees

Classification of EC by Transactions or Interactions (cont.)

collaborative commerce (c-commerce): e-commerce model in which individuals or groups communicate or collaborate online e-learning: the online delivery of information for purposes of training or education exchange (electronic): a public electronic market with many buyers and sellers

Classification of EC by Transactions or Interactions (cont.)

exchange-to-exchange (E2E): ecommerce model in which electronic exchanges formally connect to one another the purpose of exchanging information e-government: e-commerce model in which a government entity buys or provides goods, services, or information to businesses or individual citizens

Figure 1-1 Transactions in Electronic Markets

A Brief History of EC

1970s: innovations like electronic funds transfer (EFT)funds routed electronically from one organization to another (limited to large corporations) electronic data interchange (EDI) electronically transfer routine documents (application enlarged pool of participating companies to include manufacturers, retailers, services) interorganizational system (IOS)travel reservation systems and stock trading

A Brief History of EC (cont.)

1969 U.S. government experimentthe Internet came into being initially used by technical audience of government agencies, academic researchers, and scientists 1990s the Internet commercialized and users flocked to participate in the form of dot-coms, or Internet start-ups Innovative applications ranging from online direct sales to e-learning experiences

A Brief History of EC (cont.)

Most medium- and large-sized organizations have a Web site Most large U.S. corporations have comprehensive portals 1999 the emphasis of EC shifted from B2C to B2B 2001 the emphasis shifted from B2B to B2E, c-commerce, e-government, e-learning, and m-commerce EC will undoubtedly continue to shift and change

A Brief History of EC (cont.)

EC successes Virtual EC companies eBay VeriSign AOL Checkpoint Click-and-mortar Cisco General Electric IBM Intel Schwab

EC failures 1999, a large number of EC-dedicated companies began to fail ECs days are not numbered! dot-com failure rate is declining sharply EC field is experiencing consolidation most pure EC companies, are expanding operations and generating increasing sales (Amazon.com)

The Interdisciplinary Nature of EC

Major EC disciplines
Computer science Marketing Consumer behavior Finance Economics Management information systems

Electronic Commerce is Interdisciplinary

Marketing Computer sciences Consumer behavior and psychology Finance Economics

Management information systems Accounting and auditing Management Business law and ethics Others

The Driving Forces of Electronic Commerce

The New World of Business

Business pressures Organizational responses The role of Information Technology (including electronic commerce)

Exhibit 1.3: Major Business Pressures and the Role of EC

Major Business Pressures

Strong competition Global economy Regional trade agreements (e.g. NAFTA) Extremely low labor cost in some countries Frequent and significant changes in markets Increased power of consumers

Market and economic pressures

Major Business Pressures (cont.)

Changing nature of workforce Government deregulation of banking and other services Shrinking government subsidies Increased importance of ethical and legal issues Increased social responsibility of organizations Rapid political changes

Societal and environmental pressures

Major Business Pressures (cont.)

Rapid technological obsolescence Increase innovations and new technologies Information overload Rapid decline in technology cost vs. performance ratio

Technological pressures

Organizational Responses

Strategic systems Continuous improvement efforts Business process reengineering (BPR) Business Alliances Electronic commerce

Organizational Responses
External Environment, Social, Economic, Political, etc

Organization Structure and the Corporate Culture

The Organizations Strategy

Management and Business Process

Information Technology

Individual and Roles Framework for Organizational and Societal Impacts of Information Technology

IT Support and EC
Reducing cycle time and time to market Empowerment of employees and collaborative work Supply chain improvements Mass customization Change management

The Benefits of EC

Benefits to Organizations
Expands the marketplace to national and international markets Decreases the cost of creating, processing, distributing, storing and retrieving paper-based information

Benefits of EC (cont.)

Benefits to Organizations (cont.)

Allows reduced inventories and overhead by facilitating pull-type supply chain management The pull-type processing allows for customization of products and services which provides competitive advantage to its implementers

Benefits of EC (cont.)

Benefits to Organizations (cont.)

Reduces the time between the outlay of capital and the receipt of products and services Supports business processes reengineering (BPR) efforts Lowers telecommunications cost - the Internet is much cheaper than value added networks (VANs)

Benefits of EC (cont.)

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

Benefits of EC (cont.)

Benefits to consumers (cont.)

Allows quick delivery of products and services (in some cases) especially with digitized products Consumers can receive relevant and detailed information in seconds, rather than in days or weeks Makes it possible to participate in virtual auctions

Benefits of EC (cont.)

Benefits to consumers (cont.)

Allows consumers to interact with other consumers n electronic communities and exchange ideas as well as compare experiences Facilitates competition, which results in substantial discounts

Benefits of EC (cont.)

Benefits to society
Enables more individuals to work at home, and to do less traveling for shopping, resulting in less traffic on the roads, and lower air pollution Allows some merchandise to be sold at lower prices benefiting less affluent people

Benefits of EC (cont.)

Benefits to society (cont.)

Enables people in Third World countries and rural areas to enjoy products and services which otherwise are not available to them Facilitates delivery of public services at a reduced cost, increases effectiveness, and/or improves quality

The Limitations of EC

Technical limitations of electronic commerce

Lack of sufficient systems security, reliability, standards, and communication protocols Insufficient telecommunication bandwidth The software development tools are still evolving and changing rapidly

The Limitations of EC (cont.)

Technical Limitations of EC (cont.)

Difficulties in integrating the Internet and electronic commerce software with some existing applications and databases The need for special Web servers and other infrastructures, in addition to the network servers (additional cost)

The Limitations of EC (cont.)

Technical Limitations of EC (cont.)

Possible problems of interoperability, meaning that some EC software does not fit with some hardware, or is incompatible with some operating systems or other components

Non-Technical Limitations

Cost and justification

The cost of developing an EC in house can be very high, and mistakes due to lack of experience may result in delays. There are many opportunities for outsourcing, but where and how to do it is not a simple issue In order to justify the system, one needs to deal with some intangible benefits which are difficult to quantify.

Non-Technical Limitations (cont.)

Security and Privacy

These issues are especially important in the B2C area, but security concerns are not so serious from a technical standpoint Privacy measures are constantly improving too The EC industry has a very long and difficult task of convincing customers that online transactions and privacy are, in fact, very secure

Non-Technical Limitations (cont.)

Lack of trust and user resistance

Customers do not trust:

Unknown faceless sellers Paperless transactions Electronic money

Switching from a physical to a virtual store may be difficult

Non-Technical Limitations (cont.)

Other limiting factors are:

Lack of touch and feel online Many unresolved legal issues Rapidly evolving and changing EC Lack of support services Insufficiently large enough number of sellers and buyers Breakdown of human relationships Expensive and/or inconvenient accessibility to the Internet

Impact on EC: Everything will be Changed

The Analysis-of-Impacts Framework

Impacts on Trading Processes and Intermediaries (cont.)

Winners in EC
Internet access providers Diversified portal service providers EC software companies Proprietary network owners Others

Losers in EC
Wholesalers (particularly small ones) Brokers Salespeople Nondifferentiated manufacturers

Impact on Business Processes and Organizations

Improving direct marketing

Product promotion New sales channels Direct savings Reduced cycle time Customer service Brand or corporate image

Impact on Business Processes and Organizations (cont.)

Other marketing-related impacts

Customization Advertising Ordering systems Markets

Transforming organizations
Technology and organization learning Changing nature of work

Impact on Business Processes and Organizations (cont.)

Redefining organizations
New product capabilities New business models

Impacts on manufacturing
Build-to-order

Impact on finance and accounting Human resource management, training, and education

Putting It All Together

Major concern of todays companies how to transform themselves to take part in digital economy Example:Toys, Inc.
Uses intranet for internal communications, collaboration, dissemination of information Networked to e-marketspaces and large corporations Corporate portal for communication and collaboration with business partners

Figure 1-2 Putting It All Together

Prentice Hall, 2002

61

Managerial Issues

Is it real? How to evaluate the magnitude of the business pressures. What should be my companys strategy towards EC? Why is the B2B area so attractive? What is the best way to learn about EC? What ethical issues exist? How can failures be avoided?

Electronic Commerce: Definitions and Concepts (cont.)

Pure vs. Partial EC depends upon the degree of digitization (the transformation from physical to digital) of:
1. the product (service) sold; 2. the process; and for 3. the delivery agent (or digital intermediary)

Brick-and-Mortar organizations are old-economy organizations (corporations) that perform most of their business off-line, selling physical products by means of physical agents

Electronic Commerce: Definitions and Concepts (cont.)

Virtual (pure-play) organizations conduct their business activities solely online Click-and-mortar organizations conduct some EC activities, but do their primary business in the physical world

Electronic market (e-marketplace) online marketplace where buyers and sellers meet to exchange goods, services, money, or information

Electronic Commerce: Definitions and Concepts (cont.)

Interorganizational information systems (IOSs) allow routine transaction processing and information flow between two or more organizations

Intraorganizatio nal information systems enable EC activities to go on within individual organizations