Chapter 1 Foundation of Electronic Commerce

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Chapter 1
Overview of Electronic Commerce
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Learning Objectives

• Define electronic commerce (EC) and describe its
  various categories
• Describe and discuss the content and framework of
  EC
• Describe the major types of EC transactions
• Describe some EC business models
• Discuss the benefits of EC to organizations,
  consumers, and society

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Learning Objectives (cont.)

• Describe the limitations of EC
• Describe the role of the digital revolution in EC
  and the economic impact of EC
• Discuss the contribution of EC in helping
  organizations respond to environmental pressures
• Discuss some major managerial issues regarding EC

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Qantas AirwaysA New Way to Compete

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

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Qantas Airways (cont.)

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

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Qantas Airways (cont.)

• Business-to-business (B2B)

• E-marketplace member
• Joined Airnew Co.links major airlines with
  suppliers
• Fuel
• Fuel services
• Light maintenance services
• Catering

• Joined Corporcure.com.au with 13 other large
  Australian corporations
• Electronically purchase general goods and
  services
• Office supplies
• Light bulbs
• Maintenance services

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Qantas Airways (cont.)

• Formed Pan-Pacific exchange
• E-marketplace
• Business-to-business-to-consumer (B2B2C)
• Provides
• Full spectrum travel services
• Products and services to business partners
• Travel agencies who can use this marketplace to
  sell directly to consumers

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Qantas Airways (cont.)

• Business-to-customer (B2C)
• Online booking
• E-mails to frequent-flyer members
• Mileage bonuses and opportunities to win 10,000
  AU
• Wireless communications

• Business-to-employee (B2E)
• Online training
• Online banking

B2C B2E
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Qantas Airways (cont.)

• The Results
• Qantas expects to see an estimated 85 million AU
  in cost reductions per year by 2003
• Qantas expects to increase annual revenues by
  700 million AU from nontravel sales
• Outlasted one competitor

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EC Definitions Concepts

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

EC
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EC Definitions Concepts (cont.)

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

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Exhibit 1.1The Dimensions of Electronic Commerce
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EC Definitions Concepts (cont.)

• Traditional commerce all dimensions are physical
• Brick-and-mortar organizations
• Old-economy organizations (corporations)
• Perform all business off-line
• Sell physical products by means of physical agents

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EC Definitions Concepts (cont.)

• Pure EC all dimensions are digital
• Pure online (virtual) organizations
• New-economy organization
• Sell products or services only online
• Partial EC a mix of digital and physical
  dimensions
• Click-and-mortar organizations
• Conduct EC activities
• Do their primary business in the physical world

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EC Definitions Concepts (cont.)

• Internet vs. Non-Internet EC
• VANsvalue-added networks
• LANslocal area networks
• Single computerized machines
• Using a smart card in a vending machine
• Using a cell phone to make an online purchase

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Electronic Markets vs. Interorganizational
Systems

• E-markets
• Buyers and sellers meet to exchange
• Goods
• Services
• Money
• Information

• Interorganizational Information Systems (IOS)
• Between two or more organizations
• Routine transaction processing
• Information flow

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The EC Framework and Field

• An EC Framework
• EC applications supported by infrastructure and 5
  support areas
• People
• Public policy
• Technical standards and protocols
• Business partners
• Support services

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Exhibit 1.2A Framework for EC
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Classification of EC by the Nature of the
Transaction

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

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Classification of EC by the Nature of the
Transaction (cont.)

• Consumer-to-business(C2B) individuals who use
  the Internet to sell products or services to
  organizations and /or seek sellers to bid on
  products or services they need
• Consumer-to-consumer (C2C) consumers sell
  directly to other consumers

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Classification of EC by the Nature of the
Transaction (cont.)

• Mobile commerce (m-commerce)EC transactions and
  activities conducted in a wireless environment
• Location-commerce(l-commerce)
• m-commerce transactions targeted to individuals
  in specific locations, at specific times

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Classification of EC by the Nature of the
Transaction (cont.)

• Intrabusiness (organizational) EC EC category
  that includes all internal organizational
  activities that involve the exchange of goods,
  services, or information among various units and
  individuals in an organization

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Classification of EC by the Nature of the
Transaction (cont.)

• Business-to-employee (B2E) EC model in which an
  organization delivers services, information, or
  products to its individual employees
• Collaborative commerce (c-commerce) EC model in
  which individual or groups communicate or
  collaborate online
• E-government Government-to-citizens (G2C) EC
  model in which a government entity buys or
  provides good, services, or information to
  businesses or individual citizens

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Classification of EC by the Nature of the
Transaction (cont.)

• Exchange (electronic) a public e-market with
  many buyers and sellers
• Exchange-to-exchange (E2E) EC model in which
  electronic exchanges formally connect to one
  another for the purpose of exchanging information

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Interdisciplinary Nature of EC

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

• Marketing
• Computer sciences
• Consumer behavior and psychology
• Finance
• Economics

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Brief History of EC

• EC applications first developed in the early
  1970s
• Electronic funds transfer (EFT)

• Limited to
• Large corporations
• Financial institutions
• A few other daring businesses

EFT
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Brief History of EC (cont.)

• Electronic data interchange (EDI)electronic
  transfer of documents
• Purchase orders
• Invoices
• E-payments between firms doing business

• Enlarged pool of participants to include
• Manufacturers
• Retailers
• Service providers

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Brief History of EC (cont.)

• Interorganizational systems (IOS)
• Stock trading
• Travel reservation systems
• Internet became more commercialized in the early
  1990s
• Almost all medium-and large-sized organization in
  the world now has a Web site
• Most large corporations have comprehensive portals

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Brief History of EC (cont.)

• EC Successes
• Pure online
• eBay
• VeriSign
• AOL
• Checkpoint
• Click-and-mortar
• GE
• IBM
• Intel
• Schwab

• EC Failures
• E-tailors began to fail in 1999
• This does not mean that ECs days are numbered
• Large EC companies like Amazon.com are expanding
  but success or failure is not certain

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Success Story of Campusfood.com

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

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Campusfood.com (cont.)

• Building the companys customer base involved
• Registering other universities
• Attracting students
• Generating a list of restaurants from which
  students could order food for delivery
• Some activities are outsourced to a marketing
  firm enabling the addition of dozens of schools
  nationwide

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Campusfood.com (cont.)

• Built on an investment of less than 1 million
• Private investors
• Friends
• Family members
• Revenue is generated through transaction fees5
  percent commission on each order

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Campusfood.com (cont.)

• At campusfood.com you can
• Navigate through a list of local restaurants,
• Browse an interactive menu.
• Bypass busy telephone signals to place an order
  online
• Get access to special foods, promotions, and
  restaurant giveaways
• Arrange electronic payment of your order

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Business Models

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

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Business Plans Business Cases

• Business plan
• A written document that identifies the business
  goals and outlines the plan of how to achieve them

• Business case
• A written document that is used by managers to
  garner funding for specific applications or
  projects its major emphasis is the justification
  for a specific investment

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The Content of a Business Plan

• Mission statement and company description
• The management team
• The market and the customers
• The industry and competition
• The specifics of the products and/or services

• Marketing and sales plan
• Operations plan
• Financial projections and plans
• Risk analysis
• Technology analysis

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Structure of Business Models

• All business models must specify their revenue
  model (the description of how the company or an
  EC project will earn revenue)
• Revenue sources are

• Transaction fees
• Subscription fees
• Advertisement fees

• Affiliate fees
• Sales
• Other models

• Value proposition is the description of the
  benefits a company can derive from using EC

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Typical Business Models in EC

• Online, direct marketing
• Electronic tendering systems
• Reverse auction is a tendering system sellers are
  invited to bid on the fulfillment of an order to
  produce a product or provide a service the
  lowest bid wins
• Name your own price
• Find the best price

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Typical Business Models in EC (cont.)

• Affiliate marketing is an arrangement whereby a
  marketing partner (business, organization or
  individual) refers consumers to the selling
  companys Web site
• Viral marketing is word-or-mouth marketing in
  which customers promote a product or service to
  friends or other people by using the Internet

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Typical Business Models in EC (cont.)

• Group purchasing is getting many small buyers
  together to by in large quantities
• Online auctions
• Product and service customization
• Customization is the creation of a product or
  service according to the buyers specifications
• Electronic marketplaces and exchanges
• Vertical marketplace is a marketplace that
  concentrates on one industry also called
  vertical portals or vortals
• Supply chain improvers

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Exhibit 1.3The Business Model of 7dream.com
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The Benefits of EC

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

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Benefits of EC (cont.)

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

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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

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Benefits of EC (cont.)

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

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Benefits of EC (cont.)

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

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Interorganization and Collaboration
Orbis Corporation changes linear physical supply
chain to an electronic hub
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Orbis Corporation (cont.)
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The Limitations of EC

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

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The Digital Revolution and the Economic Impact
of EC

• In the Digital Revolution the economy is based on
  digital technologies including
• Digital communication networks
• Computers
• Software
• Other related information technologies
• Also called
• Internet economy
• New economy
• Web economy

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The Digital Revolution and the Economic Impact
of EC (cont.)

• Digital networking and communication
  infrastructures provide a global platform where
  people and organizations
• Interact
• Communicate
• Collaborate
• Search for information

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The Digital Revolution and the Economic Impact
of EC (cont.)

• The global platform includes these
  characteristics
• A vast array of digitizable products
• Consumers and firms conduct financial
  transactions digitally
• Microprocessors and networking capabilities
  embedded in physical goods

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The Digital Revolution and the Economic Impact
of EC (cont.)

• The term digital economy also refers to the
  convergence of computing and communication
  technologies on the Internet and other networks
  and the resulting flow of information and
  technology that is stimulating e-commerce and
  vast organizational changes

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The Digital Revolution and the Economic Impact
of EC (cont.)

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

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Exhibit 1.5Cost Curve of Regular Digital
Products
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Exhibit 1.6The Economic Effects of EC
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Economics of Digital Systems (cont.)

• Reach vs. richness
• Another economic impact of EC is the trade-off
  between the number of customers a company can
  reach (called reach) and the amount of
  interactions and information services they can
  provide to customers (called richness)

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Exhibit 1.7Reach vs. Richness
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Contributions of EC to Organizations

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

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Business Pressures

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

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Exhibit 1.8Major Business Pressures the Role
of EC
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Organizational Responses

• Strategic systems
• Provide organizations with strategic advantages,
  enabling them to
• Increase their market share
• Better negotiate with their suppliers
• Prevent competitors from entering into their
  territory

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FedEx Solutions

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

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FedEx Solutions (cont.)

• FedEx express distribution depots
• Provides a one-stop source of express
  distribution capabilities.
• Goods in these depots are available for delivery
  24 hours a day.
• Service is targeted at time-critical businesses
• All communication is done online

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FedEx Solutions (cont.)

• FedEx returns management
• FedEx NetReturn designed to streamline the
  process of returns
• Internet-based system to schedule pickup of
  packages from consumers and to obtain
  time-definite delivery
• Online status tracking and customized reporting

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FedEx Solutions (cont.)

• Other value-added services
• Products can be shipped from a FedEx-operated
  warehouse instead of the business customers
  warehouse
• FedEx can provide a merge-in-transit service to
  customers that operate on rapid turnaround and
  delivery

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Organizational Responses (cont.)

• Continuous improvement efforts
• Many companies continuously conduct programs to
  improve
• Productivity
• Quality
• Customer service
• Business process reengineering (BPR)
• Strong business pressures may require a radical
  change
• Such an effort is referred to as business process
  reengineering (BPR)

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Organizational Responses (cont.)

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

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Organizational Responses (cont.)

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

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Time-to-Market for New Drugs

• FDA must be extremely careful in approving new
  drugs public pressure to approve new drugs
  quickly
• FDA requires
• Extensive research
• Clinical testing
• Very bulky documentation is necessary
• Manual review process slows

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Time-to-Market for New Drugs (cont.)

• Computer-Aided Drug Application Systems (software
  program) offers a computerized solution
• Network-distributed document processing system
• Enables the pharmaceutical company to scan
  documents into a database
• Saves time
• Information can be processed or printed at the
  users desktop computer

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Time-to-Market for New Drugs (cont.)

• Remote corporate and business partners can also
  access the system
• The overall result time-to-market of a new drug
  is reduced by up to a year
• ISIS Pharmaceuticals, Inc. (isip.com) developed
  an extranet-based system
• Uses CD-ROMs to submit reports to the FDA
• Opens its intranet to FDA personnel
• Save 6 to 12 months

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Organizational Responses (cont.)

• Empowerment of employees and collaborative work
• Employees given the authority to act and make
  decisions on their own improves
• Productivity
• Customer relationship management (CRM)
• Empowered sales people and customer service
  employees
• Make customers happy quickly
• Help increase customer loyalty

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Organizational Responses (cont.)

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

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Putting It All Together

• The task facing each organization is how to put
  together the components that will enable the
  organization to gain competitive advantage by
  using EC

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Putting It All Together (cont.)

• The first step is to put in the right connective
  networks
• The vast majority of EC is done on computers
  connected to
• Internet
• Intranet--An internal corporate or government
  network that uses Internet tools, such as Web
  browsers, and Internet protocols
• Extranet--A network that uses the Internet to
  link multiple intranets

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Putting It All Together (cont.)

• Major concern of todays companieshow to
  transform themselves to take part in digital
  economy
• ExampleToys, 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

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Exhibit 1.10Networked Organizations
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Managerial Issues

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

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Summary

• Definition of EC and description of its various
  categories
• The content and framework of EC
• The major types of EC transactions
• The major business models
• Benefits of EC to organizations, consumers, and
  society
• Limitations of EC
• The digital revolution and the economic impact of
  EC
• The role of EC in combating pressures in the
  business environment