Chapter 14 Strategizing with Information Systems ... · PDF fileStrategizing with Information Systems: Electronic commerce ... Amazon was not profitable for years. ... The portal model

Chapter 14 * Electronic Commerce * Bob Travica ©

Chapter 14

Strategizing with Information Systems:

Electronic commerce Whenever you shop on the Internet, you engage in electronic commerce (e-commerce). Companies participating in supplier-buyer chains do e-commerce when they exchange business documents and money electronically. The speed, convenience, savings, market reach and other benefits motivate both individuals and organizations to do e-commerce. For companies, going e-commerce is a new and important strategy of innovation and economic sustainability. For e-commerce is here to stay, management education cannot be complete if this area of commerce remains unaddressed. This chapter explores basics of e-commerce, its two key domains, technological issues, and costs/benefits.

Concept of E-commerce E-commerce can be briefly defined as the area of commerce that is conducted via computer networks and information systems. Traditional trading activities of buying and selling are done in a new way, in which modern information technologies and systems play the key part. Companies in some industries have been trading electronically as far back as in the 1960s. But the real expansion of these practices, consumer involvement, and recognition of e-commerce happened with the wide acceptance of the Internet in the second half of the 1990s. Until the mid-1990s, the Internet was used primarily by researchers in North America. Then, access to it was enhanced with the invention of the browser software that supported a graphical user interface (GUI). The use of computer mouse and point-and-click interaction with the computer simplified the Internet use and opened it to casual users. Although there were alternative computer networks outside North America, the Internet began spreading at their expense due to its technological and economic advantages. The Web (World Wide Web) part of the Internet, which had the capability of addressing and linking data at the level of file and word, found a good fit with business needs. Web technology was already in place when GUI was invented. The coupling of these two enabled companies to get on the Internet. Companies quickly seized the new opportunity to expand marketing channels by creating their Web sites. In the beginning, these sites would just present a company and its products. Then, the whole sales process including the payment step moved online. Prices of PCs went down, telecommunications providers added Internet access to their services, and free Internet search systems emerged. All these conditions led to the birth of e-


commerce focused on consumer markets. It quickly spread globally along with the Internet expansion. However, the practice of conducting business electronically between firms already had a tracking in North America. It was not conducted via the Internet but rather via private corporate networks. Two Domains of E-commerce There are two main domains in e-commerce:

Business-to-Consumer (B2C)

Business-to-Business (B2B). The two domains of e-commerce are depicted in Figure 1. In this example, B2C e-commerce is represented by a Web storefront that offers and sells to a consumer. B2C e-commerce is also called Web-based retail since it focuses on consumer markets. In contrasts to B2C e-commerce, B2B e-commerce is essentially an electronic supply chain. It is represented in two scenarios in Figure 1. In one of these, the Web storefront transacts electronically with its supplier. In another, the buyer firm is a classical company not engaged in B2C commerce. The following sections discuss each domain in detail.

Figure 1. Two domains of e-commerce

Business-to-Consumer E-commerce B2C e-commerce refers to selling to consumers on the Internet or Web-based retail. It is conducted via Web storefronts (online stores) that substitute for traditional physical facilities. Having roots in phone-based shopping, B2C e-commerce has evolved since 1994. Early entrants in B2C e-commerce first used the telephone for taking customer orders (e.g., Amazon.com and Dell Computer). Books, music, and computer games were some of the products traded in the early B2C e-commerce. Within a decade, B2C e-commerce expanded to include all imaginable products. Perhaps the tipping point was when the products associated with fitting rooms took


off on the B2C channel. Retailer invented methods of suiting consumers’ uncertainty. One such method uses avatars to simulate the fitting activity in “virtual fitting rooms” (Figure 2). A shopper provides measurements, and an avatar is sized and displayed for the shopper to try on different clothing items. A reliable return product policy necessarily accompanies this technique.

B2C e-commerce is conducted in two ways: (a) exclusively on the Internet, or (b) as an addition to physical stores. Option A is sometimes called “pure click” as the trading cycle is performed entirely by “clicking” on pages of Web-based stores. Option B is called “click-and-mortar” to refer to combining the online stores with classical physical stores. The online store is sometimes referred to as the dot-com part of the business, which comes from the “.com” part of Internet addresses for business Web sites (“com” stands for “commercial”). A click-and-mortar business may outsource the dot-com part rather than running it by itself (e.g., Chapters.com).

Figure 2. Virtual fitting room Business models for B2C E-commerce Many business models have been tried in B2C e-commerce. The model of Web storefront is among the first and most responsible for the global spread of the B2C domain. Amazon.com was among the early entrants and has sustained as a “pure click” business since 1995. It started with a limited assortment of products and expanded its inventory to a broader range of consumer products. The fact that there are no physical stores does not mean that the Amazon runs entirely on computers and the Internet. On the contrary, Amazon.com has warehouses and employs tens of thousands of people. However, the sales channel is all rested on the Internet. Amazon was not profitable for years. The goal used to be to capture a large market share among online shoppers. This changed when investors became impatient after a crash of B2C e-commerce in 2001. Amazon became profitable, spread its operations internationally, and became a standard model for online stores. Its store design has been imitated by many. Part of Amazon’s business model is a continuous innovation and improvement of the sales and inventory processes. An example is one-click shopping that eases the ordering and payment steps for Amazon’s shoppers. Amazon also tries to increase cross-selling. As it profiles its customers based on their product searches and purchases, the company tries to up-sell (selling more in the same product category to a particular customer). Amazon also strives to increase


cross-sales, that is, to add new product categories to a customer’s shopping list. This is done by automatically matching shoppers on overlapping interests. Then, each customer is offered to consider buying what the matching customer had bought. The system used for this purposes is called collaborative filtering. As discussed earlier, an online merchant actually collects more data about their customers than does the classical merchant. Amazon is the typical example for this. The company also achieved a success with its mobile reading devices that helped increase the electronic publications market. Another successful Web storefront is Dell Computer. Similarly to Amazon.com, the company started through phone-based ordering. Soon after, Dell developed a Web storefront and offered its customers the convenience of assembling the desired PC (Figure 3). Later, Dell developed a separate sales channel for its corporate customers, effectively getting into the B2B

domain of e-commerce. The Web storefront model is changing over time. As competition increases, online stores differentiate themselves on various bases, such as product category, overstock products, special deals (last minute, one-time, limited series and similar “flash sales”), subscription buying (e.g., electronic products), and so on.

Figure 3. Dell’s online store in 1996

Portal Model The portal model of B2C e-commerce is a Web site that sells advertising space based on attracting the advertising audience by providing free search services. A portal is the entry point to the Web for many Internet users. Without it, the Web would be possible to reach only if a user knows the Web address of a target site. In a way, a portal monitors and catalogs (organizes) the global Web content. Without portals, the Web’s value would be greatly diminished. Notable examples of this model are Google and Yahoo (see window “In the Beginning…”). Google has become the brand name for the Internet search: we “Google the Internet” rather than “search” it. Incorporated in 1998, the company has been sustainable and profitable, continually coming up with innovative Internet-centric services. It has made most of its revenues by selling the advertising space. This is supported by Google’s AdWords technology. When a user searches the Internet, the adds corresponding to search terms appear on margins of the output pages. Advertisers pay to Google a flat fee and/or when an Internet searcher clicks on the company’s ad (pay-per-click). Google uses its various free services (e.g., YouTube, Gmail) to increase the advertising audience and space.


Over time, the company added other business models and products unrelated beyond the portal model (e.g., Android operating system for mobile technologies, broadband networking, mobile telephony, and corporate services). Broker The broker (brokerage) business models refer to the role of middleman that draws revenues by charging for the interfacing service. The online broker emulates the off-line broker, except that the former has a much broader reach than the latter. For example, a classical mortgage broker usually serves a local geographical market, while an online mortgage broker is not so limited. In a way, the broker model counters the Web storefront model, which is based on eliminating the merchant as the middleman when a producer runs its dot-com sales operations. The revenues of a broker are usually fixed fees and referral fees resulting from selling the advertising space. Brokerages exist in various areas. For example, Travelocity intermediates between sellers and buyers of travel services (flight, accommodation, car rental). The company consolidates offers, bundles the services, and pushes these to the shoppers. Other brokers integrate data on products and prices to enable comparative pricing (e.g., car markets). There are online auction brokerages, and others.

In the Beginning…

There was chaos. It was impossible to search the Web unless the user knew the precise Web site address. But help came in quickly with first portals, such as Yahoo (1994), Alta Vista… and Google (1996). The Yahoo portal offered a Yellow Pages-like guide to the Web.


B2C E-Commerce Trends The growth of B2C e-commerce was rapid until 2000. The growth was partly fueled by the availability of cheap loans and the overall bull market. In some areas, e-commerce mushroomed on shaky business models with unreliable sources of revenues. When the bull market trend ended by 2001, many markets crashed, including B2C e-commerce. In general, B2C e-commerce contracts and expands with economic cycles similarly to the traditional retail sector. It still makes a smaller part (up to 15%) of the overall retail in the developed countries. Developing countries face particular challenges on the path to B2C e-commerce. While reliable telecommunications networks are necessary to carry the Internet traffic, even a steady supply of electricity may not be available in all countries or regions of one country. The Internet still covers just smaller segments of city population in a number of countries. The electronic payment is another challenge. It has to do with security of online transactions and a lack of trust the general public maintains toward online payment methods. Once products are sold online, they need to be delivered safely and timely. However, the transportation infrastructure and services may not always be up to the task. Moreover, product return policy is not in place in many countries, which is part of the overall economic culture shaping the mutual trust between consumers and merchants. All these factors influence the development of B2C e-commerce in the world. B2C E-commerce Benefits and Costs Benefits of B2C e-commerce should be examined from both the firm and the customer perspective. Benefits for firms are:

Global reach

24/7/365 time of operations

Savings on physical stores

Direct marketing

Cross selling.

Companies that have a strategy of B2C e-commerce, enjoy the benefit of larger consumer markets; the markets are wherever the Internet reaches. If no direct sales are possible due to various limitations mentioned above, there is at least the opportunity for presenting a firm and its products. In contrast to the traditional stores that have fixed business hours, operations flow year round in B2C e-commerce. A firm saves on expenses connected with building/renting and operating physical stores. Furthermore, marketing is direct owing to customer profiling and personalizing Web storefronts; as well, methods for automated product promotion and eventually cross selling are available.


While canceling some costs of traditional trade, B2C E-commerce brings up its own costs. These are:

IS investments

Delivery, logistics, product return

Payment security

Legal boundaries

Competition increase

Invisible customer

Electronic branding.

Figure 4. Information systems for online store

The costs of physical stores are replaced by the cost of IS on which an online store runs. These vary with the volume of operations. If a firm is on the upward innovation curve, the difference between costs of operating physical stores and online stores may not be significant. Figure 4 depicts some of the systems requirements for an online store. There is a Web storefront, which is a set of Web pages running on a Web server. An electronic product catalog is also on the Web site ready to support customers’ product search. A system for accepting customer’s order (a shopping cart, a sales TPS), and a system for handling e-payment must also be in set up. The payment system links with banks and clearing houses via a high security banking network. Then, there are systems for customer relationship management, such as profiling and product promotion. All these must run smoothly and be able to handle varying volume of operations. Delivery, product return, and payment issues have to be continually attended to keep customers satisfied. These are supply chain aspects. An online retailer that neglects them is likely to lose customers. There are also legal boundaries to e-commerce with regard to local taxes and import dues. In the beginning of B2C e-commerce, online retailers were simply bypassing local tax authorities. But this changed. The issue bounces back with the e-commerce breaking into new geographical spaces.


Nonetheless challenging is the fact that global e-commerce increases competition. New market entrants can emerge from literally anywhere in the world. Furthermore, customers are invisible and tracking them down takes investment and creativity. Another marketing hurdle is the novelty of electronic branding, how to build it and maintain through social media and other channels.

On the customer side, the main benefit is convenience. Shopping could be done without moving to a physical store. As ell, one could shop from any place via mobile technologies. The consumer may also benefit from a greater selection and more competitive prices. In the customer’s cost rubric, some of the savings from competitive pricing are lost to expenses for shipping and handling. Other costs are related to potential insecurity with regard to electronic payment and product quality and return. Privacy issues may be significant due to continuous customer profiling and the push of marketing messages to the customer.

Business-to-Business E-Commerce B2B e-commerce refers to buying and selling transactions between organizations by using computer networks and information systems. One organization is a buyer and another is a seller, and these conduct business electronically. For example, a manufacturer purchases materials needed from its supplier by ordering and paying electronically. A service firm buys office furniture and technology from producers or distributors by using an electronic market. B2B e-commerce is essentially the area of electronic supply chain. A longer definition used in North America explains e-commerce as “sales of goods and services where an order is placed by the buyer or price and terms of sale are negotiated over the Internet, an extranet, Electronic Data Interchange (EDI) network, or other online systems. Payment may or may not be made online.” (Source: http://shielddigital.com/economicsofsellingonline/tag/b2b) This definition illuminates technologies that carry B2B e-commerce. An extranet is a private company network that is opened to invited partners; and EDI is a legacy technology for creating electronic documents used in trading. Note that B2B can also be entirely via a private computer network rather than the public Internet. Electronic trading between firms started in the 1960s in North America, and particularly in the transportation industry and grocery supply chains. Car manufacturers were also early entrants. The explosion of the Internet in the 1990s shaped up B2B e-commerce. Since the Internet communications were much cheaper than transacting via private computer networks, the new


value proposition attracted businesses with limited IS budgets. For example, while EDI via private networks was rather expensive, it became more affordable in its Internet-based version. B2B e-commerce is conducted via two models: (a) by marketplaces, and (b) by direct transactions between buyer and supplier firms. Figure 5 depicts the direct model with electronic links between departments on the buyer and the seller side. Note the link between the Production Scheduling and the Inventory. It means that the supplier can look into the buyer’s inventory in order to arrange for just-in-time supplies. The mediated model deploys an e-market as the intermediary. This is a particular business model that works as a B2B market maker (more in the next section). Banks are engaged in either model via electronic links for payment purposes.

Figure 5. Two models of B2B e-commerce

An example of B2B e-commerce is Covisint. It was a private e-market created by North American car manufacturers to link them to their suppliers. In the past, there were EDI connections between each manufacture and each of the thousands of suppliers. Covisint simplified this network, acting as the hub to which each supplier and buyer was connected. Later on, Covisint evolved into a separate business and added other industries to its portfolio.

Another example of B2B e-commerce is Freelancer, a maker of the job market matching the individuals with various skills and employers in need of completing usually smaller projects. Dell Computer cited in the section

on B2C e-commerce also features in the B2B markets. It developed channels for selling its computers directly to organizations. For years, Dell was selling exclusively online. (More examples are in the next section.) The B2B domain is not only older than its B2C counterpart, but it is also larger. In the U.S., one third of all trading between companies is electronic. The B2B domain is also more resilient to economic cycles. In times of recession, it may even serve as a source of savings since costs can often be cut by economizing with the timing and volume of supplies. The E-Market Business Model


The e-market is the business model of B2B e-commerce that connects buyer and supplier firms and draws main revenues from this interfacing service. This business is crucial for the development of B2B e-commerce. It is also called e-exchange, e-hub, and net market maker. Think, for example, how wholesale trading has been done unchanged for centuries. Fairs, exchanges and similar events and organizations have served the purpose. However, the e-market is a real game changer as it eliminates travel, time restrictions, and unnecessary expenses, while focusing on the business essence – matching demand and supply in a direct, efficient and encompassing manner. An e-market can be controlled by the buyer (e.g., Covisint in the beginning), seller (e.g., Global

Health Exchange – GHX), or independent (e.g., B2BQuote or the Chinese e-market called Alibaba). Some notable controlled e-markets evolved toward the independent model. If controlled by either side, the e-market may not have balanced sides. An

independent e-market tends to balance the buyer and seller side, as shown in Figure 6. Reaching a critical volume on both the supply and the demand side maximizes the value for the clients as well as for the e-market business. Furthermore, the e-market can be within an industry (e.g., health, plastics, metals, etc.), or across industries (e.g., Covisint, B2BQuote, and Alibaba).

An e-market can make money in several ways. Most common methods are charging the membership fees, and charging per sale transaction. Some e-markets provide credit services and earn on the interest (possibly sharing it with partnering banks). Additional incomes may come from helping clients to create their product catalogs and from supervising order fulfillment.

Figure 6. E-market balancing demand and supply Benefits and Costs of B2B E-Commerce


Benefits from a B2B e-commerce strategy are the following:

Larger market

Savings from efficiencies in supply chain

Better coordination in supply chain

Dynamic pricing (auctions)

24/7/365 business (via e-marketplaces) A firm enjoys the benefit of a larger market by accessing global markets of products or customers. In contrast, a classical supply chain limits upstream and downstream visibility to a number of partners that a firm has to or can handle. Savings from efficiencies in supply chain result from the electronic character of supply chain links, which enable fast communication and transfer of business documents and money. These time savings reflect in the reduction of process time in purchasing, inventory, production, and sales operations. An electronic supply chain allows for better coordination among the partners, so that each has a chance to contribute to the value chain and the final deliverable of the supply chain. Think of the car industry in which thousands of suppliers and buyers line up on the path from raw materials (metal, plastic) to semi-products (care engine, body, etc.) and to the finished cars. Apparently, e-markets have a major role in the management of buy and sell activities. Dynamic pricing happens in auctions, a function that many e-markets support. This function benefits the sellers who can make global buyers compete for their products and in that way raise prices. Moreover, similarly to the B2C domain, business of B2B e-commerce runs on the 24/7/365 basis with help of e-markets. Many tasks are automated so that immediate intervention of people is not needed. Costs associated with a B2B e-commerce strategy are the following:

Costs of intermediaries (e-markets)

Increased competition

Volatile business relationships

Costs of private networks

Legal boundaries. A firm has to pay for the services of an e-market. E-markets are businesses on their own and have to cover their costs and meet earning expectations. B2B e-commerce increases competition and makes it global. New players unpredictably enter in markets. This fact is related to the next possible cost of volatile business relationships. As both buyers and sellers continuously search the e-markets, abandoning old business partners may happen when better deals are located.


Costs of private networks sometimes have to be covered, because stronger players or law make the network use mandatory. Corporate networks are more secure, faster and higher capacity than the Internet, but they also cost more. Finally, there are legal boundaries to B2B e-commerce. Governments may intervene to regulate business. This happened to Covisint, when government authorities intervened on the basis of anti-trust legislation. From a macro-economic perspective, regulations may not necessarily be bad, but they may undercut expected returns from some investments in B2B e-commerce.

Questions for Review and Study 1. How is the Internet related to e-commerce? 2. What are the main business models for B2C e-commerce? (Hint: What is the product? Who

is the customer? What are the sources of earning?) 3. Discuss three similarities and three differences between two main domains of e-commerce. 4. List IS needed for running a Web storefront (an online store). 5. What are the issues that can make consumers hesitate to become online shoppers? 6. What is a dot-com part of business, and how is it different from "pure click" e-commerce? 7. Discuss the direct and mediated model of B2B e-commerce. 8. Discus the main business model for B2B e-commerce. (Hint: What is the product? Who is

the customer? What are the sources of earning?) 9. Who can run an e-market? Does ownership make a difference? 10. What markets can the e-market business serve? 11. What does e-commerce have to do with organizational strategy? (Hint: Focus on benefits of

B2C and B2B domains.) 12. Compare costs for B2C with costs for B2B e-commerce (both tangible and intangible). What

is similar and what different?

13. Compare benefits from B2C with benefits from B2B e-commerce (both tangible and intangible). What is similar and what different?


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Chapter 14 Strategizing with Information Systems ... · PDF fileStrategizing with Information Systems: Electronic commerce ... Amazon was not profitable for years. ... The portal model