Prentice Hall, 2003 1 Chapter 1 Overview of Electronic Commerce

1Prentice Hall, 2003

Chapter 1

Overview of

Electronic Commerce


Learning Objectives

Define electronic commerce (EC) and describe its various categoriesDescribe and discuss the content and framework of ECDescribe the major types of EC transactionsDescribe some EC business modelsDiscuss the benefits of EC to organizations, consumers, and society


Learning Objectives (cont.)

Describe the limitations of ECDescribe 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 pressuresDiscuss some major managerial issues regarding EC


Qantas AirwaysA New Way to Compete

The ProblemIncreased fuel costs placed pressure on the airline industryQantas faced two major competitors and higher fees at Sydney AirportAir traffic dwindled after September 11th

Qantas needed to replace aircraft in order to stay competitiveAustralian economy slowed down


Qantas Airways (cont.)

The SolutionBought 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



E-marketplace memberJoined Airnew Co.—links major airlines with suppliers

FuelFuel servicesLight maintenance servicesCatering

Joined Corporcure.com.au with 13 other large Australian corporationsElectronically purchase general goods and services

Office suppliesLight bulbsMaintenance services

Business-to-business (B2B)



Formed Pan-Pacific exchangeE-marketplaceBusiness-to-business-to-consumer (B2B2C)Provides

Full spectrum travel servicesProducts and services to business partners

Travel agencies who can use this marketplace to sell directly to consumers



Business-to-customer (B2C):

Online bookingE-mails to frequent-flyer membersMileage bonuses and opportunities to win $10,000 AU

Wireless communications

Business-to-employee (B2E):

Online trainingOnline banking



The ResultsQantas expects to see an estimated $85 million AU in cost reductions per year by 2003Qantas expects to increase annual revenues by $700 million AU from nontravel salesOutlasted one competitor


EC Definitions & Concepts

Electronic Commerce (EC) is the process of buying, selling, or exchanging products, services, and information via computer networksEC defined from these perspectives

CommunicationsBusiness processServiceOnlineCollaborationsCommunity


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 customersCollaborating with business partnersConducting electronic transactions within an organizationPure vs. Partial EC: based on the degree of digitization of product, process, delivery agent


Exhibit 1.1The Dimensions of Electronic Commerce



Traditional commerce: all dimensions are physical

Brick-and-mortar organizationsOld-economy organizations (corporations)Perform all business off-lineSell physical products by means of physical agents



Pure EC: all dimensions are digitalPure online (virtual) organizationsNew-economy organizationSell products or services only online

Partial EC: a mix of digital and physical dimensions

Click-and-mortar organizationsConduct EC activitiesDo their primary business in the physical world



Internet vs. Non-Internet ECVANs—value-added networksLANs—local area networksSingle computerized machines

Using a smart card in a vending machineUsing a cell phone to make an online purchase


Electronic Markets vs. Interorganizational Systems

E-marketsBuyers and sellers meet to exchange

GoodsServicesMoneyInformation

Interorganizational Information Systems (IOS)

Between two or more organizations

Routine transaction processingInformation flow


The EC Framework and Field

An EC FrameworkEC applications supported by infrastructure and 5 support areas

PeoplePublic policyTechnical standards and protocolsBusiness partnersSupport services


Exhibit 1.2A Framework for EC


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 organizationsBusiness-to-consumer (B2C): EC model in which businesses sell to individual shoppersBusiness-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


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



Mobile commerce (m-commerce)—EC transactions and activities conducted in a wireless environmentLocation-commerce—(l-commerce)

m-commerce transactions targeted to individuals in specific locations, at specific times



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



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



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


MarketingComputer sciencesConsumer behavior and psychologyFinanceEconomics

Management information systemsAccounting and auditingManagementBusiness law and ethicsOthers

Interdisciplinary Nature of EC


Brief History of EC

EC applications first developed in the early 1970s

Electronic funds transfer (EFT)

Limited to:Large corporationsFinancial institutionsA few other daring businesses


Brief History of EC (cont.)

Electronic data interchange (EDI)—electronic transfer of documents:

Purchase ordersInvoicesE-payments between firms doing business

Enlarged pool of participants to include:

ManufacturersRetailersService providers



Interorganizational systems (IOS)Stock tradingTravel reservation systems

Internet became more commercialized in the early 1990s

Almost all medium-and large-sized organization in the world now has a Web siteMost large corporations have comprehensive portals



EC SuccessesPure online

eBayVeriSignAOLCheckpoint

Click-and-mortarGEIBMIntelSchwab

EC FailuresE-tailors began to fail in 1999This does not mean that EC’s days are numberedLarge EC companies like Amazon.com are expanding but success or failure is not certain


Success Story of Campusfood.com

Campusfood.com’s recipe for success was to provide interactive menus to college students

Using the power of the Internet to enhance traditional telephone ordering of mealsTaking thousands of orders for local restaurants, bringing pizzas, hoagies, and wings to the Penn community


Campusfood.com (cont.)

Building the company’s customer base involved

Registering other universitiesAttracting studentsGenerating 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



Built on an investment of less than $1 million

Private investorsFriendsFamily members

Revenue is generated through transaction fees—5 percent commission on each order



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


A method of doing business by which a company can generate revenue to sustain itselfSpells out where the company is positioned in the value chainBusiness models are a component of a business plan or a business case

Business Models


Business Plans & Business Cases

Business planA 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


The Content of a Business Plan

Mission statement and company descriptionThe management teamThe market and the customersThe industry and competitionThe specifics of the products and/or services

Marketing and sales planOperations planFinancial projections and plansRisk analysisTechnology analysis


Structure of Business Models

Transaction feesSubscription feesAdvertisement fees

Affiliate feesSalesOther 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

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


Typical Business Models in EC

Online, direct marketingElectronic 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 priceFind the best price


Typical Business Models in EC (cont.)

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


Typical Business Models in EC (cont.)

Group purchasing is getting many small buyers together to by in large quantitiesOnline auctionsProduct and service customization

Customization is the creation of a product or service according to the buyer’s specifications

Electronic marketplaces and exchangesVertical marketplace is a marketplace that concentrates on one industry; also called vertical portals or vortals

Supply chain improvers


Exhibit 1.3The Business Model of 7dream.com


The Benefits of EC

Benefits to OrganizationsExpands the marketplace to national and international marketsDecreases the cost of creating, processing, distributing, storing and retrieving paper-based informationAllows reduced inventories and overhead by facilitating pull-type supply chain management


Benefits of EC (cont.)

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



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



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



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


Interorganization and Collaboration

Orbis Corporation changes linear physical supply chain to an electronic hub


Orbis Corporation (cont.)


The Limitations of EC

Technical limitationsThere is a lack of universally accepted standards for quality, security, and reliabilityThe telecommunications bandwidth is insufficientSoftware development tools are still evolvingThere 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


The Digital Revolution and the Economic Impact of EC

In the Digital Revolution the economy is based on digital technologies including:

Digital communication networksComputersSoftwareOther related information technologies

Also called:Internet economyNew economyWeb economy


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

Digital networking and communication infrastructures provide a global platform where people and organizations:

InteractCommunicateCollaborateSearch for information



The global platform includes these characteristics

A vast array of digitizable productsConsumers and firms conduct financial transactions digitallyMicroprocessors and networking capabilities embedded in physical goods



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



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


Exhibit 1.5Cost Curve of Regular & Digital Products


Exhibit 1.6The Economic Effects of EC


Economics of Digital Systems (cont.)

Reach vs. richnessAnother 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”)


Exhibit 1.7Reach vs. Richness


Contributions of EC to Organizations

The New World of BusinessBusiness pressuresOrganizational responsesThe role of Information Technology (including electronic commerce)


Business Pressures

The term business environment refers to the social, economic, legal, technological, and political actions that affect business activitiesBusiness pressures are divided into the following categories:

Market (economic)SocietalTechnological


Exhibit 1.8Major Business Pressures & the Role of EC


Organizational Responses

Strategic systemsProvide organizations with strategic advantages, enabling them to:

Increase their market shareBetter negotiate with their suppliersPrevent competitors from entering into their territory


FedEx Solutions

FedEx provides a host of Web-based logistics solutions to enterprise (business) customers providing services

FedEx distribution centersWorldwide network of warehouses to provide ready-to-use warehousing services to businessesAllows for instant expansion of distribution capabilitiesNetwork is managed electronicallyAll communication with the shippers and receivers is done online


FedEx Solutions (cont.)

FedEx express distribution depotsProvides 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 businessesAll communication is done online



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



Other value-added servicesProducts can be shipped from a FedEx-operated warehouse instead of the business customer’s warehouseFedEx can provide a “merge-in-transit” service to customers that operate on rapid turnaround and delivery


Organizational Responses (cont.)

Continuous improvement effortsMany companies continuously conduct programs to improve:

ProductivityQualityCustomer service

Business process reengineering (BPR)Strong business pressures may require a radical changeSuch an effort is referred to as business process reengineering (BPR)



Business alliancesAlliances with other companies, even competitors, can be beneficialVirtual corporation—electronically supported temporary joint venture

Special organization for a specificTime-limited mission

Electronic marketsOptimize trading efficiencyEnable their members to compete globallyRequire the collaboration of the different companies and competitors



Reduction in cycle time and time to market

Cycle time reduction—shortening the time it takes for a business to complete a productive activity from its beginning to endExtremely important for increasing productivity and competitivenessExtranet-based applications expedite steps in the process of product or service development, testing, and implementation


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 researchClinical testing Very bulky documentation is necessary Manual review process slows


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 timeInformation can be processed or printed at the user’s desktop computer


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

Remote corporate and business partners can also access the systemThe overall result: time-to-market of a new drug is reduced by up to a yearISIS Pharmaceuticals, Inc. (isip.com) developed an extranet-based system

Uses CD-ROMs to submit reports to the FDAOpens its intranet to FDA personnelSave 6 to 12 months



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 quicklyHelp increase customer loyalty



Supply chain improvementsHelp reduce supply chain delays, inventories and eliminate other inefficiencies

Mass customization—production of large quantities of customized items

Business problem is how to efficiently provide customizationEC is an ideal facilitator of mass customization by enabling electronic ordering to reach the production facility in minutes


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


Putting It All Together (cont.)

The first step is to put in the right connective networksThe vast majority of EC is done on computers connected to:

InternetIntranet--An internal corporate or government network that uses Internet tools, such as Web browsers, and Internet protocolsExtranet--A network that uses the Internet to link multiple intranets


Putting It All Together (cont.)

Major concern of today’s companies—how to transform themselves to take part in digital economyExample:Toys, Inc.

Uses intranet for internal communications, collaboration, dissemination of informationNetworked to e-marketspaces and large corporationsCorporate portal for communication and collaboration with business partners


Exhibit 1.10Networked Organizations


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

Managerial Issues


Summary

Definition of EC and description of its various categoriesThe content and framework of ECThe major types of EC transactionsThe major business modelsBenefits of EC to organizations, consumers, and societyLimitations of ECThe digital revolution and the economic impact of ECThe role of EC in combating pressures in the business environment

Documents

Prentice Hall, 2003 1 Chapter 1 Overview of Electronic Commerce