Electronic Commerce IT 316

Lesson 1: An Introduction to Electronic Commerce

Session Objectives

To provide an introduction to electronic commerce (e-commerce) by answering the following questions:

What is e-commerce?

What are the advantages and disadvantages of e-commerce

What were the 1st and 2nd waves of e-commerce characterised by?

What are the categories of e-commerce?

Session Objectives Contd

To discuss concepts such as:

Markets

Value chains

Transaction cost

To evaluate international electronic

commerce issues

What is Commerce?

Traditional commerce may be defined as:

From Webster's Revised Unabridged Dictionary

Commerce : \Com"merce\, noun.

The exchange or buying and selling of commodities;

esp. the exchange of merchandise, on a large scale,

between different places or communities; extended

trade or traffic.

What is E-Commerce?

A general term for any type of business, or

commercial transaction that involves the transfer

of information across the Internet.

This covers a range of different types of

businesses from consumer-based retail sites, like

Amazon.com, through auction and music sites

like eBay or MP3.com, to business exchanges

trading goods or services between corporations.

What is E-Commerce Contd?

The use of electronic communication to do

business.

E-commerce is not about technology. It is

not a new business. E-commerce is a

method for companies to create and

operate their business in new and efficient

ways.

What is E-Commerce Contd?

Most fundamentally, e-commerce

represents the realization of digital, as

opposed to paper-based, commercial

transactions between businesses, between a

business and its consumers, or between a

government and its citizens or constituent

business.

What is E-Commerce Contd?

In summary, e-commerce is the

use of electronic communication to do business

Specifically, the transfer of information (transactions), over

the Internet

Some people use the term e-business to refer to

all the categories of e-commerce

E.g. IBM defines e-business as:

The transformation of key business processes through the

use of Internet technologies

From Traditional Commerce to

E-commerce

Sailing ships

Printing press

Steam engine

Telephone

Opened avenues for

trade between buyers

and sellers. Ancient

times (thousands of

years ago)

From Traditional Commerce to

E-commerce Contd

Electronic Funds Transfer (EFTs)

Electronic Data Interchange (EDI)

Internet

Wire transfers - used

by banks

Businesses transfer

electronic data

- data not re-keyed

- high implementation

cost, thus excluded

small businesses

On-line shopping

Business Processes Suited to

Certain Type of Commerce

E-commerce

Sale/purchase of books & CDs, travel

services, investments and insurance services

Online delivery of software

Online shipment tracking

Business Processes Suited to

Certain Type of Commerce Contd

E-commerce & Traditional

Sale/purchase of automobiles and residential

real estate (e.g. do research online then buy

from a dealer or real estate agent)

Online banking

Roommate matching service

Business Processes Suited to

Certain Type of Commerce Contd

Traditional

Sale/purchase of impulse items for immediate

use, high fashion jewelry and antiques

(personal inspection required; prefer to touch,

smell or examine closely)

Small denomination purchases and sales

(since there is not yet a standard for

transferring small amounts of money)

What Are the Advantages of E-

commerce? Increases sales, decreases cost

Allows small businesses to have global customer base

Reduced cost through electronic sales inquiries, price quotes and order taking

Provides purchasing opportunities for buyers (businesses can identify new suppliers and partners)

Increase speed and accuracy for exchanged information, thus reducing cost (Telecommuting)

Virtual Community

What Are the Advantages of E-

commerce Contd? Business can be transacted 24hrs a day

The level of detail of purchase information is selected by user

Digital products can be delivered instantly

Tax refunds, public retirement and welfare support costs less when distributed over the Internet

Allows products and services to be available in remote areas, e.g. remote learning

What Are the Disadvantages of

E-commerce?

Inability to sell some products (e.g. high cost jewelry and perishable foods, although supermarkets like www.philgrocer.com delivers to your home)

The newness and evolution of the current technology

Many products require a large number of people to purchase to be viable

High capital investment

There are a myriad of privacy issues

What Are the Disadvantages of

E-commerce Contd? Difficulty in integrating current databases and

transaction processing systems into e-commerce solutions

Cultural and legal obstacles

Transmission of credit card details

Some consumers resistant to change

Laws are unclear

Shipping profile: Products with a low value-to-weight ratio that can not be efficiently packed and shipped are unsuitable (use traditional commerce)

The 1st Wave of E-commerce The 1st wave was from

the mid 1990s to 2003

Dot-com boom (over $100 billion in investment): Rapid growth from mid-1990s to 2000

Dot-com bust: in 2000

Gloom years: 2000 2003 (over $200 billion in investment)

Characteristics of the 1st Wave

It was primarily a U.S. phenomenon

Web pages were in English

Internet technologies were slow and inexpensive

(e.g. dial-up lines)

Bar codes and scanners used to track parts (B2B

and Business processes)

Email, tool for unstructured communication

On-line advertising main revenue source

The 2nd Wave of E-commerce Beginning in 2003 e-

commerce has shown signs of new life

Companies like Amazon.com (books), and eBay.com (auctions) who survived the downturn were beginning to show profits

Continuous growth of B2C sales: 20-30% each year since 2000

Characteristics of the 2nd Wave

International scope where sellers do business in

many countries and languages

Faster, cheaper connections (x20 faster),

broadband at home (although more expensive)

Radio frequency ID devices and smart cards

Fingerprint readers and retina scanners (biometric

technologies) used for tracking

Email, integral part of marketing

Characteristics of the 2nd Wave

Contd

E-commerce integral part of marketing and

customer contact strategy

Some categories of on-line advertising, e.g.

employment services (job want ads) have

replaced traditional advertising outlets

Problems

Language conversions

Currency conversions

International Nature of e-Commerce: Trust. Shoppers may not perceive foreign

businesses as trustworthy as businesses from their

homelands

Language. 50% of Internet users do not read

English and 75% of users are outside the United

States.

Culture. An example would be Asian cultures

not valuing private property in the same way as

Europeans and North American cultures.

International Nature of e-Commerce

Contd: Government. Some countrys governments are

much more restrictive in what is allowed on the

Internet than others

Infrastructure. Infrastructure includes the

computer and software connected to the

Internet. The level of infrastructure varies in

different parts of the world

E-commerce Categories

There are five general e-commerce categories:

Business to Consumer (or B2C) e-commerce

Business to Business (or B2B) e-commerce

(sometimes called e-procurement)

Business processes that support buying and selling

activities

Consumer-to-consumer (or C2C) e-commerce

Business-to-government (or B2G) e-commerce

Definitions of Procurement: Dealing with the legal problems that

arise from large contracts for the supply of goods or services,

especially for businesses or government organisations.

B2C e-commerce

Description

Businesses sell products or services to individual customers (consumers)

Example

Walmart.com sells merchandise to consumers through its Web site

Web site

www.walmart.com

www.sm.com

B2B E-commerce

Description

Businesses sell products or services to other businesses

Example

Grainger.com sells industrial supplies to large and small businesses through its Web site

Web site

www.grainger.com

Business Processes that Support

Buy/Sell Activities

Description

Businesses and other organisations maintain and use information to identify and evaluate customers, suppliers and employees (and to support buying, selling hiring, planning and other activities). More and more this information is being shared

Example

Dell Computer uses secure internet connections to share current sales and forecasts with suppliers who use it to plan their production, therefore they deliver the right quantities of components at the right time

C2C e-commerce

Description

Participants in an online marketplace can buy and sell

goods with each other

Example

Consumers and businesses trade with each other on

eBay.com

Web site

www.ebay.com

www.ebili.com

B2G e-commerce

Description

Business sell goods or services to governments and government agencies

Example

Cal-Buy portal for businesses that want to sell online to the State of California

Web site

www.pd.dgs.ca.gov/calbuy/default.htm

E-commerce Categories Example

You are a computer manufacturing company who performs the following activities on the Internet:

Sells computers to individuals (B2C)

Purchases parts (e.g. hard drives, power supplies etc.) from a supplier (B2B)

Hires staff, manage customer accounts, advertise, etc. (Business processes)

Sells computers to the Government to be used in schools (B2G)

On eBay.com individuals buy and sell this brand of computers (C2C)

Business processes

Relative Sizes of E-commerce

Categories

B2C

B2B

Relative Sizes of E-commerce

Categories Contd

Year B2C Sales

($ Billions)

B2B Sales

($ Billions)

2005 150 4100

2004 130 2800

2003 100 1600

2000 50 60

Economic Forces

Economics is the study of how people allocate scarce resources

Resources are allocated through:

Commerce (markets)

Government actions (e.g. taxes)

Markets

A market is a place where sellers can come into contact with buyers and a medium of exchange (e.g. currency) is available (e.g.the stock market)

Some hierarchical organisations (companies) however, due to high transaction cost, choose to replace supplier markets with its own hierarchical structure for creating the product. This is called vertical integration

E.g. Thomson Financial, a financial software provider, purchased the data supplier Datastream

Hierarchical Organisations

(Firms)

Firms participate in markets to purchase rawmaterials and sell finish products.

WorkerA

ManagerA

WorkerB

ManagerB

Executive1

WorkerE

ManagerE

WorkerF

ManagerF

Executive2

WorkerJ

ManagerJ

WorkerK

ManagerK

Executive3

Chief Operating Officer

Transaction Costs

Transaction costs are the total costs that a buyer

and seller incur as they gather information and

negotiate a purchase/sale transaction

Transaction costs are the main reason for vertical

integration (Ronald Coase)

Businesses can use e-commerce to reduce

transaction costs (e.g. telecommuting rather than

physical commuting to allow global employment

opportunities)

Transaction Costs Example

Transaction costs incurred by a sweater

dealer when purchasing from independent

sweater knitters:

Cost of identifying independent knitters

Cost of site visit to negotiate purchase price,

arrange delivery and inspection of sweaters

Costs incurred by knitters:

Knitting tools and yarn purchase

Network Economic Structures

Many businesses operate in an economic structure that is neither market or hierarchical

These businesses form, long-term, strategic alliances with other companies who share common goals and strategies

These alliances may occur over the Internet which are called virtual companies

Teams complete a project or activity then dissolve

New teams are creating as required

Value Chains

A value chain is a way to organise the activities that a business undertakes to design, produce, promote, market, deliver and support the products or services it sells

There are several types of value chains including:

Business unit value chains

Industry value chains

Strategic Business Unit Value

Chains

A strategic business unit is a particular combination of product, distribution channel and customer type (large firms often break down their business into these units)

The value chain for a strategic business unit include:

Primary activities (the activities that the strategic business unit undertakes

Support activities (such as human resource management and purchasing)

Manufacturer Value Chain

Finance

& adminHR Technology

development

Support activities

Design

Identify

customers

Manufacture

product or create

service

deliverAfter sales

service & support

Market & sellPurchase materials

and supplies

Primary activities

International Issues

Trust issues

Language issues

Culture issues

Infrastructure issues

Trust Issues

Anyone can create a site on the Web

These individuals or businesses can easily remain anonymous

Without an established brand consumers find it difficult to trusts on-line businesses:

especially with personal information and credit card numbers

The key is developing methods which allow legitimate businesses to establish trusts relationships quickly with consumers

Language Issues (localisation)

Global impact requires local language Web sites

customers prefer to buy from sites in native language

60% of web content today is in English; but more than 50% of the current users do not read English

Multiple translations may be required for different dialects, e.g. Spanish- Mexico and Spain

Translating entire Web sites is expensive

25-90 cents per word for human translators (400-600 words per hour)

Automated software translation (machine translation) is cheaper (400,000 word per hour) - less accurate

Culture Issues

Culture is the combination of language and

customs

Culture varies across national boundaries

and in many cases regions within nations

Example:

General Motors Chevrolet Nova automobile

amused people in Latin America since no va

means it will not go

Culture Issues Contd

Choice of icons on Web pages becomes problematic on international Web sites:

In the US a shopping cart is useful, in the UK a shopping basket is more appropriate, Australians call shopping carts, shopping trolleys

In many places other than Brazil the thumbs up gesture means okay, in Brazil it is an obscene gesture

Infrastructure Issues

Limited telecommunication infra-structure

may lead to unreliable Internet access

Internet connection cost might be high

Reduces time businesses might spend surfing

for new suppliers or products

Flat-rate access to the Internet required

Definitions A commodity item is a product or service that is hard to

distinguish from the same products or services provided by other sellers (e.g. gasoline, office suppliers, soap and computers)

A transaction is an exchange of value, such as a purchase or sale, or the conversion of raw materials into finished products (a transaction has one or more associated activity)

A business process is the set of logically related and sequential activities and transactions in which businesses engage

Definitions Contd

Merchandising is a combination of store

design, layout and product display

knowledge

A shipping profile is the collection of

attributes that affect how easily that

product can be packaged and delivered

(e.g. airline tickets have a high value-to-

weight ratio)

Definitions Contd

The definition of a market satisfies two

conditions:

Potential seller of a good (product) comes

into contact with buyers

A medium of exchange is available (e.g.

currency or barter (to exchange goods or

services directly without the use

of money))

Definitions Contd

Transaction costs are the total costs that a

buyer and seller incur as they gather

information and negotiate a purchase/sale

transaction. This includes:

Brokerage fees and sales commissions

Cost of information search and acquisition

Sellers investment in equipment or hire of

skilled employees

Definitions Contd Procurement:Dealing with the legal

problems that arise from large contracts for

the supply of goods or services, especially

for businesses or government

organisations.

Hierarchical business organizations are firms that include multiple levels with varying

responsibilities starting with a president at the top

and moving downward to vice presidents, middle

managers, and eventually low-level employees

such as clerks.

Definitions Contd Vertical Integration:Style of management

control