Chapter 1 Overview of Electronic Commerce. Learning Objectives 1.Define electronic commerce (EC) and...

Chapter 1

Overview of Electronic Commerce

Marks & Spencer—A New Way to Compete

• The Problem– UK-based, upscale, global retailer of

high-quality, high-priced merchandise faces stiff competition, since economic slowdown that started in 1999

– Critical success factors• Customer service• Appropriate store inventory system• Efficient supply chain activities

Marks & Spencer (cont.)

• The Solution– M&S realized that digital era survival

depends on the use of information technology in general and electronic commerce in particular

– Electronic commerce (EC, e-commerce)—a process of buying, selling, transferring, or exchanging products, services, and/or information via electronic networks and computers


– M & S initiated several EC initiatives, including:

• Security• Warehouse management• Merchandise receiving• Inventory control• Speeding up the supply of fashion garments• Collaborative commerce


• The Results– As of summer 2002, a turnaround is

underway– M & S has become a leader and example

setter in retailing, resulting in increased profitability and growth


• What can we learn…– Traditional brick-and-mortar companies face

increasing pressures in a competitive marketing environment

– A possible response is to introduce a variety of e-commerce initiatives that can improve

• supply chain operation• information• money from raw materials through factories • increase customer service• open up markets to more customers

E-Commerce I and II

E-Commerce I Explosive growth starting in 1995 Widespread of Web to advertise

products Ended in 2000 when dot.com began to

collapse E-Commerce II

Began in January 2001 Reassessment of e-commerce

companies

E-Commerce I 1995-2000

For computer scientist and information technologists Vindication of a set of information

technologies developed over 40 years

Extending from the early Internet to the PC and local area networks

The vision of universal communications


For economists Raised realistic prospect of perfect

Bertrand Market where price, cost, and quality information is

equally distributed where a nearly infinite set of suppliers

compete against one another where customers have access to all revelant

market information worldwide

Merchants have equal direct access to hundreds of millions of customers


Disintermediation displacement of market

middlemen who traditionally are intermediaries between producers and consumers by a new direct relationship between manufacturers and content originators with their customers


Friction-free commerce a vision of commerce in which

information is equally distributed transaction costs are low prices can be dynamically adjusted to

reflect actual demand intermediaries decline unfair competitive advantages are

eliminated


First mover a firm that is first to market in a

particular area and that moves quickly to gather market share

Network effect occurs where users receive value

from the fact that everyone else uses the same tool or product

E-Commerce II 2001-2006

Crash in stock market values of E-commerce I companies throughout 2000 is an end to E-commerce I

Led to a sobering reassessment of the prospects of e-commerce and the methods of achieving business success.

E-commerce II begins in 2001 and ends five year later -- the limit for making technology and business projections

E-Commerce II 2001-2006

Reasons for the end of E-Commerce I run-up in technology stocks due to enormous information

technology capital expenditure of firms rebuilding their internal business systems to withstand Y2K

telecommunications industry had built excess capacity in high-speed fiber optic networks

1999 e-commerce Christmas season provided less sales growth that anticipated and demonstrated e-commerce was not easy (eToys.com)

valuations of dot.com and technology companies had risen so high supporters were questioning whether earnings could justify the prices of the shares.

Unique of E-commerce Technology and Their Business

SignificanceE-commerce: is ubiquitous has global reach operates according to universal

standards provides information richness is interactive increases information density permits personalization

Seven Unique Features of E-commerce Technology and Their Business Significance

Page 9, Table 1.1

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-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


• 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


• 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


• 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

Amazon.com: Before and After

Amazon.com: Before and After

Most well-known e-commerce company Conceived by Jeff Bezos in 1994 Opened in July 1995 Four compelling reasons to shop

Selection (1.1 million titles) Convenience (anytime, anywhere) Price (high discounts on bestsellers) Service (automated order confirmation,

tracking, and shipping information)

E-commerce vs. E-business

E-commerce involves Digitally enabled commercial transactions

between organizations and individuals. Digitally enabled transactions include all

transactions mediated by digital technology

Commercial transactions involve the exchange of value across organizational or individual boundaries in return for products or services

E-commerce vs. E-business

E-business involves Digital enablement of transactions

and processes within a firm, involving information systems under the control of the firm

E-business does not involve commercial transactions across organizational boundaries where value is exchanged

The Difference Between E-commerce and E-Business


• 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


• 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


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

• Intraorganizational information systems enable EC activities to go on within individual organizations

: The Dimensions of Electronic Commerce

Section Review• 1. Define EC and e-business.• 2. Distinguish between pure and partial EC.• 3. Define click-and-mortar organizations.• 4. Define electronic markets, IOSs, and

intraorganizational information systems.• 5. Identify the seven unique features of e-commerce

technology and explain how these features set e-commerce apart from more traditional ways of conducting commercial transactions.

• 6.Describe the visions and forces behind e-commerce I in terms of what the various interest groups hoped for: the computer scientist and information technology people; the economists; and the entrepreneurs, venture capitalists and marketers. Explain whether what each group envisioned came to fruition and why or why not.

•

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

A Framework for Electronic Commerce

Types 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

Major Business-to-Consumer (B2C) Business Models


Portal offers powerful search tools plus an

integrated package of content and services

typically utilizes a combines subscription/advertising revenues/transaction fee model

may be general or specialize (vortal)


E-tailer online version of traditional retailer includes

virtual merchants (online retail store only) clicks and mortar e-tailers (online

distribution channel for a company that also has physical stores)

catalog merchants (online version of direct mail catalog)

online malls (online version of mall) Manufacturers selling directly over the Web


Content Provider information and entertainment

companies that provide digital content over the Web

typically utilizes an advertising, subscription, or affiliate referral fee revenue model

Transaction Broker processes online sales transactions typically utilizes a transactions fee.

revenue model


Market Creator uses Internet technology to create markets that bring

buyers and sellers together typically utilizes a transaction fee revenue model

Service Provider offers services online

Community Provider provides an online community of like-minded

individuals for networking and information sharing revenue is generated by referral fee, advertising, and

subscription

Major Business-to-Business (B2B) Business Models


B2B Hub also known as marketplace/exchange electronic marketplace where suppliers

and commercial purchasers can conduct transactions

may be a general (horizontal marketplace) or specialized (vertical marketplace)

E-distributor supplies products directly to individual

businesses


B2B Service Provider sells business services to other firms

Matchmaker links businesses together charges transaction or usage fees

Infomediary gather information and sells it to

businesses

Types 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


• 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

Business Models in Other Emerging Areas of E-

Commerce

Business Models in Other Emerging Areas of E-Commerce

C2C Business Models connect consumers with other

consumers most successful has been the market

creator business model P2P Business Models

enable consumers to share file and services via the Web without common servers

a challenge to find a revenue model that works


• mobile commerce ((m-commerce):

e-commerce transactions and activities conducted in a wireless environment

• location-based commerce (l-commerce): m-commerce transactions targeted to individuals in specific locations, at specific times


M-commerce Business Models traditional e-commerce business

models leveraged for emerging wireless technologies to permit mobile access to the Web

E-commerce Enablers’ Business Models focus on providing infrastructure

necessary for e-commerce companies to exist, grow, and prosper

E-commerce Enablers


• 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): e-commerce model in which an organization delivers services, information, or products to its individual employees


• 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


• exchange-to-exchange (E2E): e-commerce 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

Insight on Technology:Google.com -- Searching for Profits

Web’s hottest search engine Started in 1998 by two enterprising

Stanford grad students Uses outside criteria to validate that

a search result is likely to be relevant the more outside links there are to a

particular page, the higher it jumps in Google’s ranking structure

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

– EC’s 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 Success Story of Campusfood.Com

• Provide interactive menus to college students, using the power of the Internet to replace and/or facilitate the traditional telephone ordering of meals

• Built the company’s customer base– expanding to other universities– attracting students– generating a list of restaurants from which students

could order food for delivery

The Success Story of Campusfood.Com (cont.)

• Now some of these activities are outsourced to a marketing firm, enabling the addition of dozens of schools nationwide

• Financed through private investors, friends, and family members, the site was built on an investment of less than $1 million

• Campusfood.com’s revenue is generated through transaction fees—the site takes a 5 % commission on each order from the sellers

The Success Story of Campusfood.Com (cont.)

• At campusfood.com you can:– Navigate through a list of local restaurants,

their hours of operation, addresses, phone numbers, etc.

– Browse an interactive menu– Bypass “busy” telephone signals to place an

order online– Access special foods, promotions, and

restaurant giveaways – Arrange electronic payment of your order

Review Questions

• List the major components of the EC framework.• List the major transactional types of EC.• List some EC successes and failures• Define intranets and extranets.• Give examples of B2C, B2B, C2C and P2P Web

sites• How does disintermediation impact friction-free

commerce?

Campus food questions

• Explain the benefits of Campusfood.com for its students and for the restaurants it represents.

• Trace the flow of digitized information in this venture.

• How does the outsourcing of marketing activities contribute to the business?

Kozmo Finally Crashes

Use the Internet to combine the convenience of a catalog with the immediate gratification of in-store shopping by offering entertainment, food, and convenience products delivered within one hour, with no minimum order required and no delivery charges.


• Created a Web site that featured localized offerings based on customer zip code.

• An order placed on the Web site would be transmitted directly to Kozmo’s distribution center, packed, and delivered.


• $250 million in Venture capital• Rapid expansion and intensive

spending to gain market share and brand recognition

• No concern for short-term profitability


• Painful lessons:– Hard to make money delivering low-priced

convenience store items.– Business model didn’t work everywhere.– Company founders are not necessarily its best

managers.

• Difficult for a new firm to establish a profitable e-commerce business in an entirely new market niche.

E-Commerce Business Models

• Business model– a set of planned activities designed to result in

a profit in a marketplace• Business plan

– a document that describes a firm’s business model

• E-commerce business model– a business model that aims to use and

leverage the unique qualities of the Internet and the World Wide Web.

Eight Key Ingredients of a Business Model

Page 58, Table 2.1

Eight Key Ingredients of a Business Model: Value

Proposition Defines how a company’s product or

service fulfills the needs of customers.

Questions Why will customers choose to do

business with your firm instead of another company?

What will your firm provide that other firms do not and cannot?

Eight Key Ingredients of a Business Model: Revenue

Model Describes how the firm will earn

revenue, produce profits, and produce a superior return on invested capital.

E-commerce revenue models include: advertising model subscription model transaction fee model sales model affiliate model


Model Advertising revenue model

a company provides a forum for advertisements and receives fees from advertisers (Yahoo)

Subscription revenue model a company offers it users content or

services and charges a subscription fee for access to some or all of it offerings (Consumer Reports or Wall Street Journal)

http://www.yahoo.com/

http://www.consumerreports.org/

http://navigation.helper.realnames.com/framer/1/112/default.asp?realname=Wall+Street+Journal&url=http%3A%2F%2Fpublic%2Ewsj%2Ecom%2Fhome%2Ehtml&frameid=1&providerid=112&uid=417065


Model Transaction fee revenue model

a company receives a fee for enabling or executing a transaction (eBay or E-Trade)

Sales revenue model a company derives revenue by selling goods,

information, or services (Amazon or DoubleClick)

Affiliate revenue model a company steers business to an affiliate and

receives a referral fee or percentage of the revenue from any resulting sales (MyPoints)

http://pages.ebay.com/

http://www.etrade.com/

http://www.amazon.com/

http://doubleclick.net/

http://www.mypoints.com/

Five Primary Revenue Models

Page 61, Table 2.2

Eight Key Ingredients of a Business Model: Market

Opportunity Market opportunity

refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm in that market space

defined by the revenue potential in each of the market niches where you hope to compete

Marketspace the area of actual or potential commercial

value in which a company intends to operate

Eight Key Ingredients of a Business Model: Competitive

Environment Refers to the other companies

operating in the same marketplace selling similar products

Influenced by: how many competitors are active how large are their operations the market share of each competitor how profitable these firms are how they price their products

Marketspace and Market Opportunity is the Software Training Market

Page 62, Figure 2.1


Advantage Achieved by a firm when it can

produce a superior product and/or bring the product to market at a lower price than most, or all, of its competitors

Achieved because a firm has been able to obtain differential access to the factors of production that are denied their competitors -- at least in the short term


Advantage Asymmetry

exists whenever one participant in a market has more resources than other participants

First mover advantage a competitive market advantage for a

firm that results from being the first into a marketplace with a serviceable product or service


Advantage Unfair competitive advantage

occurs when one firm develops an advantage based on a factor that other firms cannot purchase

Perfect Market a market in which there are no competitive advantages

or asymmetries because all firms have equal access to all the factors of production

Leverage when a company uses its competitive advantage to

achieve more advantage in surrounding markets

Eight Key Ingredients of a Business Model: Market

Strategy The plan you put together that

details exactly how you intend to enter a new market and attract new customers

Best business concepts will fail if not properly marketed to potential customers

Eight Key Ingredients of a Business Model: Organizational

Development Describes how the company will

organize the work that needs to be accomplished

Work is typically divided into functional departments

Move from generalists to specialists as the company grows

Eight Key Ingredients of a Business Model: Management

Team Employees of the company responsible

for making the business model work Strong management team gives instant

credibility to outside investors A strong management team may not be

able to salvage a weak business model Should be able to change the model and

redefine the business as it becomes necessary

E-commerce Business Models

• Business models—a method of doing business by which a company can generate revenue to sustain itself

• Examples:– Name your price– Find the best price– Dynamic brokering– Affiliate marketing

E-commerce Business Plans and 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

Structure of Business Models

• Business model: A method of doing business by which a company can generate revenue to sustain itself

Structure of Business Models (cont.)

• Revenue model: description of how the company or an EC project will earn revenue– Sales– Transaction fees – Subscription fees– Advertising – Affiliate fees– Other revenue sources

Structure of Business Models (cont.)

• Value proposition: The benefits a company can derive from using EC– search and transaction cost efficiency– complementarities– lock-in– novelty– aggregation and interfirm collaboration

Exhibit 1.4: Common Revenue Models

Typical Business Modelsin EC

1. Online direct marketing

2. Electronic tendering systems

tendering (reverse auction): model in which a buyer requests would-be sellers to submit bids, and the lowest bidder wins

3. Name your own price: a model in which a buyer sets the price he or she is willing to pay and invites sellers to supply the good or service at that price

Typical Business Models in EC (cont.)

4. Affiliate marketing: an arrangement whereby a marketing partner (a business, an organization, or even an individual) refers consumers to the selling company’s Web site

5. Viral marketing: word-of-mouth marketing in which customers promote a product or service to friends or other people


6. Group purchasing: quantity purchasing that enables groups of purchasers to obtain a discount price on the products purchased

7. SMEs: small to medium enterprises

8. Online auctions


8. Product and service customizationcustomization: creation of a product or service according to the buyer’s specifications

8. Electronic marketplaces and exchanges9. Value-chain integrators10.Value-chain service providers


12. Information brokers

13.Bartering

14.Deep discounting

15.Membership

16.Supply chain improvers

Business models can be independent or they can be combined amongst themselves or with traditional business models

Example of Supply Chain Improver

• Orbis Group changes a linear physical supply chain to an electronic hub– Traditional process in the B2B advertising

field

Example of Supply Chain Improver (cont.)

– ProductBank simplifies this lengthy process changing the linear flow of products and information to a digitized hub

Benefits of EC

• Global reach• Cost reduction• Supply chain

improvements• Extended hours: 24/7/365• Customization• New business models• Vendors’ specialization

• Rapid time-to-market• Lower communication

costs• Efficient procurement• Improved customer

relations• Up-to-date company

material• No city business permits

and fees• Other benefits

Benefits to organizationsBenefits to organizations

Benefits of EC (cont.)

• Ubiquity• More products and

services• Cheaper products

and services• Instant delivery• Information

availability

• Participation in auctions

• Electronic communities

• “Get it your way” • No sales tax

Benefits to consumers

Benefits of EC (cont.)

• Benefits to society– Telecommuting– Higher standard of

living– Hope for the poor– Availability of public

services

Limitations of EC

Barriers of EC

• Security • Trust and risk• Lack of qualified

personnel• Lack of business

models• Culture

• User authentication and lack of public key infrastructure

• Organization • Fraud • Slow navigation on

the Internet• Legal issues

The Digital Revolution

• Digital economy: An economy that is based on digital technologies, including digital communication networks, computers, software, and other related information technologies; also called the Internet economy, the new economy, or the Web economy

The Digital Revolution (cont.)

• A global platform over which people and organizations interact, communicate, collaborate, and search for information

• Includes the following characteristics:– A vast array of digitizable products– Consumers and firms conducting financial

transactions digitally– Microprocessors and networking capabilities

embedded in physical goods

New Business Environment• Customers are becoming more powerful• Created due to advances in science

occurring at an accelerated rate• Results in more and more technology• Rapid growth in technology results in a

large variety of more complex systems

New Business Environment (cont.)

• Characteristics in the business environment – A more turbulent environment with more business

problems and opportunities– Stronger competition– Need for organizations to make decisions more

frequently – A larger scope for decisions because more factors – More information and/or knowledge needed for

making decisions

Environment-Response-Support Model

• Critical response activities– traditional actions such as lowering cost and

closing unprofitable facilities– introduce innovative actions such as

customizing or creating new products or providing superb customer service

Exhibit 1.6: Major Business Pressures and the Role of EC

Major Business Pressures

Market andeconomicpressures

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

MajorBusiness Pressures (cont.)

Societal andenvironmental

pressures

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

MajorBusiness Pressures (cont.)

Technological

pressures

Rapid technological obsolescence

Increase innovations and new technologies

Information overload Rapid decline in

technology cost vs. performance ratio

Organizational Responses

• Strategic systems• Continuous improvement efforts and business

process reengineering—including business process reengineering (BPR)

• Customer relationship management (CRM)—divided into the following areas– Operational CRM – Analytical CRM – Collaborative CRM

Organizational Responses (cont.)

• Business alliances

• Electronic markets

• Reductions 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 end


• Empowerment of employees

• Supply chain improvements

• Mass customization: make-to-order in large quantities in an efficient manner

Mass customization: Production of large quantities of customized items


• Intrabusiness: from sales force automation to inventory

• Knowledge management Knowledge management (KM): The process of creating or capturing knowledge, storing and protecting it, updating and maintaining it, and using it

Putting It All Together

• Task facing each organization is how to put together the components that will enable the organization to transform itself to the digital economy and gain competitive advantage by using EC

• Many employ corporate portalsA major gateway through which employees, business partners, and the public can enter a corporate Web site

Exhibit 1.8: The Networked Organization

Managerial Issues

1. Is it real?

2. How should we evaluate the magnitude of the business pressures?

3. Why is B2B e-commerce so attractive?

4. There are so many EC failures—how can one avoid them?

Managerial Issues (cont.)

5. What should be my company’s strategy toward EC?

6. How do we transform our organization into a digital one?

7. What are the top challenges of EC?

Summary

1. Definition of EC and description of its various categories.

2. The content and framework of EC.

3. The major types of EC transactions.

4. The major business models.

Summary (cont.)

5. Benefits to organizations, consumers, and society.

6. Limitations of EC.

7. The role of the digital revolution.

8. The role of EC in combating pressures in the business environment.

Chapter 1 Overview of Electronic Commerce. Learning Objectives 1.Define electronic commerce (EC) and...

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