Electronic Commerce COMP3210

Session 1: An Introduction to Electronic Commerce

Dr. Paul Walcott Department of Computer Science, Mathematics and PhysicsUniversity of the West Indies, Cave Hill CampusBarbados

The Department of Computer Science Mathematics and Physics, University of the West Indies, Cave Hill Campus, Barbados

© 2007 Dr. Paul Walcott

Session Objectives Define e-commerce? Compare and contrast the advantages and

disadvantages of e-commerce Compare and contrast the 1st and 2nd waves

of e-commerce Comprehend the categories of e-

commerce?

Session Objectives Cont’d Discuss the following:

Markets Value chains Transaction cost

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?Electronic commerce (e-commerce) is 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 Cont’d?Electronic commerce is 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.1

What is E-Commerce Cont’d?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.2

What is E-Commerce Cont’d? 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-commerce3

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 Cont’d

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 Commerce3

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 Cont’d

A combination of E-commerce and Traditional Commerce 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 Cont’d

Traditional Commerce 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?3

Increases sales, decreases cost Allows small businesses to have global customer

base Reduced cost through electronic sales enquires, price

quotes and order taking Provides purchasing opportunities for buyers

(businesses can identify new suppliers and partners)

Increases the speed and accuracy of exchanged information, thus reduces cost

What are the Advantages of E-commerce Cont’d? Business can be transacted 24 hours 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?3

Inability to sell certain products (e.g. high cost jewelry and perishable foods; although supermarkets such as www.Tesco.com deliver perishable food items to your home)

The newness and evolution of the current technology Many products require large sales volumes in order to be

viable This is a challenge for small island economies; in the Caribbean

the CARICOM Single Market and Economy (CSME) might provide opportunities since it comprises some 14 million people (if Haiti is included – only 6 million if it is not) http://www.ab.gov.ag/gov_v2/government/docs/csme/aboutcsme/b

ackground_info.html

What are the Disadvantages of E-commerce Cont’d? A large capital investment is required to startup and run e-commerce

initiatives Difficulty in integrating current databases and transaction processing

systems (legacy systems) into e-commerce solutions Cultural and legal obstacles

Transmission of credit card information Some consumers’ resistance to change E-commerce legislation is not well developed and is often unclear

Shipping profile Products with a low value-to-weight ratio that can not be efficiently

packed and shipped are unsuitable for e-commerce (use traditional commerce)

The 1st Wave of E-commerce3

The 1st wave was from the mid 1990s to 2003

During the dot-com boom over $100 billion was invested and a rapid growth of e-commerce was seen (mid-1990s – 2000)

The dot-com bust occurred in 2000

This was followed by the gloom years, 2000 – 2003 (however, during this time over $200 billion was invested in e-commerce)

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 showed new signs of 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 - sellers do business in many

countries and languages Faster connections (x20 faster), broadband at

home (although more expensive) Radio frequency ID devices (are used to track

packages) and smart cards Fingerprint readers and retina scanners (biometric

technologies) used for tracking (physical security)

Email is now an integral part of marketing

Characteristics of the 2nd Wave Cont’d E-commerce is an 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

Some problems however include: Language conversions Currency conversions

E-commerce Categories3

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

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

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 of this information is being shared

Example Dell Computer uses secure internet connections to

share current sales and forecasts information with suppliers who use it to plan their production. As a result 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 from each other

Example Consumers and businesses trade with each other on

eBay.com

Web site www.ebay.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 processesthat support buy/sell activities

Relative Sizes of E-commerce Categories3

B2C e-commerce

B2B e-commerce

Relative Sizes of E-commerce Categories Cont’d

Year B2C Sales ($Billions) in the US

B2B Sales($Billions) in the US

2007 240 (estimate) 6800 (estimate)

2006 190 (estimate) 5300 (estimate)

2005 150 4100

2004 130 2800

2003 100 1600

2000 50 60

Relative Sizes of E-commerce Categories Cont’d

At the end of 2006 actual B2C sales revenue in the US was US$219 billion4

However, in the same period the B2C sales revenue in Europe was US$133 billion5 E-Commerce in Europe is currently dominated by the

UK, Germany and France (72% total online sales) Annual growth of 25% is expected over the next 4

years5

Economic Forces Economics is the

study of how people allocate scare 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 hierarchal organisations (companies) however, due to high transaction cost, choose to replace supplier markets with its own hierarchal structure for creating the product. This is called vertical integration E.g. Thomson Financial, a financial software

provider, purchased the financial data supplier Datastream ICV

Hierarchical Organisations (Firms)

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

W o rke rA

M a n ag e rA

W o rke rB

M a n ag e rB

E xecu tive1

W o rke rE

M a n ag e rE

W o rke rF

M a n ag e rF

E xecu tive2

W o rke rJ

M a n ag e rJ

W o rke rK

M a n ag e rK

E xecu tive3

C h ie f O p e ra tin g O ffice r

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 includes: Primary activities (the activities that the strategic

business unit undertakes Support activities (such as human resource

management and purchasing)

Manufacturer Value Chain

Finance& admin HR

Technologydevelopment

Support activities

Design

Identify customers

Manufacture product or create

service

deliverAfter sales

service & support

Market & sellPurchase materials

and supplies

Primary activities

Primary Activities Identify new customers, and sell new services to

existing customers (research & surveys) Design – from concept to manufacturing Purchase materials and supplies – includes

contracts, vendor selection, monitoring quality and delivery timeliness

Manufacture product or create service –transform materials and labour into finished products

Primary Activities Cont’d Market and sell – advertising, promoting,

managing sales staff, pricing and monitoring sales Deliver – store, deliver distribute and ship final

product – warehousing, consolidating freight, selecting shippers and monitoring delivery timeliness

Provide after-sale service and support – promote relationship with customer, e.g. installing, maintaining, testing, repairing, and warranties

Primary Activities Cont’d If a strategic business unit provides a

service then the value chain will include a “Provide service” activity instead of “Manufacture activity”

Support Activities Each business unit must also undertake support

activities that provide the infrastructure for the primary activities: Finance and administration – accounting, paying

bills, borrowing, compliance with laws Human resources – recruiting, hiring, training,

compensation and benefits Technology development – improves the product or

service, including basic and applied research and development, process improvement and field tests of maintenance procedures

Industry Value Chains Industry value chains describes the larger stream

of activities into which a particular business unit’s value chain is embedded

When a business unit delivers a product to a customer the customer might use the product as purchased materials in its value chain

By examining how other business units in the industry value chain conduct their business, cost reduction and product improvement may result

Industry Value Chain Example A value chain for a wooden chair:

Logger cuts down tree Sawmill converts logs to lumber Lumberyard provides selection of lumber Chair manufacture assembles chair Furniture retailer markets and sells chair Consumer purchases and uses chair Landfill or recycler disposes of chair

SWOT Analysis3

SWOT analysis is used to analyse and evaluate business opportunities

SWOT is an acronym for: Strengths Weaknesses Opportunities Threats

SWOT Analysis Cont’d An analyst examines the business unit to

determine strengths and weaknesses Then examines the business environment

to identify opportunities and threats

SWOT Analysis Cont’dQuestions asked during SWOT analysis: Strengths

What does the company do well? Is the company strong in its market? Does the company have a strong sense of purpose

and the culture to support it? Weaknesses:

What does the company do poorly? What problems could be avoided? Does the company have serious financial liabilities?

SWOT Analysis Cont’d Opportunities:

Are industry trends moving upwards? Do new markets exist for the company’s products/services? Are there new technologies that the company can exploit?

Threats: What are the competitors doing well? What obstacles does the company face? Are there troubling changes in the company’s business

environment (technologies, law and regulations)?

SWOT Analysis Cont’dIn the mid-1990s DELL Computer did the

following SWOT analysis: Strengths:

Sell directly to consumers Keep costs below competitors

Weaknesses: No strong relationships with computer

retailers

SWOT Analysis Cont’d Opportunities:

Consumers desire for one-stop shopping Consumers know what they want to buy Internet could be a powerful marketing tool

Threats: Competitors have stronger brand names Competitors have strong relationships with

computer retailers

International Issues3

Trust issues Language issues Culture issues Infrastructure issues

Trust Issues Anyone can create a website 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 to develop methods which would

allow legitimate businesses to establish trust 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

Language Issues (localisation) Translating entire websites 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) but less accurate

The home page should be translated to all supported languages, as well as marketing and product pages

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 Cont’d 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 the hand gesture where the index finger touches the thumb means okay; while in Brazil it is an obscene gesture

Culture Issues Cont’d In some cases unrestricted access to the

Internet is not permitted, for example in the Middle East and North Africa This limits the growth of e-commerce

In France any advertisement for a product or service must in in French – by law This means that French companies must

provide websites in at least two languages if they want to sell goods outside of France

Infrastructure Issues Limited telecommunication infrastructure

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 is required These are major issue in developing

countries, including Barbados

Conclusion In this session:

It was made clear that e-commerce was not a new business, rather a new way of doing business

The advantages and disadvantages of e-commerce were discussed

The characteristics of the first and second waves were compared and contrast

The five e-commerce categories were presented

Conclusion Cont’d The importance of reducing transaction costs

was considered The importance of SWOT analysis was

demonstrated through a useful example Issues involved in international commerce

were also considered

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 Cont’d 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 Cont’d 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 useof money))

Definitions Cont’d Transaction costs are the total costs that a

buyer and seller incur as they gather information and negotiate a purchase/sale transaction. These costs include: Brokerage fees and sales commissions Cost of information search and acquisition Seller’s investment in equipment or hire of

skilled employees

References[1] NSW Department of State and Regional Development, “Brief on Electronic Commerce”,

http://www.smallbiz.nsw.gov.au/textonly/issues/technology/brief/index.html

[2] Ford, Warwick, “Secure Electronic Commerce: Building the Infrastructure for Digital Signatures and Encryption (2nd Edition), pp. 1, 2000

[3] Schneider, Gary, P., “Electronic Commerce”, Thomson Course Technology, Seventh Annual Edition, 2007

[4] Gourmet Retailer, “Online Sales of Food/Beverage/Grocery Down”, May 2007. Available online at http://www.gourmetretailer.com/gourmetretailer/headlines/article_display.jsp?vnu_content_id=1003585259

[5] Cheap Web Hosting Directory, “E-Commerce Report, Details $133 Billion Online B2C Sales”, August 21, 2007. Available online at http://www.cheaphostingdirectory.com/news-e-commerce-report-details-133-billion-online-b2c-sales-3304.html