MIS415 Ch02 PDF

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2
CHAPTER
E-MARKETPLACES:
STRUCTURES, MECHANISMS,
ECONOMICS, AND IMPACTS
Learning Objectives
Upon completion of this chapter, you will be
able to: Content
1. Define e-marketplaces and list their How Blue Nile Inc. Is Changing the Jewelry
components. Industry
2. List the major types of e-marketplaces and 2.1 E-Marketplaces
describe their features. 2.2 Types of E-Marketplaces: From
3. Describe the various types of EC Storefronts to Portals
intermediaries and their roles. 2.3 Transactions, Intermediation, and
4. Describe electronic catalogs, shopping carts, Processes in E-Commerce
and search engines. 2.4 Electronic Catalogs and Other Market
5. Describe the major types of auctions and list Mechanisms
their characteristics. 2.5 Auctions as EC Market Mechanisms
6. Discuss the benefits, limitations, and impacts 2.6 Bartering and Negotiating Online
of auctions.
2.7 E-Commerce in the Wireless
7. Describe bartering and negotiating online. Environment: M-Commerce and
8. Define m-commerce and explain its role as a L-Commerce
market mechanism. 2.8 Competition in the Digital Economy and
9. Discuss competition in the digital economy. Its Impact on Industries
10. Describe the impact of e-marketplaces on 2.9 Impacts of EC on Business Processes
organizations and industries. and Organizations
Managerial Issues
Real-World Case: Wal-Mart Leads RFID
Adoption
ISBN: 0-558-13856-X
Appendix 2A: Build-to-Order Production
42
Electronic Commerce 2008: A Managerial Perspective, by Efraim Turban, David King, Judy McKay, Peter Marshall, Jae Lee, and Dennis Viehland.
Published by Prentice Hall. Copyright 2008 by Pearson Education, Inc.
M02_TURB3315_05_SE_C02.QXD 9/4/07 7:54 PM Page 43
EC Application
HOW BLUE NILE INC. IS CHANGING THE JEWELRY INDUSTRY
Blue Nile Inc. (bluenile.com), a pure-play online e-tailer that specializes in diamonds and jewelry, capitalized on online diamond
sales as a dot-com start-up in 1999. The company provides a textbook case of how EC fundamentally undercuts the traditional way
of doing business.
The Opportunity jewelry expert offers in a physical store. It features educational

guides in plain English and provides independent (and trusted)
Using the B2C EC modelknocking out expensive stores and
quality ratings for every stone. A customer can look over a rating
intermediaries and then slashing prices (up to 35 percent less
scale for cut, clarity, color, and so on and then conduct a price
than rivals to gain market share), Blue Nile captured a high
comparison with Diamond.com (diamond.com) and other online
market share in a short time, inducing more and more people to
stores. Most important is the 30-day money-back guarantee (now
buy online and making a sizable profit.
an online industry standard). This provides customers a comfort
How did the start-up defy conventional wisdom that dia-
level against fraud and gives Blue Nile a competitive edge against
monds could not be sold online? Basically, Blue Nile offers a huge
stores that take the stones back but charge a fee to do so.
selection of diamonds and more information on diamonds than a
The Results This is one reason why in the United States some
465 small jewelry stores closed in 2003 alone. The
Blue Nile sales reached $129 million in 2003 (a 79 percent
survivors specialize in custom-crafted pieces. Large rivals
increase over 2002), with a net income of $27 million. In 2006,
try to fight back, streamlining the supply chain, emphasizing
sales exceeded $210 million (40 percent annual growth). The
customer service, and even trying to sell some products online.
company became the eighth-largest specialty jewelry company
The future seems to be clear, as summarized by Roger
in the United States and went public in 2004 (one of the most
Thompson, a small jeweler in Lambertville, New Jersey, who said,
successful IPOs of 2004).
Anyone with half a brain, who wants a diamond engagement
To sell $210 million in jewelry, a traditional retail chain
ring will go to the Internet. So, he stopped selling diamonds.
needs 200 stores and close to 1,800 employees. Blue Nile does
In the meantime, grooms make proposals with Blue Nile rings,
it with one 10,000-square-foot warehouse and 115 staffers.
saving $3,000 to $5,000.
The company also bypasses the industrys tangled
supply chain, in which a diamond can pass through Sources: Adapted from Mullaney (2004), BusinessWeek Online (2006),
and bluenile.com (accessed December 2006).
five or more middlemen before reaching a retailer.
Blue Nile deals directly with original suppliers,
such as Thaigem.com (thaigem.com; see Online File W2.5).
W H AT C A N W E L E A R N . . .
Blue Nile is a pure-play online store (a storefront) that uses electronic catalogs, virtual shopping carts, and superb customer service to sell
diamonds and jewelry. Storefronts, carts, and catalogs are the major mechanisms for selling online, and they are described here and in
Chapter 16. This case also shows the impact of online sales on an industry. Because of low operating costs and global reach, Blue Nile and
other online jewelers quickly conquered an impressive market share, driving hundreds of small traditional jewelry retailers out of business.
This competitive impact and other impacts of EC are discussed in this chapter.
ISBN: 0-558-13856-X
44 Part 1: Introduction to E-Commerce and E-Marketplaces
2.1 E-MARKETPLACES
According to Bakos (1998), electronic markets play a central role in the economy, facilitating
the exchange of information, goods, services, and payments. In the process, they create
economic value for buyers, sellers, market intermediaries, and for society at large.
Markets (electronic or otherwise) have three main functions: (1) matching buyers and sellers;
(2) facilitating the exchange of information, goods, services, and payments associated with mar-
ket transactions; and (3) providing an institutional infrastructure, such as a legal and regulatory
framework that enables the efficient functioning of the market (see Zwass 2003 for details).
ELECTRONIC MARKETS
The major place for conducting EC transactions is the electronic market (e-market).
e-marketplace An e-marketplace is a virtual marketplace in which sellers and buyers meet and conduct
An online market, usually different types of transactions. Customers exchange these goods and services for money (or
B2B, in which buyers and other goods and services if bartering is used). The functions of an e-market are the same as
sellers exchange goods or that of a physical marketplace; however, computerized systems tend to make markets much
services; the three types more efficient by providing more updated information to buyers and sellers.
of e-marketplaces are In recent years, markets have seen a dramatic increase in the use of IT and EC (Turban
private, public, and et al. 2007). EC has increased market efficiencies by expediting or improving the functions
consortia. listed in Exhibit 2.1. Furthermore, EC has been able to significantly decrease the cost of
executing these functions.
The emergence of electronic marketplaces (also called e-marketplaces or marketspaces),
especially Internet-based ones, changed several of the processes used in trading and supply
chains. These changes, driven by technology, resulted in:
Greater information richness of the transactional and relational environment
Lower information search costs for buyers
Diminished information asymmetry between sellers and buyers
Greater temporal separation between time of purchase and time of possession of physical
products purchased in the e-marketplace
Greater temporal proximity between time of purchase and time of possession of digital
products purchased in the e-marketplace
The ability of buyers and sellers to be in different locations
EXHIBIT 2.1 Functions of a Market

Matching of Buyers and Sellers Facilitation of Transactions Institutional Infrastructure
Determination of product offerings Logistics Legal
Product features offered by sellers Delivery of information, goods, Commercial code, contract law,
Aggregation of different products or services to buyers dispute resolution, intellectual
Search (of buyers for sellers and of Settlement property protection
sellers for buyers) Transfer of payments to sellers Export and import law
Price and product information Trust Regulatory
Organizing bids and bartering Credit system, reputations, rating Rules and regulations, monitoring,
Matching seller offerings with agencies such as Consumer Reports enforcement
buyer preferences and the BBB, special escrow and Discovery
Price discovery online trust agencies Provides market information
Process and outcome in Communication (e.g., about competition,
determination of prices Posting buyers requests government regulations
Enabling price comparisons
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Others
Providing sales leads
Sources: Compiled from Bakos (1998) and from E-Market Services (2006).
Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 45
EC leverages IT with increased effectiveness and lower transaction and distribution

costs, leading to more efficient, friction-free markets. An example of such efficiency is the
Blue Nile case. For more on e-marketplaces, see Li and Du (2005) and Varadarajan and
Yadav (2002).
E-MARKETPLACE COMPONENTS AND PARTICIPANTS

A marketspace includes electronic transactions that bring about a new distribution of marketspace
goods and services. The major components and players in a marketspace are customers, A marketplace in which
sellers, goods and services (physical or digital), infrastructure, a front end, a back end, sellers and buyers
intermediaries and other business partners, and support services. A brief description of exchange goods and
each follows: services for money
(or for other goods and
Customers. The 1.6 billion people worldwide who surf the Web are potential buyers of services) but do so
the goods and services offered or advertised on the Internet. These consumers are electronically.
looking for bargains, customized items, collectors items, entertainment, socialization,
and more. They are in the drivers seat. They can search for detailed information,
compare, bid, and sometimes negotiate. Organizations are the largest consumers,
accounting for more than 85 percent of EC activities.
Sellers. Millions of storefronts are on the Web, advertising and offering a huge variety of
items. These stores are owned by companies, government agencies, or individuals. Every
day it is possible to find new offerings of products and services. Sellers can sell direct
from their Web sites or from e-marketplaces.
Products and services. One of the major differences between the marketplace and the
marketspace is the possible digitization of products and services in a marketspace.
Although both types of markets can sell physical products, the marketspace also can digital products
sell digital products, which are goods that can be transformed to digital format and Goods that can be
instantly delivered over the Internet. In addition to digitization of software and music, transformed to digital
it is possible to digitize dozens of other products and services, as shown in Online File format and delivered
W2.1. Digital products have different cost curves than those of regular products. In over the Internet.
digitization, most of the costs are fixed, and variable costs are very low. Thus, profit
will increase very rapidly as volume increases, once the fixed costs are paid for.
Infrastructure. The marketspace infrastructure includes electronic networks, hardware,
software, and more. (EC infrastructure is presented in Chapter 1; also see Online
Chapter 19.)
Front end. Customers interact with a marketspace via a front end. The components of front end
the front end can include the sellers portal, electronic catalogs, a shopping cart, a search The portion of an e-sellers
engine, an auction engine, and a payment gateway. (For details, see Beynon-Davies 2004.) business processes
Back end. All the activities that are related to order aggregation and fulfillment, inven- through which customers
tory management, purchasing from suppliers, accounting and finance, insurance, interact, including the
payment processing, packaging, and delivery are done in what is termed the back end of sellers portal, electronic
the business. (For details, see Beynon-Davies 2004.) catalogs, a shopping cart,
Intermediaries. In marketing, an intermediary is typically a third party that operates a search engine, and a
between sellers and buyers. Intermediaries of all kinds offer their services on the Web. payment gateway.
The role of these electronic intermediaries (as will be seen throughout the text and espe-
back end
cially in Chapters 3, 5, and 10) is frequently different from that of regular intermediaries
The activities that support
(such as wholesalers). For example, online intermediaries create and manage the online
online order fulfillment,
markets. They help match buyers and sellers, provide some infrastructure services, and
inventory management,
help customers and/or sellers to institute and complete transactions. They also support
purchasing from suppliers,
the vast number of transactions that exist in providing services, as demonstrated in the
payment processing,
WebMD case (Case 2.1). Most of these online intermediaries operate as computerized
packaging, and delivery.
systems.
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Other business partners. In addition to intermediaries, several types of partners, such as intermediary
shippers, use the Internet to collaborate, mostly along the supply chain. A third party that
Support services. Many different support services are available, ranging from certifica- operates between sellers
tion and escrow services (to ensure security) to content providers. and buyers.
CASE 2.1
EC Application
WEBMD
WebMD is the largest medical services company in the United etc.), the Medscape portal provides medical news, medical
States. Although the company is known mainly for its con- education, research-related information, and more.
sumer portal, webmd.com, the most visited medical-related Porex. The medical product unit manufactures and sells
Web site, its core business is being an e-intermediary. specialty medical products.
The health-care industry is huge (close to $2 trillion per Of the many services available on the portal, notable are:
year, the largest in terms of GNP). Almost $600 billion is spent News Center. Provides the latest in health news.
just on administrative expenses. The government (federal and A-Z Guides. Provides guides on topics ranging from med-
state) provides large amounts of money to health-care ical tests to prescription drugs to common symptoms.
providers (e.g., physicians, hospitals, drug companies), and it Health Search. An enhanced search tool that enables
attempts to control costs. A major instrument for cost control users to find the information they need, quickly and
is the Health Insurance Portability and Accountability Act of completely.
1996 (HIPAA), which requires digital medical records and WebMD. Videos are offered on a number of health-
standardized documents for the health-care industry. WebMD is related topics.
attempting to capitalize on this legislation by providing Family and Pregnancy. Provides valuable information
computer-related services to both the providers and purchasers for parents, future parents, grandmothers and grand-
(government, insurance companies, HMOs) of services, mainly fathers, and caregivers.
in terms of standardized electronic transactions. The company Blogs for Experts. Blogs devoted to specific topics
provides services to health-care providers, vendors, customers, within an industry.
and government entities. Blogs for Readers. Blogs on multiple topics made
WebMDs major objective is to reduce costs for the available to any and all who are interested.
participants by facilitating electronic communication and
collaboration because paper-based transactions are 20 to 30 According to OBuyonge and Chen (2006), the success of
times more expensive than electronic ones. It also seeks to WebMD is a result of the proper value proposition in its business
speed cycle time. model. Most important are the value-added services provided to
WebMD operates via several separate, but electronically health-care providers, insurers, and other B2B participants.
linked, divisions: WebMDs future as an intermediary is not clear. On the
one hand, disintermediation is possible due to the fact that
WebMD Envoy. This division (now a subsidiary of Emdeon)
the largest customers may develop their own B2B connec-
is the leading clearinghouse for real-time transactions
tions. On the other hand, the need to comply with HIPAA
(over $2.5 billion a year) among over 300,000 medical and
may facilitate the role of WebMD, especially for small- and
dental providers, 600 hospitals, 650 software vendors,
medium-sized health-care participants.
36,000 pharmacies and laboratories, and 1,200 govern-
ment and commercial health agencies. Transactions are Sources: Compiled from Southwick (2004), webmd.com (accessed
secure; large customers use EDI (Chapter 5), and others September 2006), and webmd.com (accessed September 2006).
use the Internet. The system handles all types of transac-
tions, from clinical data to billing.
WebMD Practice Services. This division provides software Questions
and programs that help physicians and other providers man-
1. Visit webmd.com to learn more about the types of
age their businesses. Hundreds of different applications are
intermediation it provides. Write a report based on
available (this service is referred to as Intergy EHR). Some
your findings.
provide access to patient information, whereas others
retrieve medical knowledge. Practice Services is a leading 2. What kinds of reintermediation do you foresee for the
provider of payment and transaction services at the van- company?
guard of bringing innovative practice management solu- 3. WebMD Health does not bring in much revenue. Should
tions to the rapidly changing health-care industry. the company close it? Why or why not?
WebMD Health. This information gateway has portals for 4. What impact can WebMD have on the health-care
both consumers and professionals. For consumers, informa- industry? (Use the chapters framework in your
tion is provided about wellness, diseases, and treatments. answer.)
For professionals (physicians, nurses, medical technicians,
Section 2.1 REVIEW QUESTIONS

ISBN: 0-558-13856-X
1. What is the difference between a physical marketplace and an e-marketplace (marketspace)?

2. List the components of a marketspace.
3. Define a digital product and provide five examples.
2.2 TYPES OF E-MARKETPLACES: FROM STOREFRONTS

TO PORTALS
There are several types of e-marketplaces. The major B2C e-marketplaces are storefronts
and Internet malls. B2B e-marketplaces include private sell-side e-marketplaces, buy-side
e-marketplaces, and exchanges. Lets elaborate on these, as well as on the gateways to
e-marketplacesportals.
ELECTRONIC STOREFRONTS
An electronic or Web storefront refers to a single companys Web site where products and storefront
services are sold. It is an electronic store. The storefront may belong to a manufacturer (e.g., A single companys Web
geappliances.com and dell.com), to a retailer (e.g., walmart.com and wishlist.com.au), to site where products or
individuals selling from home, or to another type of business. Note that companies that sell services are sold.
services (such as insurance) may refer to their storefronts as portals. An example of a service-
related portal is a hotel reservation system, as shown in Online File W2.2.
A storefront includes several mechanisms that are necessary for conducting the sale (see
also Chapter 16). The most common mechanisms are an electronic catalog; a search engine that
helps the consumer find products in the catalog; an electronic cart for holding items until
checkout; e-auction facilities; a payment gateway where payment arrangements can be made; a
shipment court where shipping arrangements are made; and customer services, including product
and warranty information. The first three mechanisms are described in Section 2.4; e-auctions
are described in Section 2.5 and in Chapter 10; payment mechanisms are described in
Chapter 12; and shipments are discussed in Chapter 13. Customer services, which can be
fairly elaborate, are covered throughout the book and especially in Chapter 13 (see CRM).
ELECTRONIC MALLS
In addition to shopping at individual storefronts, consumers can shop in electronic malls
(e-malls). Similar to malls in the physical world, an e-mall (online mall) is an online shopping e-mall (online mall)
location where many stores are located. For example, Hawaii.com (hawaii.com) is an e-mall An online shopping
that aggregates Hawaiian products and stores. It contains a directory of product categories and center where many
the stores in each category. When a consumer indicates the category he or she is interested in, online stores are located.
the consumer is transferred to the appropriate independent storefront. This kind of a mall does
not provide any shared services. It is merely a directory. Other malls do provide shared services
(e.g., choicemall.com). Some malls are actually large click-and-mortar retailers; others are
virtual retailers (e.g., buy.com).
Visualization and Virtual Realty in Shopping Malls

To attract users to shopping malls, vendors use rich media, including virtual reality (VR).
Lepouras and Vassilakis (2006) proposed an architecture for a VR Mall (see Exhibit 2.2). The
major task of VR is to relate the content via digital representation to the potential buyers.
TYPES OF STORES AND MALLS

Stores and malls are of several different types:
General stores/malls. These are large marketspaces that sell all types of products.
Examples are amazon.com, choicemall.com, shop4.vcomshop.com, spree.com, and the
major public portals (yahoo.com, aol.com, and msn.com). All major department and
discount stores also fall into this category.
Specialized stores/malls. These sell only one or a few types of products, such as books,
flowers, wine, cars, or pet toys. Amazon.com started as a specialized e-bookstore
but today is a generalized store. 1800flowers.com sells flowers and related gifts;
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fashionmall.com/beautyjungle specializes in beauty products, tips, and trends; and

cattoys.com sells cat toys.
Regional versus global stores. Some stores, such as e-grocers or sellers of heavy
furniture, serve customers that live nearby. For example, parknshop.com serves the Hong
EXHIBIT 2.2 Virtual Reality Shopping

Stakeholders Adaptive VR-Mall System End Users
Content Content database
management
Digital item Interaction Space
tools
representations methods elements
New world
New world requests, payments,
requests shipping data, etc.
Content creators
and Domain experts
User modeling Virtual Worlds Worlds,

engine world receipts, etc. VRML/Web
Personalization engine creator E-Commerce browsers
server
User profile User activity

database recorder
Source: Lepouras, G., and C. Vassilakis. Adaptive Virtual Reality Shopping Malls, in Khosrow-Pour, 2006.
Kong community; it will not deliver groceries to New York. However, some local stores
will sell to customers in other countries if the customer will pay the shipping, insurance,
and other costs (e.g., see hothothot.com).
Pure-play online organizations versus click-and-mortar stores. Stores may be pure online
(i.e., virtual or pure-play) organizations, such as Blue Nile, Amazon.com, Buy.com, or
Cattoys.com. They do not have physical stores. Others are physical (i.e., brick-and-mortar)
stores that also sell online (e.g., Wal-Mart with walmart.com, 1800-Flowers.com with
1800flowers.com, and Woolworths with woolworths.com.au). This second category is
private e-marketplaces called click-and-mortar. Both categories will be described further in Chapter 3.
Online markets owned by
a single company; may be TYPES OF E-MARKETPLACES
either sell-side and/or
In general conversation, the distinction between a mall and a marketplace is not always clear.
buy-side e-marketplaces.
In the physical world, malls are often viewed as collections of stores (i.e., shopping centers)
sell-side e-marketplace where the stores are isolated from each other and prices are generally fixed. In contrast,
A private e-marketplace in marketplaces, some of which are located outdoors, are often viewed as places where many
which one company sells vendors compete and shoppers look for bargains and are expected to negotiate prices.
either standard and/or On the Web, the term marketplace has a different and distinct meaning. If individual
customized products to customers want to negotiate prices, they may be able to do so in some storefronts or malls.
qualified companies. However, the term e-marketplace usually implies B2B, not B2C. We distinguish two types of
e-marketplaces: private and public.
buy-side e-marketplace
A private e-marketplace
in which one company Private E-Marketplaces
makes purchases from Private e-marketplaces are those owned and operated by a single company (see Chapter 5).
invited suppliers. As can be seen in the Raffles Hotel case (Online File W2.2), private markets are either sell-
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side or buy-side. In a sell-side e-marketplace, a company, for example, Cisco, will sell either
standard or customized products to qualified companies; this type of selling is considered to
be one-to-many. It is similar to a B2C storefront. In a buy-side e-marketplace, a company
purchases from many suppliers; this type of purchasing is considered to be many-to-one. For
example, Raffles Hotel buys its supplies from approved vendors that come to its market.
Private marketplaces are frequently open only to selected members and are not publicly
regulated. We will return to the topic of private e-marketplaces in Chapter 5.
Public E-Marketplaces
Public e-marketplaces are B2B markets. They often are owned by a third party (not a seller public e-marketplaces
or a buyer) or by a group of buying or selling companies (a consortium), and they serve many B2B marketplaces, usually
sellers and many buyers. These markets also are known as exchanges (e.g., a stock exchange). owned and/or managed
They are open to the public and are regulated by the government or the exchanges owners. by an independent third
An example of a public marketplace, NTE.net, is provided in Online File W2.3. Public party, that include many
e-marketplaces are presented in detail in Chapter 6. sellers and many buyers;
also known as exchanges.
INFORMATION PORTALS
A portal is a mechanism that is used in e-marketplaces, e-stores, and other types of EC (e.g.,
in intrabusiness, e-learning, etc.). With the growing use of intranets and the Internet, many
organizations encounter information overload at a number of different levels. Information is
scattered across numerous documents, e-mail messages, and databases at different locations
and in disparate systems. Finding relevant and accurate information is often time-consuming
and requires access to multiple systems.
As a consequence, organizations lose a lot of productive employee time. One solution to
this problem is the use of portals. A portal is an information gateway. It attempts to address
information overload by enabling people to search and access relevant information from
disparate IT systems and the Internet, using advanced search and indexing techniques (such
as Googles desktop), in an intranet-based environment. An information portal is a single information portal
point of access through a Web browser to critical business information located inside and A single point of access
outside of an organization. Many information portals can be personalized for the users. through a Web browser to
business information
Types of Portals inside and/or outside an
organization.
Portals appear under many descriptions and shapes. One way to distinguish among them is to
look at their content, which can vary from narrow to broad, and their community or audi-
ence, which also can vary. The following are the major types of portals:
Commercial (public) portals. These portals offer content for diverse communities
and are the most popular portals on the Internet. Although they can be customized by
the user, they are still intended for broad audiences and offer fairly routine content,
some in real time (e.g., a stock ticker and news about a few preselected items).
Examples of such sites are yahoo.com, aol.com, and msn.com.
Corporate portals. Corporate portals provide organized access to rich content
within relatively narrow corporate and partners communities. They also are known
as enterprise portals or enterprise information portals. Corporate portals appear in
different forms and are described in detail in Chapter 7.
Publishing portals. These portals are intended for communities with specific
interests. These portals involve relatively little customization of content, but they
provide extensive online search features and some interactive capabilities.
Examples of such sites are techweb.com and zdnet.com.
Personal portals. These target specific filtered information for individuals. They
offer relatively narrow content and are typically very personalized, effectively
having an audience of one.
Mobile portals. Mobile portals are portals that are accessible from mobile mobile portal
devices (see Chapter 9 for details). Although most of the other portals mentioned A portal accessible via
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here are PC based, increasing numbers of portals are accessible via mobile devices. a mobile device.
One example of such a mobile portal is i-mode, which is described in Section 2.7.
voice portal
Voice portals. Voice portals are Web sites, usually portals, with audio inter- A portal accessed by
faces. This means that they can be accessed by a standard telephone or a cell telephone or cell phone.
phone. AOLbyPhone is an example of a service that allows users to retrieve

e-mail, news, and other content from AOL via telephone. It uses both speech
recognition and text-to-speech technologies. Companies such as Tellme.com
(tellme.com) and BeVocal (bevocal.com) offer access to the Internet from
telephones and tools to build voice portals. Voice portals are especially popular
for 1800 numbers (Enterprise 800 numbers) that provide self-service to
customers with information available in Internet databases (e.g., find flight
status at delta.com).
Knowledge portals. Knowledge portals enable access to knowledge by knowledge
workers and facilitate collaboration (see Chapter 7).
Agent-Based E-Marketplaces
E-marketplaces, especially for B2B and mega B2C (such as Amazon.com) may be plagued
by information overload. To overcome the problem, Guan (2006) suggests using intelligent
(or software) agents. As we will see in Chapter 3, software agents already provide compar-
isons (e.g., froogle.com, comparefare.com). Various search engines can help explore catalogs,
and monitoring agents watch auctions. But todays state of the art is still limited (see
Appendix C). Guan (2006) explores a more autonomous system called a virtual marketplace
that is composed of a control center, a business center, and a financial center. Each center has
its own database and agent (e.g., negotiating agents). The seller and buyer agents can interact
in the fully automated market (see Exhibit 2.3).
EXHIBIT 2.3 Agent-Based E-Marketplace

Sending out information agents for
Monitoring information collecting
(Messages)
Owner Agent butler Information
agency
Alerting
Sending out negotiation
Report to the agents Decision
agent butler making
Strategy
Conduct small Conduct agency
payment big payment
(Messages) (Messages)
Execution Financial
agency agency Negotiation
agency
Owner host
buyer side
Financial institutions
bank and clearing systems
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Other owner hosts in SAFER
Source: Guan, S. U. E-Commerce Agents and Payment Systems, in Khosrow-Pour, 2006.

1. Describe electronic storefronts and e-malls.
2. List the various types of stores and e-malls.
3. Differentiate between private and public e-marketplaces.
4. What are information portals? List the major types.
5. Describe agent-based e-marketplaces.
2.3 TRANSACTIONS, INTERMEDIATION, AND PROCESSES

IN E-COMMERCE
Now that we are familiar with marketplaces, their types, components, and participants, lets
look at what is going on in these markets.
SELLERS, BUYERS, AND TRANSACTIONS

The major EC activity is electronic trading. Typically, a seller (retailer, wholesaler, or manu-
facturer) sells to customers. The seller itself buys from suppliers: either raw material (as a
manufacturer) or finished goods (as a retailer). This process is illustrated in Exhibit 2.4.
The selling company is shown in the center of the figure, marked as our company.
Internally, processes in the different functional areas are supported by enterprise software,
such as ERP and B2E activities. The customers can be individuals (B2C), businesses (B2B),
or government agencies (B2G). The customers place orders, and the seller fulfills them.
Our company buys materials, products, and so on from suppliers, distributors (B2B), or
from the government (G2B) in a process called e-procurement. Sometimes intermediaries are
involved in this process.
infomediaries
THE ROLES AND VALUE OF INTERMEDIARIES IN E-MARKETPLACES Electronic intermediaries
Intermediaries (brokers) play an important role in commerce by providing value-added that provide and/or
activities and services to buyers and sellers. There are many types of intermediaries. The control information flow
most well-known intermediaries in the physical world are wholesalers and retailers. In in cyberspace, often
cyberspace, there are, in addition, intermediaries that provide and/or control information aggregating information
flow. These electronic intermediaries are known as infomediaries. The information flows to and selling it to others.
and from buyers and sellers via infomediaries, as shown in Online File W2.4. Frequently,
intermediaries aggregate information and sell it to others (see syndication in Chapter 16).
According to Wikipedia (2006a), online intermediaries are companies that facilitate
transactions between buyers and sellers and receive a percentage of the transactions value.
EXHIBIT 2.4 EC Activities
Suppliers Customers
Materials
Individuals
Our Company
Supplies
Seller Businesses
Components (retailer, manufacturer) Government
Goods
ISBN: 0-558-13856-X
B2B Intrabusiness B2B, B2C, B2G

transactions transactions transactions
These firms make up the largest group of B2C companies today. The two types of online
intermediaries are brokers and infomediaries.
Brokers
A broker is a company that facilitates transactions between buyers and sellers. The following
are different types of brokers:
Buy/sell fulfillment. A corporation that helps consumers place buy and sell orders
(e.g., eTrade).
Virtual mall. A company that helps consumers buy from a variety of stores (e.g.,
Yahoo! Stores).
Metamediary. A firm that offers customers access to a variety of stores and provides
them with transaction services, such as financial services (e.g., Amazon zShops).
Bounty. An intermediary that will locate a person, place, or idea for a fee (e.g.,
BountyQuest (now defunct).
Search agent. A company that helps consumers compare different stores (e.g.,
Shopping.com).
Shopping facilitator. A company that helps consumers use online shops by providing
currency conversion, language translation, payment features, and delivery solutions, and
potentially a user-customized interface, (e.g., MyOrbital.com).
Infomediaries
Web sites that gather and organize large amounts of data and act as intermediaries between
those who want the information and those who supply the information are called
infomediaries (Webopedia 2006). There are two types of infomediaries:
The first type offers consumers a place to gather information about specific products and
companies before they make purchasing decisions. It is a third-party provider of unbi-
ased information; it does not promote or try to sell specific products in preference over
other products or act on behalf of any vendors (e.g., Autobytel.com and BizRate.com).
The second type is not necessarily Web-based. It provides vendors with consumer infor-
mation that will help the vendor develop and market products. The infomediary collects
the personal information from the buyers and markets that data to businesses. The
advantage of this approach is that consumer privacy is protected and some infomediaries
offer consumers a percentage of the brokerage deals.
Producers and consumers may interact directly in an e-marketplace: Producers provide
information to customers, who then select from among the available products. In general,
producers set prices; sometimes prices are negotiated. However, direct interactions are some-
times undesirable or unfeasible. In that case, intermediation is needed. Intermediaries,
whether human or electronic, can address the following five important limitations of direct
interaction:
1. Search costs. It may be expensive for providers and consumers to find each
other. In electronic marketplaces, thousands of products are exchanged among
thousands of vendors and millions of consumers. Producers may have trouble
accurately gauging consumer demand for new products; many desirable items
may never be produced simply because no one recognizes the demand for them.
Some intermediaries maintain databases of customer preferences, and they can
predict demand and reduce search costs by selectively routing information from
providers to consumers and by matching customers with products and/or services.
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2. Lack of privacy. Either the buyer or seller may wish to remain anonymous or at
least protect some information relevant to a trade. Intermediaries can relay
messages and make pricing and allocation decisions without revealing the
identity of one or both parties.
3. Incomplete information. The buyer may need more information than the seller is
able or willing to provide, such as information about product quality, competing
products, or customer satisfaction. An intermediary can gather product information
from sources other than the product provider, including independent evaluators and
other customers. Many third-party Web sites provide such information (e.g.,
bizrate.com, mysimon.com, and consumerguide.com).
4. Contract risk. A consumer may refuse to pay after receiving a product, or a
producer may provide inferior products or give inadequate postpurchase service.
Intermediaries have a number of tools to reduce such risks. First, the broker can
disseminate information about the past behavior of providers and consumers.
The threat of publicizing bad behavior or removing a seal of approval may
encourage both producers and consumers to meet the brokers standard for fair
dealing. Or the broker may accept responsibility for the behavior of parties in
transactions it arranges and act as a policeman on its own. Third, the broker
can provide insurance against bad behavior. The credit card industry uses all
three approaches to reduce providers and consumers exposure to risk.
In the online auction arena or when you buy expensive items or buy from an
unknown seller, some companies act as escrow agencies, accepting and holding
payment from the buyer while the seller completes delivery of the product or
service to the escrow agency. Then, if the product is satisfactory, the agency releases
payment to the seller and the product to the buyer.
5. Pricing inefficiencies. By jockeying to secure a desirable price for a product,
providers and consumers may miss opportunities for mutually desirable trades.
This is particularly likely in negotiations over unique or custom products, such as
houses, and in markets for information products and other public goods where
freeloading is a problem. Intermediaries can use pricing mechanisms that induce
just the appropriate trades; for example, dealing with an imbalance of buy and sell
orders in stock markets.
For a study on how different strategies of intermediation affect the efficiency

of electronic markets, see Yarom et al. (2003).
E-Distributors in B2B
A special type of intermediary in e-commerce is the B2B e-distributor. These intermediaries e-distributor
connect manufacturers with business buyers (customers), such as retailers (or resellers in the An e-commerce inter-
computer industry). E-distributors basically aggregate the catalogs or the product information mediary that connects
from many manufacturers, sometimes thousands of them, in one placethe intermediarys manufacturers with busi-
Web site. An example is W. W. Grainger (see Chapter 5 for details). ness buyers (customers)
by aggregating the
catalogs of many
DISINTERMEDIATION AND REINTERMEDIATION manufacturers in one
Intermediaries are agents that mediate between sellers and buyers. Usually, they provide two placethe intermediarys
types of services: (1) They provide relevant information about demand, supply, prices, and Web site.
requirements and, in doing so, help match sellers and buyers. (2) They offer value-added
services such as transfer of products, escrow, payment arrangements, consulting, or assistance
in finding a business partner. In general, the first type of service can be fully automated and
thus is likely to be assumed by e-marketplaces, infomediaries, and portals that provide free or
low-commission services. The second type requires expertise, such as knowledge of the
industry, the products, and technological trends, and it can only be partially automated.
ISBN: 0-558-13856-X
Intermediaries that provide only (or mainly) the first type of service may be eliminated;
a phenomena called disintermediation. An example is the airline industry and its push for disintermediation
buying electronic tickets directly from the airlines. As of 2004, most airlines require Elimination of intermedi-
customers to pay $5 per ticket or more if they buy a ticket from an agent, which is equivalent aries between sellers and
to the agents commission. This is resulting in the disintermediation of travel agents from the buyers.
purchasing process. In another example, discount stockbrokers that only execute trades
manually are disappearing. However, brokers who manage electronic intermediation are
not only surviving but may actually be prospering (e.g., E-Trade). This phenomenon, in
which disintermediated entities or newcomers take on new intermediary roles, is called
reintermediation reintermediation (see Chapters 3, 6, and 14).
Establishment of new Disintermediation is more likely to occur in supply chains involving several intermedi-
intermediary roles for aries, as illustrated in the opening case. Online File W2.5 illustrates an intermediary that
traditional intermediaries does both B2C and B2B.
that have been
disintermediated, or THE PURCHASING PROCESS
for newcomers.
Customers buy goods online in different modes. The most common mode is purchasing from
catalogs at fixed prices. Sometimes prices may be negotiated or discounted. Another mode is
dynamic pricing, which refers to nonfixed prices, such as those in auctions or stock (commodity)
markets. The buyer uses the process illustrated in Exhibit 2.5
The process starts with logging into a sellers site, registering (if needed), and entering
into an online catalog or the buyers my account. E-catalogs can be very large, so a search
EXHIBIT 2.5 Buying Process in E-Market

Preshopping
Activities
(see Chs. 3, 4)
Enter e-shop
Register, security,
Find e-catalog,
privacy statement,
My Account
etc.
Compare prices,
negotiate, clarify Search
conditions, etc. e-catalog
More More
Maybe Buy or Not? No Abandonment
investigation items?
Yes
Shopping cart
Checkout
Shipment Payment
option option
Execute
Item shipped payment
View final
Check status Wait for item order/
payment
Item delivered Submit

ISBN: 0-558-13856-X
Buyer Accept
Return No satisfied? Yes Done
Post shopping activities
mechanism may be needed. Also, the buyer needs to compare prices. Some sellers (e.g.,
American Airlines) will provide comparisons with competing vendors. Otherwise, the buyer
may need to leave the site or do the comparison before entering into the specific sellers store.
If not satisfied, the buyer will abandon the site. If satisfied, the buyer will select the item and
place it in a shopping cart. The buyer may return to the catalog to choose more items. Each
selected item is placed in the shopping cart. When shopping is completed, the buyer goes to
a checkout page where a shipment option is selected from a menu. Also, a payment option
may be available. For example, newegg.com lets you pay by credit card, PayPal, after billing,
in installments, and so on. After checking all details for accuracy, the buyer submits the order.
In the remainder of this chapter, we will describe the major mechanisms that support
this process.

1. Describe the transaction process between a seller and its customers and suppliers.
2. List the roles of intermediaries in e-markets.
3. Describe e-distributors.
4. What are disintermediation and reintermediation?
5. Describe the purchasing process.
2.4 ELECTRONIC CATALOGS AND OTHER MARKET

MECHANISMS
To enable selling online, a Web site usually needs EC merchant server software (see Chapter 16
and Online Chapter 19). The basic functionality offered by such software includes electronic
catalogs, search engines, and shopping carts.
ELECTRONIC CATALOGS
Catalogs have been printed on paper for generations. Recently, electronic catalogs on
CD-ROM and the Internet have gained popularity. Electronic catalogs consist of a electronic catalogs
product database, directory and search capabilities, and a presentation function. They are The presentation of
the backbone of most e-commerce sales sites. For merchants, the objective of electronic product information in
catalogs is to advertise and promote products and services. For the customer, the purpose an electronic form; the
of such catalogs is to locate information on products and services. Electronic catalogs can backbone of most
be searched quickly with the help of search engines, and they can be interactive (Cox and e-selling sites.
Koelzer 2006). For example, Change My Image from Infinisys (infinisys.co.jp) allows you
to insert your photo and then change the hairstyle and color. Electronic catalogs can be
very large; for example, the Library of Congress Web catalog (catalog.loc.gov) contains
millions of records.
The majority of early online catalogs were replications of text and pictures from printed
catalogs. However, online catalogs have evolved to become more dynamic, customized, and
integrated with selling and buying procedures. As online catalogs have become more
integrated with shopping carts, order taking, and payment, the tools for building them are
being integrated with merchant suites and Web hosting (e.g., see smallbusiness.yahoo.com/
merchant).
Electronic catalogs can be classified according to three dimensions:
1. The dynamics of the information presentation. Catalogs may be static or dynamic. In
static catalogs, information is presented in text and static pictures. In dynamic catalogs,
information is presented in motion pictures or animation, possibly with supplemental
sound. Dynamic catalogs can be real time, changing frequently, such as with prices of
ISBN: 0-558-13856-X
stocks (and commodities) on stock exchange tickers.

2. The degree of customization. Catalogs may be standard or customized. In standard
catalogs, merchants offer the same catalog to any customer. In customized catalogs,
content, pricing, and display are tailored to the characteristics of specific customers.
3. Integration with business processes. Catalogs can be classified according to the degree
of integration with the following business processes or features: order taking and fulfill-
ment; electronic payment systems; intranet workflow software and systems; inventory and
accounting systems; suppliers or customers extranets; and paper catalogs. For example,
when a customer places an order at amazon.com, the order is transferred automatically to
a computerized inventory-availability check. Many sellers advise you on the availability of
items and delivery dates.
Although used occasionally in B2C commerce, customized catalogs are especially useful in
B2B e-commerce. For example, e-catalogs can show only the items that the employees in a
specific organization are allowed to purchase and can exclude items the buying companys
managers do not want their employees to see or to buy. E-catalogs can be customized
to show the same item to different customers at different prices, reflecting discounts or
purchase-contract agreements. They can even show the buyers ID number for the item,
model, or stock-keeping unit (SKU) number, rather than the sellers ID numbers. Extranets, in
particular, can deliver customized catalogs to different business customers.
For a comprehensive discussion of online catalogs, see Bauknecht et al. (2002),
jcmax.com/advantages.html, and purchasing.about.com.
Online Catalogs Versus Paper Catalogs

The advantages and disadvantages of online catalogs are contrasted with those of paper
catalogs in Exhibit 2.6. Although online catalogs have significant advantages, such as ease
of updating; the ability to be integrated with the purchasing process; coverage of a wide
spectrum of products, interactivity; customization; and strong search capabilities, they do
have disadvantages and limitations. To begin with, customers need computers and Internet
access to view online catalogs. However, as computers and Internet access are spreading
EXHIBIT 2.6 Comparison of Online Catalogs with Paper Catalogs

Type Advantages Disadvantages
Paper Easy to create without high technology Difficult to update changed product
catalogs Reader is able to look at the catalog information promptly
without computer system Only a limited number of products can be
More portable than electronic catalog displayed
Limited information through photographs and
textual description is available
No possibility for advanced multimedia such
as animation and voice
Online Easy to update product information Difficult to develop catalogs, large fixed cost
catalogs Able to integrate with the purchasing process There is a need for customer skill to deal with
Good search and comparison capabilities computers and browsers
Able to provide timely, up-to-date product
information
Provision for globally broad range of
product information
Possibility of adding on voice and animated
pictures
Long-term cost savings
Easy to customize
More comparative shopping
ISBN: 0-558-13856-X
Ease of connecting order processing,

inventory processing, and payment
processing to the system
rapidly, a large number of paper catalogs will be supplemented by, if not actually replaced by,
electronic ones. However, considering the fact that printed newspapers and magazines have
not diminished due to online ones, paper catalogs probably will not disappear soon. There
seems to be room for both media, at least in the near future. However, in B2B paper catalogs
may disappear more quickly.
A representative tool for building online catalogs is Microsofts Commerce Server
2006a .NET tool for creating Web sites. RadioShack (Radioshack.com) builds and main-
tains electronic catalogs based on its customers paper catalogs. The service includes search
capabilities, the ability to feature large numbers of products, enhanced viewing capabilities,
and ongoing support.
Customized Catalogs
A customized catalog is a catalog assembled specifically for a company, usually a customer of
the catalog owner. It also can be tailored to loyal individual shoppers or to a segment of
shoppers (e.g., frequent buyers). There are two approaches to creating customized catalogs.
The first approach is to let the customers identify the parts of interest to them from
the total catalog, as is done by software products such as QuickSilver from Broadvision
(broadvision.com). Then customers do not have to deal with items that are irrelevant to
them. Such software allows the creation of catalogs with branded value-added capabilities
that make it easy for customers to find the products they want to purchase, locate the
information they need, and quickly configure their order.
The second approach is to let the system automatically identify customer characteristics
based on the customers transaction records. However, to generalize the relationship between
the customer and items of interest, data-mining technology (Chapter 4) may be needed. This
second approach can be combined with the first one.
As an example of the second approach, consider the following scenario, which uses
Oracles 9i server: Joe Smith logs on to the Acme Shopping site, where he has the option to
register as an account customer and record his preferences in terms of address details, interest
areas, and preferred method of payment. Acme Shopping offers a wide range of products,
including electronics, clothing, books, and sporting goods. Joe is interested only in clothing
and electronics. He is neither a sportsman nor a great book lover. Joe also has some very
distinct hobby areasone is photography.
After Joe has recorded his preferences, each time he returns to Acmes electronic store the
first page will show him only the clothing and electronics departments. Furthermore, when Joe
goes into the electronics department, he sees only products related to photographycameras
and accessories. Some of the products are out of Joes price range, so Joe can refine his prefer-
ences further to indicate that he is interested only in electronics that relate to photography and
cost $300 or less. Such personalization gives consumers a value-added experience and adds to
their reasons for revisiting the site, thus building brand loyalty to that Internet store.
Against the backdrop of intense competition for Web time, personalization provides a
valuable way to match consumers with the products and information in which they are most
interested as quickly and painlessly as possible. An example of how corporations customize
their catalogs for corporate clients is provided in Online File W2.6.
Implementing E-Catalogs
Implementing e-catalogs on a small scale is fairly simple (see Chapter 16). However,
transforming a large-scale catalog to an e-catalog is not an easy task because it is necessary to
create a matching customer support system. See Schmitz et al. (2005) for a discussion of the
topic, examples of successes and failures, and suggestions for implementation. Large online
catalogs need a search engine. search engine
A computer program that
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can access databases of

SEARCH ENGINES AND INTELLIGENT AGENTS Internet resources, search
A search engine is a computer program that can access databases of Internet resources, for specific information
search for specific information or keywords, and report the results. For example, customers or keywords, and report
tend to ask for product information (e.g., requests for product information or pricing) in the the results.
same general manner. This type of request is repetitive, and answering such requests is costly
when done by a human. Search engines deliver answers economically and efficiently by
matching, for example, questions with FAQ (frequently asked question) templates, which
respond with canned answers.
Google, AltaVista, and Lycos are popular search engines. Portals such as AOL, Yahoo!,
and MSN have their own search engines. Special search engines organized to answer
certain questions or search in specified areas, include Ask.com, Northern Light, Mama,
and Looksmart. Thousands of different public search engines are available (see
searchengineguide.com). In addition, hundreds of companies have search engines on their
portals or storefronts. A search engine for online catalogs is Endeca InFront (from
endeca.com).
software (intelligent) Unlike a search engine, a software (intelligent) agent can do more than just search
agent and match. It has capabilities that can be used to perform routine tasks that require intelli-
Software that can perform gence. For example, it can monitor movements on a Web site to check whether a customer
routine tasks that require seems lost or ventures into areas that may not fit the customers profile. If it detects such
intelligence. confusion, the agent can notify the customer and provide assistance. Software agents can be
used in e-commerce to support tasks such as comparing prices, interpreting information,
monitoring activities, and working as an assistant. Users can even chat or collaborate
with agents.
Users use both search engines and intelligent agents in e-commerce. If customers
are inside a storefront or an e-mall, they can use the search engine to find a product or a
service. They can also use Web search engines, such as Google, to find general information
about a product or service. Finally, they can use software agents that make comparisons
(e.g., mysimon.com or froogle.com) and conduct other tasks. The essentials of software
agents are provided in Online Technical Appendix C. Applications of software agents are
described in several chapters, especially in Chapters 3 through 7. For more on search
engines see Chapter 18.
SHOPPING CARTS
electronic shopping cart An electronic shopping cart is an order-processing technology that allows customers to
An order-processing accumulate items they wish to buy while they continue to shop. In this respect, it is similar to
technology that allows a shopping cart in the physical world. The software program of an electronic shopping cart
customers to accumulate allows customers to select items, review what has been selected, make changes, and then
items they wish to buy finalize the list. Clicking on buy will trigger the actual purchase.
while they continue to Shopping carts for B2C are fairly simple (visit amazon.com to see an example), but for
shop. B2B a shopping cart may be more complex. A B2B shopping cart could enable a business
customer to shop at several sites while keeping the cart on the buyers Web site to integrate
it with the buyers e-procurement system. A special B2B cart was proposed for this pur-
pose by Lim and Lee (2003) where, in addition to the cart offered at the sellers site, there
is a buyers cart (b-cart) that resides on the buyers sites and is sponsored by the partici-
pating sellers.
Shopping-cart software is sold or provided for free as an independent component
(e.g., monstercommerce.com and easycart.com). It also is embedded in merchants servers,
such as smallbusiness.yahoo.com/merchant. Free online shopping carts (trials and demos) are
available at volusion.com and gomerchant.com.
For more on shopping carts, see Chapter 16 and Online Chapter 19.
Product Configuration
A key characteristic of EC is the self-customization of products and services, as done by Dell.
Manufacturers need to produce the customized products in an economic way so that the
price of the products will be competitive. Product configuration systems support the acquisi-
tion of the customer requirements while automating the order-taking process, and they allow
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customers to configure their products by specifying their technical requirements.

Sophisticated product configuration systems use artificial intelligence (AI) tools because
they need to support the interaction with the customers and understand their needs. For an
overview, see Blecker (2006a).

1. List the dimensions by which electronic catalogs can be classified.
2. List the benefits of electronic catalogs.
3. Explain how customized catalogs are created and used.
4. Compare search engines with software agents.
5. Describe an electronic shopping cart.
2.5 AUCTIONS AS EC MARKET MECHANISMS

One of the most interesting market mechanisms in e-commerce is electronic auctions
(Nissanoff 2006). They are used in B2C, B2B, C2C, G2B, G2C, and more.
DEFINITION AND CHARACTERISTICS

An auction is a market mechanism that uses a competitive process by which a seller solicits auction
consecutive bids from buyers (forward auctions) or a buyer solicits bids from sellers (reverse A competitive process in
auctions). Prices are determined dynamically by the bids. A wide variety of online markets which a seller solicits
qualify as auctions using this definition. Auctions, an established method of commerce for consecutive bids from
generations, deal with products and services for which conventional marketing channels are buyers (forward auctions)
ineffective or inefficient, and they ensure prudent execution of sales. For example, auctions or a buyer solicits bids
can expedite the disposal of items that need to be liquidated or sold quickly. Rare coins and from sellers (backward
other collectibles are frequently sold in auctions. auctions). Prices are
There are several types of auctions, each with its own motives and procedures. (For determined dynamically
details, see Chapter 10.) Auctions can be done online or offline. They can be conducted in by the bids.
public auction sites, such as at eBay. They also can be done by invitation to private auctions.
This section presents the essential information about auctions that is necessary for
understanding related material in Chapters 3 through 6. See also Saarinen et al. (2006) and
Bajari and Hortacsu (2004) for e-auction information.
TRADITIONAL AUCTIONS VERSUS E-AUCTIONS

Traditional, physical auctions are still very popular. However, the volume traded on e-auctions
is significantly larger and continues to increase.
Limitations of Traditional Offline Auctions

Traditional offline auctions, regardless of their type, have the following limitations: They
generally last only a few minutes, or even seconds, for each item sold. This rapid process may
give potential buyers little time to make a decision, so they may decide not to bid. Therefore,
sellers may not get the highest possible price; bidders may not get what they really want, or
they may pay too much for the item. Also, in many cases the bidders do not have much time
to examine the goods. Bidders have difficulty learning about auctions and cannot compare
what is offered at each location. Bidders must usually be physically present at auctions; thus,
many potential bidders are excluded.
Similarly, it may be difficult for sellers to move goods to an auction site. Commissions are
fairly high because a location must be rented, the auction needs to be advertised, and an auc-
tioneer and other employees need to be paid. Electronic auctioning removes these deficiencies.
Electronic Auctions
The Internet provides an infrastructure for executing auctions electronically at lower cost,
with a wide array of support services and with many more sellers and buyers. Individual con-
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sumers and corporations both can participate in this rapidly growing and very convenient
form of e-commerce. Forrester Research projects that the Internet auction industry will reach electronic auction
$65.2 billion in sales by 2010 (123jump.com 2006). (e-auction)
Electronic auctions (e-auctions) are similar to offline auctions except that they are Auctions conducted
done online. E-auctions have been in existence since the 1980s over LANs (e.g., flowers; see online.
CASE 2.2
EC Application
INNOVATIVE AUCTIONS
The following are some examples of innovative implementa- business. Now he is also one of eBays 40,000 trading
tions of e-auctions: assistants. Web Auction Hawaii and other trading assis-
Every year, Warren Buffett, the famous U.S. stock investor tants handle advertisements, auction listings, appraisals,
and investment guru, invites a group of eight people to descriptions, authentication, payments, shipments, insur-
lunch with him. The eight pay big money for the pleasure. ance, and more. Dan also advises sellers as to which eBay
The money is donated to the needy in San Francisco. In the category is the best for their particular item. Dan is
past, Buffett charged $30,000 per group. As of July 2003, helping nonprofit organizations, estate administrators,
Buffett places the invitation on an online auction (eBay). and others to sell just about anything, including the four
In 2003, bidders pushed the bid from $30,000 to $250,100. mules he helped sell in September 2004. Dans basic
The winning bid in 2006 was $620,100. One of the winners charge is $25 per item plus a 25 percent commission. (Dan
commented that he was willing to pay whatever was needed only handles items with an expected price of over $200.)
so that he could express to Buffett his appreciation for
investment guidance. Before the auction, he had no chance Questions
to be invited.
A Harley-Davidson motorcycle autographed by celebrities 1. Why is Warren Buffett so successful with his auctions?
and offered by talk-show host Jay Leno fetched $800,100 2. You can place your item for sale on eBay without a
on eBay to benefit tsunami victims. trading assistant and save on the commission. Why do
Richard Dan operates an eBay store in Maui, Hawaii, called people use Dans services?
Safedeal (see trading assistants list on ebay.com). Initially
3. What are the advantages of fundraising via auctions?
he was selling unclaimed items from his pawnbroker
Saarinen et al. 2006) and were started on the Internet in 1995. Host sites on the Internet
serve as brokers, offering services for sellers to post their goods for sale and allowing buyers
to bid on those items.
Major online auctions, such as eBay, offer consumer products, electronic parts, artwork,
vacation packages, airline tickets, and collectibles, as well as excess supplies and inventories
being auctioned off by B2B marketers. Another type of B2B online auction is increasingly
used to trade special types of commodities, such as electricity transmission capacities and gas
and energy options. Furthermore, conventional business practices that traditionally have
relied on contracts and fixed prices are increasingly being converted into auctions with
bidding for online procurements (e.g., Raffles Hotel, Online File W2.2).
Of course, many consumer goods are not suitable for auctions, and for these items con-
ventional sellingsuch as posted-price retailingis more than adequate. Yet the flexibility
offered by online auction trading offers innovative market processes for many other goods.
For example, instead of searching for products and vendors by visiting sellers Web sites, a
buyer may solicit offers from all potential sellers. Such a buying mechanism is so innovative
that it has the potential to be used in almost all types of consumer goods auctions (as will
be shown later when reverse auctions and name-your-own-price auctions are discussed).
Some examples of innovative auctions are provided in Case 2.2.
DYNAMIC PRICING AND TYPES OF AUCTIONS

dynamic pricing A major characteristic of auctions is that they are based on dynamic pricing. Dynamic pricing
Prices that change based refers to prices that are not fixed but that are allowed to fluctuate as supply and demand in a
on supply and demand market change. In contrast, catalog prices are fixed, as are prices in department stores, super-
relationships at any given markets, and many electronic storefronts.
time. Dynamic pricing appears in several forms. Perhaps the oldest forms are negotiation
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and bargaining, which have been practiced for many generations in open-air markets. It is
customary to classify dynamic pricing into four major categories based on how many buyers
and sellers are involved. These four categories are outlined in the following text and are
discussed more fully in Chapter 10.
One Buyer, One Seller

In this configuration, one can use negotiation, bargaining, or bartering. The resulting price
will be determined by each partys bargaining power, supply and demand in the items
market, and (possibly) business environment factors.
One Seller, Many Potential Buyers

In this configuration, the seller uses a forward auction, an auction in which a seller entertains forward auction
bids from multiple buyers. (Because forward auctions are the most common and traditional An auction in which a
form, they often are simply called auctions.) The four major types of forward auctions are seller entertains bids from
English and Yankee auctions, in which bidding prices increase as the auction progresses, and buyers. Bidders increase
Dutch and free-fall auctions, in which bidding prices decline as the auction progresses. Each of price sequentially.
these can be used for either liquidation or for market efficiency (see Chapter 10 and
Gallaugher 2002). reverse auction (bidding
or tendering system)
Auction in which the
One Buyer, Many Potential Sellers buyer places an item for
Two popular types of auctions in which there is one buyer and many potential sellers are bid (tender) on a request
reverse auctions (tendering) and name-your-own-price auctions. for quote (RFQ) system,
Reverse Auctions. When there is one buyer and many potential sellers, a reverse potential suppliers bid on
auction (also called a bidding or tendering system) is in place. In a reverse auction, the buyer the job, with the price
places an item he or she wants to buy for bid (or tender) on a request for quote (RFQ) system. reducing sequentially, and
Potential suppliers bid on the item, reducing the price sequentially (see Exhibit 2.7). In elec- the lowest bid wins;
tronic bidding in a reverse auction, several rounds of bidding may take place until the bidders primarily a B2B or G2B
do not reduce the price further. The winner is the one with the lowest bid (assuming that mechanism.
only price is considered). Reverse auctions are primarily a B2B or G2B mechanism. (For fur-
ther discussion and examples, see Chapter 5.)
The Name-Your-Own-Price Model. Priceline.com pioneered the name-your-own-price name-your-own-price
model. In this model, a would-be buyer specifies the price (and other terms) that he or she is model
willing to pay to any willing and able seller. For example, Priceline.com presents consumers Auction model in which a
requests to sellers, who fill as much of the guaranteed demand as they wish at prices and terms would-be buyer specifies
requested by buyers. Alternately, Priceline.com searches its own database that contains vendors the price (and other
lowest prices and tries to match supply against requests. Priceline.com asks customers to terms) he or she is willing
guarantee acceptance of the offer if it is at or below the requested price by giving a credit card to pay to any willing and
number. This is basically a C2B model, although some businesses use it too (see Chapter 10 able seller. It is a C2B
for details.) model that was pioneered
by Priceline.com.
EXHIBIT 2.7 The Reverse Auction Process

Cost Price
Bid
$$$$$
A
$$$$
B
$$$ Buyer
A
$$
B
$
Sellers C
Low Bid
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Winner
Time
Many Sellers, Many Buyers

When there are many sellers and many buyers, buyers and their bidding prices are matched
with sellers and their asking prices based on the quantities on both sides. Stocks and
commodities markets are typical examples of this configuration. Buyers and sellers may be indi-
double auction viduals or businesses. Such an auction is called a double auction (see Chapter 10 for details).
Auctions in which
multiple buyers and their BENEFITS, LIMITATIONS, AND IMPACTS OF E-AUCTIONS
bidding prices are E-auctions are becoming important selling and buying channels for many companies and
matched with multiple individuals. E-auctions enable buyers to access goods and services anywhere auctions are
sellers and their asking conducted. Moreover, almost perfect market information is available about prices, products,
prices, considering the current supply and demand, and so on. These characteristics provide benefits to all.
quantities on both sides.
Benefits of E-Auctions
According to Nissanoff (2006), the auction culture will revolutionize the way customers buy,
sell, and obtain what they want. A listing of the benefits of e-auctions to sellers, buyers, and
e-auctioneers is provided in Insights and Additions 2.1.
Limitations of E-Auctions
E-auctions have several limitations. The most significant limitations are minimal security,
the possibility of fraud, and limited participation.
Minimal Security. Some of the C2C auctions conducted on the Internet are not secure
because they are done in an unencrypted environment. This means that credit card numbers
could be stolen during the payment process. Payment methods such as PayPal (paypal.com)
Insights and Additions 2.1 Benefits of E-Auctions
Benefits to Sellers Benefits to Buyers Benefits to E-Auctioneers

Increased revenues from broadening
]0
eb
alm
to
rn
lfaiT[ Opportunities to find unique items Higher repeat purchases. Jupiter Research
bidder base and shortening cycle and collectibles. ( jupiterresearch.com) found that auction sites,
time. such as eBay, tend to garner higher repeat-
purchase rates than the top B2C sites, such as
Amazon.com.
Opportunity to bargain instead of Entertainment. Participation in High stickiness to the Web site (the tendency
selling at a fixed price. e-auctions can be entertaining and of customers to stay at sites longer and come
exciting. back more often). Auction sites are frequently
stickier than fixed-priced sites. Stickier sites
generate more ad revenue for the e-auctioneer.
Optimal price setting determined Convenience. Buyers can bid from Easy expansion of the auction business.
by the market (more buyers, more anywhere, even with a cell phone;
information). they do not have to travel to an auc-
tion place.
Sellers can gain more customer Anonymity. With the help of a third
dollars by offering items directly party, buyers can remain anonymous.
(saves on the commission to inter-
mediaries; also, physical auctions
are very expensive compared with
e-auctions).
Can liquidate large quantities Possibility of finding bargains, for
quickly. both individuals and organizations.
Improved customer relationship
and loyalty (in the case of
specialized B2B auction sites and
electronic exchanges).
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can be used to solve the payment problem (see Chapter 12). In addition, some B2B auctions
are conducted over highly secure private lines.
Possibility of Fraud. Auction items are in many cases unique, used, or antique. Because the
buyer cannot see the items, the buyer may get defective products. Also, buyers can commit
fraud by receiving goods or services without paying for them. Thus, the fraud rate on e-auctions
is relatively high. For a discussion of e-auction fraud and fraud prevention, see Chapter 10.
Limited Participation. Some auctions are by invitation only; others are open to dealers
only. Limited participation may be a disadvantage to sellers, who usually benefit from as large
a pool of buyers as possible.
Impacts of Auctions
Because the trade objects and contexts for auctions are very diverse, the rationale behind auc-
tions and the motives of the different participants for setting up auctions are quite different.
The following are some representative impacts of e-auctions.
Auctions as a Coordination Mechanism. Auctions are used increasingly as an efficient
coordination mechanism for establishing a price equilibrium. An example is auctions for the
allocation of telecommunications bandwidth.
Auctions as a Social Mechanism to Determine a Price. For objects that are not traded in
traditional markets, such as unique or rare items, or for items that may be offered randomly or at
long intervals, an auction creates a marketplace that attracts potential buyers, and often experts.
By offering many of these special items at a single place and time and by attracting considerable
attention, auctions provide the requisite exposure of purchase and sale orders, and hence liquid-
ity of the market in which an optimal price can be determined. Typical examples are auctions of
fine arts or rare items, as well as auctions of communications frequencies, Web banners, and
advertising space. For example, wine collectors can find a global wine auction at winebid.com.
Auctions as a Highly Visible Distribution Mechanism. Some auctions deal with special
offers. In this case, a supplier typically auctions off a limited number of items, using the
auction primarily as a mechanism to gain attention and to attract those customers who are
bargain hunters or who have a preference for the gambling dimension of the auction process.
The airline seat auctions by Cathay Pacific, American Airlines, and Lufthansa fall into this
category (see Saarinen et al. 2006).
Auctions as an EC Component. Auctions can stand alone, or they may be combined with
other e-commerce activities. An example of the latter is the combination of group purchasing
with reverse auctions, as described in Online File W2.7.

1. Define auctions and describe how they work.
2. Describe the benefits of electronic auctions over traditional (offline) auctions.
3. List the four types of auctions.
4. Distinguish between forward and reverse auctions.
5. Describe the name-your-own-price auction model.
6. List the major benefits of auctions to buyers, sellers, and auctioneers.
7. What are the major limitations of auctions?
8. List the major impacts of auctions on markets.
2.6 BARTERING AND NEGOTIATING ONLINE

Two emerging mechanisms are gaining popularity (as can be seen in Chapter 10) in EC:
e-bartering and e-negotiation.
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ONLINE BARTERING
Bartering, the exchange of goods and services, is the oldest method of trade. Today, it is done bartering
primarily between organizations. The problem with bartering is that it is difficult to find The exchange of goods or
trading partners. Businesses and individuals may use classified ads to advertise what they services.
need and what they offer, but they still may not be able to find what they want. Intermediaries
may be helpful, but they are expensive (20 to 30 percent commission) and very slow.
e-bartering (electronic E-bartering (electronic bartering)bartering conducted onlinecan improve the
bartering) matching process by attracting more partners to the barter. In addition, matching can be
Bartering conducted done faster, and as a result, better matches can be found. Items that are frequently bartered
online, usually in a online include office space, storage, and factory space; idle facilities; and labor, products, and
bartering exchange. banner ads. (Note that e-bartering may have tax implications that need to be considered.)
E-bartering is usually done in a bartering exchange, a marketplace in which an
bartering exchange
intermediary arranges the transactions. These exchanges can be very effective. Representative
A marketplace in which
bartering Web sites include allbusiness.com, intagio.com, and barterdepot.com. The process
an intermediary arranges
works like this: First, the company tells the bartering exchange what it wants to offer. The
barter transactions.
exchange then assesses the value of the companys products or services and offers it certain
points or bartering dollars. The company can use the points to buy the things it needs
from a participating member in the exchange.
Bartering sites must be financially secure. Otherwise users may not have a chance to use
the points they accumulate. (For further details see virtualbarter.net and barternews.com).
ONLINE NEGOTIATING
Dynamic prices also can be determined by negotiation. Negotiated pricing commonly is used
for expensive or specialized products. Negotiated prices also are popular when large quanti-
ties are purchased. Much like auctions, negotiated prices result from interactions and
bargaining among sellers and buyers. However, in contrast with auctions, negotiation also
deals with nonpricing terms, such as the payment method and credit. Negotiation is a
well-known process in the offline world (e.g., in real estate, automobile purchases, and
contract work). In addition, in cases where there is no standard service or product to speak of,
some digital products and services can be personalized and bundled at a standard price.
Preferences for these bundled services differ among consumers, and thus they are frequently
negotiated. More discussions on electronic negotiations can be found in Bichler et al. (2003).
A simple P2P negotiation can be seen in ioffer.com (see Chapter 10). For more on negotia-
tion in P2P money lending see the ZOPA and Prosper cases in Chapter 18.
According to Choi and Whinston (2000), online (electronic) negotiation is easier than
offline negotiation. Due to customization and bundling of products and services, it often is
mobile computing
necessary to negotiate both prices and terms for online sales. E-markets allow such online
Use of portable devices,
negotiations to be conducted virtually for all products and services. Three factors may facilitate
including smart cell
online negotiation: (1) the products and services that are bundled and customized, (2) the
phones, usually in a
computer technology that facilitates the negotiation process, and (3) the software (intelligent)
wireless environment. It
agents that perform searches and comparisons, thereby providing quality customer service and
permits real-time access
a base from which prices can be negotiated.
to information, applica-
tions, and tools that,
until recently, were Section 2.6 REVIEW QUESTIONS
accessible only from a 1. Define bartering and describe the advantages of e-bartering.
desktop computer. 2. Explain the role of online negotiation in EC.
mobile commerce
(m-commerce)
E-commerce conducted
2.7 E-COMMERCE IN THE WIRELESS ENVIRONMENT:
via wireless devices. M-COMMERCE AND L-COMMERCE
m-business The widespread adoption of wireless and mobile networks, devices (smart cell phones,
The broadest definition of PDAs, etc.), and middleware (software that links application modules from different
m-commerce, in which computer languages and platforms) is creating exciting new opportunities. These new
e-business is conducted technologies are making mobile computing possible. These technologies permit real-time
access to information, applications, and tools that, until recently, were accessible only from a
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in a wireless environment.
desktop computer. Mobile commerce (m-commerce) refers to the conduct of e-commerce
via wireless devices or from portable devices (see the Maybelline case in Online File W1.2).
It is also sometimes called m-business, when reference is made to its broadest definition, in
which the e-business environment is wireless (Deans 2005; Sadeh 2002).
THE MOBILITY REVOLUTION

Around the world, enterprises are adopting mobilized computing technologies at a tremen-
dous rate. They are using wireless hardware and applications for untethered computing. The
productivity gains available with mobilized technology continue to expand as the price of
the technology continues to drop. And in the case of mobility, the technology revolutionizes
the way that people work.
Organizations are embracing mobilized computing technologies for several reasons:
It improves the productivity of workers in the field.
Wireless telecom support for mobility is growing quickly.
More applications can run both online and offline.
The prices of notebook computers, wireless handhelds, and smart phones continue to fall
as their capabilities increase.
Although mobility makes employees in all types of jobs more productive, one of the
biggest areas of opportunity lies with field service personnel. An estimated 350 million field
service workers around the world are carrying clipboards and notepads. Only about 30 percent
of these workers are computerized. Therefore, the potential for productivity gains is huge.
Example: BNSF Railway Co.

BNSF Railway Co., which operates one of the largest railroad networks in North America,
gave key field maintenance workers notebooks with Intel Centrino mobile technology
and equipped them with mobilized engineering applications to manage and track repairs,
access electronic work orders and technical manuals, submit reports, and plan maintenance
activities. In the past, engineers could only handle these tasks by driving back and forth to the
regional office, which could be many miles away from the days work site.
With the new mobilized technology, field service workers can now access BNSFs main-
tenance and engineering systems from anywhere in their field territory. They can file reports,
monitor maintenance activities, and better identify and resolve problems. All of this results in
smoother, more efficient railroad operations (Intel 2005).
There is a reason for the strong interest in the topic of mobile commerce. According to a
study conducted by Telecom Trends International (2004), the number of m-commerce users
was 94.9 million in 2003 and will grow to 1.67 billion in 2008. In addition, revenues from
m-commerce will grow globally from $6.86 billion in 2003 to over $554.37 billion in 2008.
Some facts and projections regarding m-commerce are provided in Online File W2.8.
Mobile devices can be connected to the Internet, allowing users to conduct transactions
from anywhere. The Gartner Group estimated that at least 40 percent of all B2C transac-
tions, totaling over $200 billion by 2005, will be initiated from smart wireless devices (Telus
Mobility 2002). Others predict much higher figures, believing that mobile devices will soon
overtake PCs as the predominant Internet access device, creating a global market of over 500
million subscribers. However, others predict a much slower adoption rate (see Chapter 9).
THE PROMISE OF M-COMMERCE

Since 1999, m-commerce has become one of the hottest topics in IT in general and in EC in
particular. Mobility significantly changes the manner in which people and trading partners
interact, communicate, and collaborate. Mobile applications are expected to change the way
we live, play, are entertained, and do business. Much of the Internet culture, which is cur-
rently PC based, may change based on mobile devices. As a result, m-commerce creates new
business models for EC, notably location-based applications.
location-based
Location-Based Commerce (LBC) and Pervasive Computing commerce (LBC)
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Location-based commerce (LBC) is an m-commerce application targeted to a customer An m-commerce applica-

whose preferences and needs and location (e.g., using GPS) are known in real time. Given tion targeted to a
this information, a merchant could send an MSM message such as, you are near our Italian customer whose location,
restaurant, please enter (address) and get a 10 percent discount. For more on LBC applica- preferences, and needs
tions, see Chapter 9 and en.wikipedia.org/wiki/Mobile-Commerce. are known in real time.
An emerging area in m-commerce is pervasive computing (see Chapter 9). One of its
promising applications is the use of RFID to improve the supply chain (see the Real-World
Case on Wal-Mart at the end of this chapter).
M-Commerce Adoption
Although there are currently many hurdles to the widespread adoption of m-commerce, it is
clear that many of these will be reduced or eliminated in the future. Many companies are already
shifting their strategy to the mobile world. Many large corporations with huge marketing
presenceMicrosoft, IBM, Intel, Sony, Google, AT&T, TimeWarner, to name a feware
transforming their businesses to include m-commercebased products and services. Nokia
emerged as a world-class company not just because it sells more cell phones than anyone else but
also because it has become the major player in the mobile economy. Similarly, major telecommu-
nications companies, from Verizon to Vodafone, are shifting their strategies to wireless products
and services. In the United States, General Motors produced 1.4 million vehicles equipped with
in-vehicle safety and communications systems in 2004 and equipped 2.2 million 2005 models.
The company plans to double production of OnStar-equipped vehicles for the model year 2006
(Onstar.com 2004). DoCoMo, the worlds largest mobile portal (nttdocomo.com; see Vision
2010), is investing billions of dollars to expand its services to other countries via its i-mode
Global. Finally, in Europe alone over 200 companies offer mobile portal services.
I-MODE: A SUCCESSFUL MOBILE PORTAL

To illustrate the potential spread of m-commerce, lets examine DoCoMos i-mode, the
pioneering wireless service that took Japan by storm in 1999 and 2000. With a few clicks on
a handset, i-mode users can conduct a large variety of m-commerce activities, ranging from
online stock trading and banking to purchasing travel tickets and booking karaoke rooms.
Users can also use i-mode to send and receive color images. Launched in February 1999,
i-mode went international in 2000 and had over 15 million users by the end of that year and
51.8 million by June 2006, including 5 million outside Japan (Wikipedia.com 2006b). The
following are some interesting i-mode applications:
Shopping guides. The addresses and telephone numbers of shops in the major shopping
malls in Tokyo and other Japanese cities are provided with a supporting search engine.
Consumers can locate information about best-selling books and then buy them. Users
can purchase music online to enjoy anywhere.
Maps and transportation. Digital maps show detailed guides of local routes and stops of
the major public transportation systems in all major Japanese cities. Users can access train
and bus timetables, guides to shopping areas, and automatic notification of train delays.
Ticketing. Airline tickets, events, and entertainment tickets can be purchased online.
News and reports. Fast access to global news, local updated traffic conditions, the air
pollution index, and weather reports are provided continuously.
Personalized movie service. Updates on the latest movies with related information,
such as casting and show times, are provided. Also, subscribers can search for their own
favorite movies by entering the name of the movie or the name of the movie theater.
Entertainment. Up-to-date personalized entertainment, such as favorite games, can be
searched for and accessed easily. Online chatting also is provided, and users can send or
receive photos. Also, users can subscribe to receive Tamagotchis characters each day for
only $1 a month. These virtual pets (the translation of their Japanese name means cute
little eggs) exhibit intelligent behavior; for example, a Tamagotchi cat will purr if you
pet it but bite if it is hungry.
Dining and reservations. The exact location of a selected participating restaurant
is shown on a digital map. Subscribers also can find restaurants that offer meals in a
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particular price range. Reservations can be made online. Discount coupons also are
available online.
Additional services. Additional services, such as banking, stock trading, telephone
directory searches, dictionary services, and horoscopes, are available.
CASE 2.3
EC Application
WIRELESS PEPSI INCREASES PRODUCTIVITY
The Pepsi Bottling Group (PBG; pbg.com), the largest In the summer of 2002, only about 700 technicians
manufacturer, seller, and distributor of Pepsi-Cola, has the used the wireless system, but already the company was
mountainous job of stocking and maintaining its Pepsi saving $7 million per year. Each of these technicians was
vending machines as well as completing huge amounts of able to handle one more call each day than previously.
paperwork and searching for parts and equipment to fix these PBG had provided the wireless capability to thousands of
machines. Any time drinks in one of the tens of thousands of technicians by 2006.
machines is out of stock or a machine is not functioning the
company loses revenue and profits. Sources: Compiled from Rhey (2002) and from pbg.com (accessed
In 2002, the company began to equip its service August 2006).
technicians with handheld devices hooked into a wireless
wide area network (WWAN). The handheld is the Melard
Sidearm (from Melard Technologies, melard.com), and it is
Questions
designed to work with many wireless platforms. iAnywhere 1. What are the capabilities of the handheld devices used
(from Sybase, Inc., sybase.com) provides the mobile by the PBG technicians?
database application that allows wireless communications 2. How do the handhelds relate to databases and
around the United States in real time. The database includes dispatching?
the repair parts inventory available on each service truck, so
3. This case deals with vending machine maintenance. In
dispatchers know whom to send for maintenance and where
what ways, if any, could wireless technologies help
the trucks are at any given moment. It also has a
with stocking the machines?
back-office system that maintains the overall inventory.
The company is also able to locate the whereabouts of each
truck in real time, using global positioning systems (GPS).
This makes scheduling and dispatching more effective.
These applications are for individual users and are provided via a mobile portal. An even
greater number of applications are available in the B2B area and in the intrabusiness area, as
illustrated in Case 2.3. For more complete coverage of m-business applications, see Chapter 9,
Shi (2004), Deans (2005), and Dekleva (2004).

1. Define mobile computing and m-commerce.
2. How does m-commerce differ from EC?
3. Define location-based commerce.
4. What are some of the major services provided by i-mode?
2.8 COMPETITION IN THE DIGITAL ECONOMY AND ITS

IMPACT ON INDUSTRIES
One of the major economic impacts of EC is its contribution to competitive advantage, as
will be shown next.
THE INTERNET ECOSYSTEM

The prevailing model of competition in the Internet economy is more like a web of inter-
ISBN: 0-558-13856-X
relationships than the hierarchical command-and-control model of the industrial economy.

Because of these interrelationships, the business model of the Internet economy has been
called the Internet ecosystem. Just like an ecosystem in nature, the activities in the Internet Internet ecosystem
economy are self-organizing: The process of natural selection takes place around company The business model of the
profits and value to customers. Internet economy.
The Internet economy has low barriers to entry, and so it is expanding rapidly. As the
Internet ecosystem evolves both technologically and in population, it will be even easier and
likelier for countries, companies, and individuals to participate in the Internet economy.
Already, a $1 trillion technical infrastructure is in place, ready and available for anyone to use
at any timefree of charge. New ideas and ways of doing things can come from anywhere at
any time in the Internet economy. Some of the old rules of competition no longer apply.
Competitive Factors
EC competition is very intense because online transactions enable the following:
Lower search costs for buyers. E-markets reduce the cost of searching for product infor-
mation (e.g., sellers, models, prices, etc.), frequently to zero. This can significantly impact
competition, enabling customers to find cheaper (or better) products and forcing sellers,
in turn, to reduce prices and/or improve customer service. Sellers that provide informa-
tion to buyers can exploit the Internet to gain a considerably larger market share. For
example, according to Tsai (2004) Wal-Mart and Walgreens are developing intelligent
search tools that are expected to increase online sales on their sites by 25 to 50 percent.
Speedy comparisons. Not only can customers find inexpensive products online, but
they also can find them quickly. For example, a customer does not have to go to several
bookstores to find the best price for a particular book. Using shopping search engines
such as allbookstores.com, bestwebbuys.com/books, or shopping.com for consumer
products, customers can find what they want and compare prices. Companies that sell
online and provide information to search engines will gain a competitive advantage.
Lower prices. Buy.com, Half.com, and other companies can offer low prices due to their
low costs of operation (no physical facilities, minimum inventories, etc.). If volume is
large enough, prices can be reduced by 40 percent or more (see the Blue Nile case at the
beginning of the chapter).
Customer service. Amazon.com and Dell, for example, provide superior customer
service. As will be shown in Chapters 3 and 13, such service is an extremely important
competitive factor.
Barriers to entry are reduced. Setting up a Web site is relatively easy and inexpensive,
and doing so reduces the need for a sales force and brick-and-mortar stores. Companies
have to view this as both a threat (e.g., Where will our next competitor come from?) and
as an opportunity (e.g., Can we use our core competencies in new areas of business?).
Virtual partnerships multiply. With access to a World Wide Web of expertise and the
ability to share production and sales information easily, the ability of a firm to create a
virtual team to exploit an EC opportunity increases dramatically (recall the Boeing case,
Chapter 1.) The Internet is especially good at reducing interaction costs, the time and
money expended when people and companies exchange goods, services, and ideas (e.g.,
meetings, sales presentations, telephone calls).
Market niches abound. The market-niche strategy is as old as the study of competitive
advantage. What has changed is that without the limits imposed by physical storefronts,
the number of business opportunities is as large as the Web. The challenge strategists face
is to discover and reap the benefits from profitable niches before the competition does so.
differentiation Differentiation and personalization. Differentiation involves providing a product or
Providing a product or service that is not available elsewhere. For example, Amazon.com differentiates itself
service that is unique. from other book retailers by providing customers with information that is not available
in a physical bookstore, such as communication with authors, almost real-time book
reviews, and book recommendations. An example of personalization is the Bombay
Sapphire case (Online File W2.9).
In addition, EC provides for personalization or customization of products and services.
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personalization Personalization refers to the ability to tailor a product, service, or Web content to specific
The ability to tailor a user preferences (see Chapter 18). For example, Amazon.com notifies customers by e-mail
product, service, or Web when new books on their favorite subjects or by their favorite authors are published. Several
content to specific user sites will track news or stock prices based on the consumers preferences. For example,
preferences. Google will e-mail all news regarding certain topics (e.g., Chinese stocks and companies) to
a user. The aim of personalization is to increase the usability of complex information by cus-
tomizing the presentation, making the user interface more intuitive and easier to understand,
and reducing information overload by tailoring content and navigation. For personalization
techniques, see Anke and Sundaram (2006).
Example: Amazon.com
Amazon.coms catalog includes several million items. Amazon.com provides easy navigation,
but it provides personalization as well. For example, when a customer looks up a book on a
certain topic, it recommends popular books on the same topic (customers who bought this
book also bought . . .). In addition, it recommends five authors in the customers area of
interest. Recommendations appear several times. Amazon.com also bundles a similar book
with the book the customer is interested in for a large discount. For details, see the opening
case in Chapter 3.
Consumers like differentiation and personalization and are frequently willing to pay more
for them. Differentiation reduces the substitutability between products, benefiting sellers who
use this strategy. Also, price cutting in differentiated markets does not impact market share very
much: Many customers are willing to pay a bit more for personalized products or services.
Certain other competitive factors have become less important as a result of EC. For
example, the size of a company may no longer be a significant competitive advantage (as will
be shown later). Similarly, location (geographical distance from the consumer) now plays a
less significant role, and language is becoming less important as translation programs remove
some language barriers (see Chapters 14 and 16). Finally, digital products are not subject to
normal wear and tear, although some become obsolete.
All in all, EC supports efficient markets and could result in almost perfect competition.
In such markets, a commodity (an undifferentiated product) is produced when the consumers
willingness to pay equals the marginal cost of producing the commodity and neither sellers
nor buyers can influence supply or demand conditions individually. The following are
necessary for perfect competition:
Many buyers and sellers must be able to enter the market at little or no entry cost (no
barriers to entry).
Large buyers or sellers are not able to individually influence the market.
The products must be homogeneous (commodities). (For customized products,
therefore, there is no perfect competition.)
Buyers and sellers must have comprehensive information about the products and about
the market participants demands, supplies, and conditions.
EC could provide, or come close to providing, these conditions. It is interesting to note
that the ease of finding information benefits both buyers (finding information about
products, vendors, prices, etc.) and sellers (finding information about customer demands,
competitors, etc.).
It can be said that competition between companies is being replaced by competition
between networks. The company with better communication networks, online advertising
capabilities, and relationships with other Web companies (e.g., having an affiliation with
Amazon.com) has a strategic advantage. It can also be said that competition is now mostly
between business models. The company with the better business model will win.
competitive forces model
Porters Competitive Analysis in an Industry Model devised by Porter
Porters (2001) competitive forces model identifies five major forces of competition that that says that five major
determine an industrys structural attractiveness. These forces, in combination, determine forces of competition
how the economic value created in an industry is divided among the players in the industry. determine industry struc-
Such an industry analysis helps companies develop their competitive strategy. ture and how economic
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Because the five forces are affected by both the Internet and e-commerce, it is interesting value is divided among
to examine how the Internet influences the industry structure portrayed by Porters model. the industry players in an
Porter divided the impacts of the Internet into either positive or negative for the industry. As industry; analysis of these
shown in Exhibit 2.8, most of the impacts are negative (marked by a minus sign). Of course, forces helps companies
there are variations and exceptions to the impacts shown in the illustration, depending on the develop their competitive
industry, its location, and its size. A negative impact means that competition will intensify in strategy.
EXHIBIT 2.8 Porters Competitive Forces Model: How

the Internet Influences Industry Structure
(+) By making the overall industry
Threat of substitute more efficient, the Internet can
products or services expand the size of the market
() The proliferation of Internet

approaches creates new
substitution threats
Buyers
Bargaining power Rivalry among Bargaining Bargaining
of suppliers existing competitors power of power of
channels end users
() Procurement using the Internet () Reduces differences among (+) Eliminates () Shifts
tends to raise bargaining power competitors as offerings are powerful bargaining
over suppliers, though it can also difficult to keep proprietary channels or power to end
give suppliers access to more improves consumers
customers () Migrates competition to price bargaining
power over () Reduces
() The Internet provides a channel () Widens the geographic market, traditional switching
for suppliers to reach end users, increasing the number of channels costs
reducing the leverage of competitors
intervening companies
() Lowers variable cost relative to
() Internet procurement and digital fixed cost, increasing pressures
markets tend to give all companies for price discounting
equal access to suppliers, and
gravitate procurements to
standardized products that
reduce differentiation () Reduces barriers to entry such as the
need for a sales force, access to channels,
() Reduced barriers to entry and Barriers to entry and physical assets; anything that
the proliferation of competitors Internet technology eliminates or makes
downstream shifts power to easier to do reduces barriers to entry
suppliers
() Internet applications are difficult to keep
proprietary from new entrants
() A flood of new entrants has come into

many industries
Source: Porters Competitive Forces Model: How the Internet Influences Industry Structure from Strategy and the Internet, by M. E. Porter,
March 2001 2001 by the Harvard Business School Publishing Corp. Harvard Business Review. Reprinted by permission.
most industries as the Internet is introduced, causing difficulties to a competing company.

Because the strength of each of the five forces varies considerably from industry to industry, it
would be a mistake to draw general conclusions about the impact of the Internet on long-term
industry profitability; each industry is affected in different ways. Nevertheless, an examination
of a wide range of industries in which the Internet is playing a role reveals some clear trends,
as summarized in Exhibit 2.8. The Internet can also boost an industrys efficiency in various
ways, expanding the overall size of the market by improving its position relative to traditional
substitutes. Thus, the Internet means stronger competition. This competition, which is espe-
cially strong for commodity-type products (e.g., toys, books, CDs), was a major contributor to
the collapse of many dot-com companies in 2000 to 2001. To survive and prosper in such an
environment, a company needs to use innovative strategies.
Examples of how e-commerce is changing entire industries are financial services,
ISBN: 0-558-13856-X
especially stock trading, cyberbanking, and e-mortgages. Zopa. com (Chapter 3) may change
money lending by moving it from banks to a person-to-person level. Obviously, retailing is
changing, and so are travel, entertainment, and more. An emerging change is in classified ads,
as demonstrated in Case 2.4.
CASE 2.4
EC Application
CRAIGSLIST: THE ULTIMATE ONLINE CLASSIFIED SITE
If you want to find (or offer) a job, housing, goods and online for rent services to get the condo rented. With
services, social activities, and much more in over 300 cities Craigslist, it took less than a week at no cost. As more
in more than 50 countries worldwide for free, go to people discover Craigslist, the traditional newspaper-based
craigslist.org. The site has much more information than you classified ad industry will probably be the loser; ad rates
will find in all the newspapers in the individual cities. For may become lower, and fewer ads will be printed.
example, more than 500,000 new jobs are listed from the eBay owns 25 percent of Craigslist. Craigslist charges for
more than 10 million new classified ads received by Craigslist help wanted ads and apartment broker listings in some
every month. Craig Newmark, the founder of Craigslist, has larger cities. In addition, Craigslist may charge ad placers,
said that everything is for sale on the site except the site especially when an ad has rich media features. Classified
itself. Although many other sites offer free classifieds, no advertising is Craigslists real money-making feature.
other site even comes close to Craigslist. According to Copeland (2006), offline classifieds generate
In addition, Craigslist features 80 topical discussion $27 billion in annual profits, and online classifieds could
forums with more than 40 million user postings. No wonder quadruple that amount in four years. Both Google and
that Craigslist has over 4 billion page views per month, making Microsoft are attempting to control this market. So, it is
it the seventh most visited site in the English language. likely that Craigslist.org will be purchased soon.
Craigslist is considered by many as one of the few Web sites
that could change the world because it is simply a free notice- Sources: Compiled from craigslist.org (accessed October 2006),
board with more than four billion readers (Naughton 2006). Brandon (2006), Naughton (2006), Copeland (2006), and
Users cite the following reasons for the popularity of Time (2006).
Craigslist:
It gives people a voice. Questions
It promotes a sense of trust, even intimacy.
1. Identify the business model used by Craigslist.
Its consistency and down-to-earth values.
Its simplicity. 2. Visit craigslist.org and identify the social network and
Its social networking capabilities. business network elements.
As an example of the sites effectiveness, we provide the 3. Why is Craigslist considered a site that changes the
personal experience of one of the authors who needed to rent world?
his condo in Los Angeles. The usual process would take 2 to 4. What do you like about the site? What do you dislike
4 weeks and $400 to $700 in newspaper ads plus the local about it?
IMPACT ON WHOLE INDUSTRIES

In addition to its impact on functional areas and organizations, EC is reshaping entire indus-
tries. In addition to impacting internal competition, major changes are taking place in the
way that business is done. For example, the travel and hospitality industry is going through a
major transition (see Case 18.2 in Chapter 18). The health-care industry is also undergoing
dramatic changes. Suomi (2006) identifies the following major emerging changes in the
health-care industry:
Patient self-care is growing rapidly.
The amount of free medical information is exploding (e.g., WebMd.com).
Patient empowerment is gaining importance (more information, more choices).
Increasing electronic interaction among patients, hospitals, pharmacies, etc.
Increasing digital hospital and other health-care facilities.
Data collected about patients is growing in amount and quality.
Easy and shared access to patient data.
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Elder care and special types of care are improving significantly due to wireless systems.
Increasing need to protect patient privacy and contain cost.
Therefore, the industry will change. For example, home care may increase and more specialty
hospitals may emerge.

1. Why is competition so intense online?
2. Describe Porters competitive forces model as it applies to the Internet and EC.
3. Describe the impact of competition on whole industries.
2.9 IMPACTS OF EC ON BUSINESS PROCESSES

AND ORGANIZATIONS
Little statistical data or empirical research on the full impact of EC is available because of the
relative newness of the field. Therefore, the discussion in this section is based primarily on
experts opinions, logic, and some actual data.
Existing and emerging Web technologies are offering organizations unprecedented
opportunities to rethink strategic business models, processes, and relationships. Feeny (2001)
called these e-opportunities, dividing them into three categories: e-marketing (Web-based
initiatives that improve the marketing of existing products), e-operations (Web-based
initiatives that improve the creation of existing products), and e-services (Web-based initia-
tives that improve customer services). Zwass (2003) also addressed the opportunities of
e-marketplaces: the creation of virtual marketplaces with desired rules, flexible pricing
(including price discovery), multichannel marketplaces (including bricks-and-clicks),
customization, and new business models.
The discussion here is also based in part on the work of Bloch et al. (1996), who
approached the impact of e-marketplaces on organizations from a value-added point of view.
Their model, which is shown in Exhibit 2.9, divides the impact of e-marketplaces into three
EXHIBIT 2.9 The Analysis-of-Impacts Framework

Business New Information
Drivers and Communication
Technology
Industry Industry
Competitors Level
New Actors
New Configurations
New Strategies
The Organization Sources of Business Value
Improve it! Product promotion

New sales channel
Direct savings
Feedback EC Strategy Time to market
and Impact
Customer service
Brand image
Transform it! Technological and organization learning
Customer relations
Redefine it! New product capabilities
New business models
Company
Level
Organizational Impact Mission
Technological Impact
Strategies
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Organization Technology
Source: Bloch, M., Y. Pigneur, and A. Segev. Leveraging Electronic Commerce for Competitive Advantage: A Business Value Framework.
Proceedings of the Ninth International Conference on EDI-IOS, Bled, Slovenia, June 1996. Reprinted by permission of Yves Pigneur.
major categories: improving direct marketing, transforming organizations, and redefining

organizations. This section examines each of these impacts.
IMPROVING MARKETING AND SALES

Traditional direct marketing is done by mail order (catalogs) and telephone (telemarketing).
According to the Direct Marketing Association, actual sales generated by direct mail totaled
$747.6 billion in 2004, and are expected to increase to $954.7 billion by 2007 (Radio
Advertising Bureau 2005). This figure is small, but growing rapidly (about 15 percent in 2005).
Bloch et al. (1996), Kioses et al. (2006), and Singh (2006) describe the following impacts
of e-marketplaces on B2C direct marketing:
Product promotion. The existence of e-marketplaces has increased the promo-

tion of products and services through direct marketing. Contact with customers
has become more information rich and interactive.
New sales channel. Because of the direct reach to customers and the bidirectional
nature of communications in EC, a new distribution channel for existing products
has been created.
Direct savings. The cost of delivering information to customers over the Internet
results in substantial savings to senders of messages. Major savings are realized in
delivering digitized products (such as music and software) rather than physical ones.
Reduced cycle time. The delivery time of digitized products and services can be
reduced to seconds. Also, the administrative work related to physical delivery,
especially across international borders, can be reduced significantly, cutting the
cycle time by more than 90 percent. One example of this is TradeNet in Singapore,
which reduced the administrative time of port-related transactions from days to
minutes. Cycle time can be reduced through improvements along the supply chain
(e.g., by using RFID).
Improved customer service. Customer service can be greatly enhanced by
enabling customers to find detailed information online. For example, FedEx and
other shippers allow customers to trace the status of their packages. Also, auto-
responders (see Chapter 13) can answer standard e-mail questions in seconds.
Finally, human experts services can be expedited using help-desk software.
Brand or corporate image. On the Web, newcomers can establish corporate
images very quickly. What Amazon.com did in just 3 years took traditional com-
panies generations to achieve. A good corporate image facilitates trust, which is
necessary for direct sales. Traditional companies such as Intel, Disney, and Wal-
Mart use their Web activities to affirm their corporate identity and brand image.
Online File W2.9 demonstrates how one company uses personalization to bolster
its image.
Customization. EC enables customization of products and services. Buying in a
store or ordering from a television advertisement usually limits customers to a sup-
ply of standard products. Dell is the classic example of customization success.
Today, customers can configure not only computers but also cars, jewelry, shoes,
clothes, gifts, and hundreds of other products and services. If done properly, a
company can achieve mass customization that provides a competitive advantage
and increases the overall demand for certain products and services. Customization
is changing marketing and sales activities both in B2C and in B2B.
Advertising. With direct marketing and customization comes one-to-one, or
direct, advertising, which can be much more effective than mass advertising.
Direct advertising creates a fundamental change in the manner in which advertis-
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ing is conducted, not only for online transactions but also for products and ser-
vices that are ordered and shipped in traditional ways. As will be shown in
Chapter 4, the entire concept of advertising is going through a fundamental
change due to EC.
Ordering systems. Taking orders from customers can be drastically improved if it

is done online, reducing both processing time and mistakes. Electronic orders can
be quickly routed to the appropriate order-processing site. This process reduces
expenses and also saves time, freeing salespeople to develop marketing plans.
Market operations. Direct e-marketing is changing traditional markets. Some
physical markets may disappear, as will the need to make deliveries of goods to
intermediaries in the marketplace. In an e-marketspace, goods are delivered directly
to buyers upon completion of the purchase, making markets much more efficient
and saving the cost of the shipment into and from the brick-and-mortar store.
Accessibility. The ability to access a market anytime from any place (especially
with wireless devices) enhances direct e-marketing.
For digital productssoftware, music, and informationthe changes brought by e-markets

will be dramatic. Already, small but powerful software packages are delivered over the Internet.
The ability to deliver digitized products electronically affects (eliminates) packaging and greatly
reduces the need for specialized distribution models.
New sales models such as shareware, freeware, and pay-as-you-use are emerging.
Although these models currently exist only within particular sectors, such as the software and
publishing industries, they will eventually pervade other sectors.
Another way to view the impact of e-marketplaces on marketing is provided by Wind
(2001). Kioses et al. (2006) summarize the changes in marketing. These changes are listed in
Exhibit 2.10.
EXHIBIT 2.10 The Changing Face of Marketing

Old ModelMass and New ModelOne-to-One
Segmented Marketing and Customization
Relationships with customers Customer is a passive participant Customer is an active coproducer.
in the exchange Target marketing is to individuals
Customer needs Articulated Articulated and unarticulated
Segmentation Mass market and target segments Segments looking for customized solutions
and segmented targets. One-to-one targets
Product and service offerings Line extensions and modification Customized products, services, and marketing
New product development Marketing and R&D drive new product R&D focuses on developing the platforms that
development allow consumers to customize based on
customer inputs
Pricing Fixed prices and discounting Customer influencing pricing (e.g., Priceline.com;
auctions); value-based pricing
models, e-auctions, e-negotiations (i-offer)
Communication Advertising and PR Integrated, interactive, and customized
marketing communication, education, and
entertainment
Distribution Traditional retailing and direct marketing Direct (online) distribution and rise of third-party
logistics services
Branding Traditional branding and cobranding The customers name as the brand (e.g., My Brand
or Brand 4 ME)
Basis of competitive advantage Marketing power Marketing finesse and capturing the customer
as partner while integrating marketing,
operations, R&D, and information
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Communities Discount to members in physical Discounts to members of e-communities

communities
Sources: Compiled from Wind (2001), Kioses et al. (2006), and Singh (2006).
All of these impacts of e-markets on direct marketing provide companies, in some cases,
with a competitive advantage over those that use only traditional direct-sales methods, as
vividly illustrated in the Blue Nile case. Furthermore, because the competitive advantage is so
large, e-markets are likely to replace many nondirect marketing channels. Some people
predict the fall of the shopping mall, and many retail stores and brokers of services (e.g.,
stocks, real estate, and insurance) are labeled by some as soon-to-be-endangered species.
TRANSFORMING ORGANIZATIONS
A second impact of e-marketplaces is the transformation of organizations. Here, we look at
two key topics: organizational learning and the nature of work.
Technology and Organizational Learning

Rapid progress in EC will force a Darwinian struggle: To survive, companies will have to
learn and adapt quickly to the new technologies. This struggle will offer them an opportunity
to experiment with new products, services, and business models, which may lead to strategic
and structural changes. These changes may transform the way in which business is done. We
believe that as EC progresses, it will have a large and durable impact on the strategies of many
organizations (see the Rosenbluth [now part of American Express] case, Online File W2.10).
Thus, new technologies will require new organizational structures and approaches. For
instance, the structure of the organizational unit dealing with e-marketspaces might be
different from the conventional sales and marketing departments. Specifically, a companys
e-commerce unit might report directly to the chief information officer (CIO) rather than to
the sales and marketing vice president. To be more flexible and responsive to the market, new
processes must be put in place. For a while, new measurements of success may be needed. For
example, the measurescalled metricsused to gauge success of an EC project in its early
stages might need to be different from the traditional revenueexpenses framework
(see Chapters 14 and 15). However, in the long run, as many dot-coms have found out, no
business can escape the traditional revenueexpenses framework.
In summary, corporate change must be planned and managed. Before getting it right,
organizations may have to struggle with different experiments and learn from their mistakes.
The Changing Nature of Work

The nature of some work and employment will be restructured in the Digital Age; it is
already happening before our eyes. For example, driven by increased competition in the
global marketplace, firms are reducing the number of employees down to a core of essential
staff and outsourcing whatever work they can to countries where wages are significantly lower.
The upheaval brought on by these changes is creating new opportunities and new risks and is
forcing people to think in new ways about jobs, careers, and salaries.
Digital Age workers will have to be very flexible. Few will have truly secure jobs in the
traditional sense, and many will have to be willing and able to constantly learn, adapt, make
decisions, and stand by them. Many will work from home.
The Digital Age company will have to view its core of essential workers as its most
valuable asset. It will have to constantly nurture and empower them and provide them with
every means possible to expand their knowledge and skill base (see Drucker 2002).
REDEFINING ORGANIZATIONS
The following are some of the ways in which e-markets redefine organizations.
New and Improved Product Capabilities

E-markets allow for new products to be created and for existing products to be customized in
innovative ways. Such changes may redefine organizations missions and the manner in
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which they operate. Customer profiles, as well as data on customer preferences, can be used
as a source of information for improving products or designing new ones.
Mass customization, as described earlier, enables manufacturers to create specific products
for each customer, based on the customers exact needs (see Appendix 2A on build-to-order
EXHIBIT 2.11 How Customization Is Done Online:

The Case of Nike Shoes
Log on to Nike.com Click on an item Select: size, color,
Go to USA You are in configuration personalized
Go to Nike iD Nike iD: Create your own logo, etc.
View 32 items Configure your choice Submit and review
(see it in a 3D picture)
Start
Here
Order flows to Get shipping Place order in

production floor information (2 to 4 shopping cart
Your personalized weeks to deliver) Use express service
logo is Arrange payment if you are a
programmed into (credit card) member
the machine
Shoes are Shoes arrive,

inspected, packed enjoy them
and transferred
to shipper
at the end of this chapter). For example, Motorola gathers customer needs for a pager or a
cellular phone, transmits the customers specifications electronically to the manufacturing
plant where the device is manufactured, and then sends the finished product to the customer
within a day. Dell and General Motors use the same approach in building their products.
Customers can use the Web to design or configure products for themselves. For example,
customers can use the Web to design T-shirts, furniture, cars, jewelry, Nike shoes, and even a
Swatch watch. With the use of mass-customization methods, the cost of customized products
is at or slightly above the comparable retail price of standard products. Exhibit 2.11 shows
how customers can order customized Nike shoes.
New Industry Order and Business Models

E-markets affect not only individual companies and their products, but also entire
industries (e.g., airlines are moving to electronic ticketing and stocks are moving to online
trading). The wide availability of information and its direct distribution to consumers
will lead to the use of new business models (e.g., the name-your-own-price model of
Priceline.com).
Improving the Supply Chain

One of the major benefits of e-markets is the potential improvement in supply chains.
A major change is the creation of a hub-based chain, as shown in Exhibit 2.12 (in compari-
son with a traditional supply chainupper part of the exhibit), and in Chapter 7.
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Self-Service. One of the major changes in the supply chain is to transfer some activities
to customers and/or employees through self-service. This strategy is used extensively in call
centers (e.g., track your package at UPS or FedEx), with self-configuration of products (e.g.,
Dell, Nike), by having customers use FAQs, and by allowing employees to update personal
EXHIBIT 2.12 Changes in the Supply Chain

Supplier Manufacturer Wholesaler
Delivery
Subsupplier Service Retailer
Buyer
a. Traditional Intermediaries
Logistics,
delivery
Other
services
Technology
Supplier
Buyer
Consultant
Electronic Buyer
Hub
Logistics
Bank
payment
Sub-
supplier
Manufacturers
Support
b. Hub-Based Chain
data online. Shifting activities to others in the supply chain saves money and increases data
accuracy and accountability.
Impacts on Manufacturing
EC is changing manufacturing systems from mass production lines to demand-driven,
just-in-time manufacturing (see Blecker et al. 2005). These new production systems are
integrated with finance, marketing, and other functional systems, as well as with business
partners and customers. Using Web-based ERP systems (supported by software such as SAP
R/3), companies can direct customer orders to designers and/or to the production floor build-to-order (pull
within seconds (Norris 2005). Production cycle time can be cut by 50 percent or more in system)
many cases, even if production is done in a different country from where the designers and A manufacturing process
ISBN: 0-558-13856-X
engineers are located. (Recall the Boeing Case, Chapter 1.) that starts with an order
Build-to-Order Manufacturing. Build-to-order (pull system) is a manufacturing (usually customized).
process that starts with an order (usually customized). Once the order is paid for, the vendor Once the order is paid
starts to fulfill it. This changes not only production planning and control but also the entire for, the vendor starts to
supply chain and payment cycle. For example, manufacturing or assembly starts only after an fulfill it.
order is received. For more on build-to-order production, see Appendix 2A at the end of this
chapter. One implementation of build-to-order is presented next.
Real-Time Demand-Driven Manufacturing. Successful manufacturing organizations must
respond quickly and efficiently to demand. Strategies and techniques of the past no longer work,
and it is a challenge to transform from the traditional, inventory-centric model to a more prof-
itable and flexible demand-driven enterprise. Demand-driven manufacturing (DDM) provides
customers with exactly what they want, when and where they want it. Effective communication
between the supply chain and the factory floor is needed to make it happen. Partnerships must
be focused on reducing costs through shared quality goals, shared design responsibility, on-time
deliveries, and continuous performance reviews. An explanation of the DDM process is provided
in Online File W2.11.
Virtual Manufacturing. An interesting organizational concept is that of virtual
manufacturingthe ability to run multiple manufacturing plants as though they were at
one location. A single company controls the entire manufacturing process, from the supply
of components to shipment, while making it completely transparent to customers and
employees. For example, Cisco works with 34 plants globally, 32 of which are owned by
other companies. Each of Ciscos products will look exactly alike, regardless of where it was
manufactured. Up-to-the-minute information sharing is critical for the success of this
mass-customization approach (Blecker et al. 2005).
Assembly Lines. Companies such as IBM, General Motors, General Electric, and
Boeing assemble products from components that are manufactured in many different loca-
tions, even different countries. Subassemblers gather materials and parts from their vendors,
and they may use one or more tiers of manufacturers. Communication, collaboration, and
coordination are critical in such multitier systems. Using electronic bidding, assemblers
acquire subassemblies 15 to 20 percent cheaper than before and 80 percent faster.
Furthermore, such systems are flexible and adaptable, allowing for fast changes with minimum
cost. Also, costly inventories that are part of mass-production systems can be minimized.
Finally, as seen in the Boeing case (Chapter 1), the system encourages suppliers to contribute
innovative ideas.
According to Blecker (2006b), Internet technologies in the future will impact the shop
floors in isolated islands of factories in real time. Internal communication and collaboration
systems will interconnect automation, such as a single machine, or an assembly line, increasing
productivity, speed, and quality.
Impacts on Finance and Accounting

E-markets require special finance and accounting systems. Most notable of these are electronic
payment systems (Chapter 12). Traditional payment systems may be ineffective or inefficient
for electronic trade. The use of new payment systems such as electronic cash is complicated
because legal issues and agreements on international standards are involved. Nevertheless,
electronic cash is certain to come soon, and it will change how payments are made. It could also
change consumers financial lives and shake the foundations of financial systems.
Executing an electronic order triggers an action in what is called the back office. Back-
office transactions include buyers credit checks, product availability checks, order confirma-
tions, changes in accounts payable, receivables, billing, and much more. These activities must
be efficient, synchronized, and fast so that the electronic trade will not be slowed down. An
example of this is online stock trading. In most cases, orders are executed in less than 1 second,
and the trader can find an online confirmation of the trade immediately.
One of the most innovative concepts in accounting and finance is the virtual close,
which would allow companies to close their accounting records, or books, within a day.
This Cisco Systems project is described in Online File W2.12. For more on impacts of EC
on the financial services industry, see Malhotra and Malhotra (2006).
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Impact on Human Resources Management and Training

EC is changing how people are recruited (see Chapter 3), evaluated, promoted, and developed.
EC also is changing the way training and education are offered to employees. Online distance
learning is exploding, providing opportunities that never existed in the past. Companies
are cutting training costs by 50 percent or more, and virtual courses and programs are
mushrooming (see Chapter 8).
New e-learning systems offer two-way video, on-the-fly interaction, and application
sharing. Such systems provide for interactive remote instruction systems, which link sites
over a high-speed intranet. At the same time, corporations are finding that e-learning may be
their ticket to survival as changing environments, new technologies, and continuously chang-
ing procedures make it necessary for employees to be trained and retrained constantly, a
process known as e-Human Resources (Ensher et al. 2002). EC systems are revolutionizing
human resources (HR) operations (see Online File W2.13).

1. List the major parts of Bloch et al.s model.
2. Describe how EC improves direct marketing.
3. Describe how EC transforms organizations.
4. Describe how EC redefines organizations.
5. Describe the concept of build-to-order (customization).
6. Describe the concept of the virtual close (described in Online File W2.12)
MANAGERIAL ISSUES
Some managerial issues related to this chapter are as follows.
1. What about intermediaries? Many EC applications is likely to be impacted by m-commerce. The opportu-
will change the role of intermediaries. This may create a nities presented by m-commerce are enormous, but so
conflict between a company and its distributors. It may are the risks. However, doing nothing may be even
also create opportunities. In many cases, distributors riskier. For further discussion, see Lei (2006) and
will need to change their roles. This is a sensitive issue Sadeh (2002).
that needs to be planned for during the transformation 5. How do we compete in the digital economy?
to the e-business plan. Although the basic theories of competition are
2. Should we auction? A major strategic issue is whether unchanged, the rules are different. Of special interest
to use auctions as a sales channel. Auctions do have some are digital products and services, whose variable costs
limitations, and forward auctions may create conflicts are very low. Competition involves both old-economy
with other distribution channels. If a company decides to and new-economy companies. The speed of changes in
use auctions, it needs to select auction mechanisms and competitive forces can be rapid, and the impact of new
determine a pricing strategy. These decisions determine business models can be devastating. As Bill Gates once
the success of the auction and the ability to attract and said, Competition is not among companies, but
retain visitors on the site. Auctions also require support among business models (Financial Analysts Meeting
services. Decisions about how to provide these services 1998).
and to what extent to use business partners are critical to
6. What organizational changes will be needed?
the success of high-volume auctions.
Companies should expect organizational changes in all
3. Should we barter? Bartering can be an interesting functional areas once e-commerce reaches momentum.
strategy, especially for companies that lack cash, need At a minimum, purchasing will be done differently in
special material or machinery, and have surplus many organizations. Introducing models such as
resources. However, the valuation of what is bought or forward auctions and affiliate programs may also have a
sold may be hard to determine, and the tax implica- major impact on business operations. Finally, the
tions in some countries are not clear. trends toward build-to-order and demand-driven
4. What m-commerce opportunities are available? A manufacturing will continue to expand.
ISBN: 0-558-13856-X
company should develop an m-commerce strategy if it
RESEARCH TOPICS
Some EC research issues related to this chapter follow. For details, references, and additional topics,
refer to the Online Appendix A Current EC Research.
1. Benefits and Issues of E-Marketplaces Examine how wireline and wireless technologies are
Analyze the benefits of e-marketplaces by industry, related (complementation, substitution, facilitation).
product, and e-market type. Investigate the adaptation of new m-commerce
What is the role of e-marketplaces in facilitating technologies, such as RFID.
coordination with partners and intermediaries? 7. Build-to-Order Manufacturing and Assembly
Summarize and compare typical empirical EC Investigate the implementation strategy of EC and
studies and outline potential new EC studies. its relationship to mass customization from differ-
Research privacy considerations in e-marketplaces. ent angles (e.g., by industry, by product type).
2. The Roles of Intermediaries in E-Marketplaces Examine the design of information systems used to
facilitate build-to-order.
Examine the traditional roles of intermediaries and
their roles in e-marketplaces (reintermediation). Examine the adaptation of DDM in different
industries.
Investigate how intermediation affects competition
and customer service. 8. Agent-Based E-Marketplaces
Analyze disintermediation and reintermediation in Discuss creation of protocols for agent-based EC.
e-marketplaces. Will people use EC intelligent agents? Is there
3. Electronic Catalogs a limit to what autonomous agents can do in EC?
What are the benefits of intelligent catalog-search Research the integration of Agent Communication
tools to buyers? What methods are used for search? Language (ACL), EDI, and B2B protocols.
From the buyers point of view, what are the bene- How are agents incorporated into Web Services?
fits of customized, aggregated catalogs? How do agents extract knowledge from Web pages?
How accurate is dynamic customer profiling? Describe the Semantic Web with eXtensible Rule
Research search agents for electronic catalogs. Markup Language (XRML) framework.
Describe design of market mechanisms and experi-
4. Auctions and Negotiation as B2B EC Mechanisms
mental simulation of their performances.
Investigate the reasons for the success of online
Examine agents in context-aware ubiquitous envi-
auctions (success factors).
ronments: architectures and applications.
Examine how businesses use auctions, especially
9. The Effect of EC on Organizational Structures
reverse ones, as a business strategy.
How has EC changed the organizational structure
Research different aspects of online negotiation
of firms?
(e.g., the role of intelligent agents).
How has EC affected procurement and sales
5. The Impact of EC
departments?
Research the impact of EC on organizations, func-
What kinds of internal processes can be out-
tional departments, competition, market structures,
sourced?
and business processes.
Examine the transformation process and issues
Use surveys and statistics to compare the impact of
involved in changing to a digital enterprise.
EC on different countries and industries.
6. Mobile Computing and Commerce
Use theoretical models, frameworks, and surveys
to compare and contrast m-commerce and e-
commerce.
ISBN: 0-558-13856-X
SUMMARY
In this chapter you learned about the following EC issues as they relate to the learning objectives.
1. E-marketplaces and their components. A market- 6. The benefits and limitations of auctions. The major
space, or e-marketplace, is a virtual market that does benefits for sellers are the ability to reach many buy-
not suffer from limitations of space, time, or borders. ers, to sell quickly, and to save on commissions to
As such, it can be very effective. Its major components intermediaries. Buyers have a chance to obtain bar-
include customers, sellers, products (some digital), gains and collectibles while shopping from their
infrastructure, front-end processes, back-end activities, homes. The major limitation is the possibility of
electronic intermediaries, other business partners, and fraud.
support services. 7. Bartering and negotiating. Electronic bartering
2. The role of intermediaries. The role of intermediaries can greatly facilitate the swapping of goods and
will change as e-markets develop; some will be elimi- services among organizations, thanks to improved
nated (disintermediation), others will change their search and matching capabilities, which is done in
roles and prosper (reintermediation). In the B2B area, bartering exchanges. Software agents can facilitate
for example, e-distributors connect manufacturers online negotiation.
with buyers by aggregating electronic catalogs of many 8. The role of m-commerce. Mobile commerce is
suppliers. New value-added services that range from emerging as a phenomenon that can provide Internet
content creation to syndication are mushrooming. access to millions of people. It also creates new
3. The major types of e-marketplaces. In the B2C area, location-related applications.
there are storefronts and e-malls. In the B2B area, 9. Competition in the digital economy. Competition in
there are private and public e-marketplaces, which online markets is very intense due to the increased
may be vertical (within one industry) or horizontal power of buyers, the ability to find the lowest price,
(across different industries). Different types of portals and the ease of switching to another vendor. Global
provide access to e-marketplaces. competition has increased as well.
4. Electronic catalogs, search engines, and shopping 10. The impact of e-markets on organizations. All func-
carts. The major mechanisms in e-markets are tional areas of an organization are affected by e-markets.
electronic catalogs, search engines, software (intelli- Broadly, e-markets improve direct marketing and
gent) agents, and electronic shopping carts. These transform and redefine organizations. Direct mar-
mechanisms facilitate EC by providing a user-friendly keting (manufacturers to customers) and one-to-one
shopping environment. marketing and advertising are becoming the norm, and
5. Types of auctions and their characteristics. In mass customization and personalization are taking
forward auctions, bids from buyers are placed sequen- off. Production is moving to a build-to-order model,
tially, either in increasing (English and Yankee) mode changing supply chain relationships and reducing cycle
or in decreasing (Dutch and free-fall) mode. In reverse time. Virtual manufacturing is also on the rise. Financial
auctions, buyers place an RFQ and suppliers submit systems are becoming more efficient as they become net-
offers in one or several rounds. In name-your-own- worked with other business functions, and the human
price auctions, buyers specify how much they are resources activities of recruiting, evaluation, and training
willing to pay for a product or service and an interme- are being managed more efficiently due to employees
diary tries to find a supplier to fulfill the request. interactions with machines.
KEY TERMS
Auction 59 Disintermediation 53 Electronic shopping cart 58
Back end 45 Double auction 62 Forward auction 61
Bartering 63 Dynamic pricing 60 Front end 45
Bartering exchange 64 E-bartering (electronic bartering) 64 Infomediaries 51
ISBN: 0-558-13856-X
Build-to-order (pull system) 77 E-distributor 53 Information portal 49

Buy-side e-marketplace 48 E-mall (online mall) 47 Intermediary 45
Competitive forces model 69 E-marketplace 44 Internet ecosystem 67
Differentiation 68 Electronic auction (e-auction) 59 Location-based commerce (LBC) 65
Digital products 45 Electronic catalog 55 M-business 64
Marketspace 45 Private e-marketplace 48 Sell-side e-marketplace 48

Mobile commerce (m-commerce) 64 Public e-marketplace 49 Software (intelligent) agent 58
Mobile computing 64 Reintermediation 54 Storefront 47
Mobile portal 49 Reverse auction (bidding Voice portal 49
Name-your-own-price model 61 or tendering system) 61
Personalization 68 Search engine 57
QUESTIONS FOR DISCUSSION

1. Compare marketplaces with marketspaces. What are 6. The name-your-own-price model is considered a
the advantages and limitations of each? reverse auction. However, this model does not include
2. Compare and contrast competition in traditional RFQs or consecutive bidding. Why is it called a
markets with that in digital markets. reverse auction?
3. Explain why sell-side and buy-side marketplaces in 7. Discuss the advantages of m-commerce over e-
the same company are usually separated, whereas in an commerce.
exchange they are combined. 8. Discuss the relationship of DDM with build-to-order.
4. Discuss the need for portals in EC.
5. Discuss the advantages of dynamic pricing over fixed
pricing. What are the potential disadvantages of
dynamic pricing?
INTERNET EXERCISES
1. Visit bluenile.com, diamond.com, and jewelry 7. Enter bloomsburgcarpet.com.
exchange.com. Compare the sites. Comment on the Explain how the site solves the
similarities and the differences. problem of sending carpet sample
2. Go to cisco.com, google.com, and cio.com and locate books to representatives all over
information about the status of the virtual close. the country. What are the special
Write a report based on your findings. features of the electronic catalogs here? (Hint: It might
be useful to read Kapp 2001.)
3. Visit ticketmaster.com, ticketonline.com, and other
sites that sell event tickets online. Assess the competition 8. Enter respond.com and send a request for a product
in online ticket sales. What services do the different sites or a service. Once you receive replies, select the best
provide? deal. You have no obligation to buy. Write a short
report based on your experience.
4. Examine how bartering is conducted online at
tradeaway.com, buyersbag.com, u-exchange.com, 9. Enter onstar.com and review its services. Comment
and intagio.com. Compare the functionalities and on the usability of each service.
ease of use of these sites. 10. Enter yahoo.com and find what personalization
5. Enter pages.ebay.com/wireless/ and investigate the methods it uses.
use of anywhere wireless. Review the wireless devices 11. Enter Timberland Boot Studio (timberland.com) and
and find out how they work. design a pair of boots. Compare it to building your
ISBN: 0-558-13856-X
6. Enter mfgquote.com and review the process by own sneakers at nike.com.

which buyers can send RFQs to merchants of their
choice. Evaluate all of the online services provided by
the company. Write a report based on your findings.
TEAM ASSIGNMENTS AND ROLE PLAYING

1. Have several teams each review Porters (2001) and of jewelry as Blue Nile did in selling expensive
Bakos (1998) articles. Each team member will research engagement rings?
one of the issues raised in the papers (e.g., competition, c. Competition between Blue Nile and Amazon.com
disintermediation, and Internet impacts) in light will continue to increase. In your opinion, which
of recent developments in the economy and the one will win (visit their Web sites and see how they
e-commerce field. sell jewelry).
2. Reread the opening case and discuss the following: d. Why is commoditization so important in the
a. Discuss the key success factors for Blue Nile. diamond business?
b. Amazon.com makes only a 15 percent margin on e. Compare the following three sites: diamond.com,
the products it sells. This enables Amazon.com to ice.com, and bluenile.com.
sell diamond earrings for $1,000 (traditional jewel- f. Follow the performance of Blue Niles stock since
ers charge $1,700 for the same). Do you think that 2003 (symbol: NILE).
Amazon.com will succeed in selling this type
Real-World Case
WAL-MART LEADS RFID ADOPTION
In the first week of April 2004, Wal-Mart the supply chain, reduce theft, increase sales, reduce
(walmart.com) launched its first live test of RFID tracing inventory costs (by eliminating both overstocking and
technology. Using one distribution center and seven understocking), and provide visibility and accuracy
stores, 21 products from participating vendors were used throughout Wal-Marts supply chain. By January 2007,
in the pilot test. Wal-Mart expects 630 suppliers to be on the system
In the pilot application, passive RFID chips with (nearly doubling the 330 in January 2006).
small antennae were attached to cases and pallets. Although some of Wal-Marts suppliers have been
When passed near an RFID reader, the chip activated, late in implementing the system, it is clear that if the
and its unique product identifier code was transmitted pilot is successful (and so far it is) RFID will become an
back to an inventory control system. Cases and pallets industry standard. After all, nearly $70 billion is lost in
containing the 21 products featuring RFID tags were the retail sector in the United States every year due to
delivered to the distribution center in Sanger, Texas, products getting lost in the supply chain or being stored
where RFID readers installed at the dock doors notified in wrong places.
both shippers and Wal-Mart what products had entered In addition to requiring RFID from its suppliers,
the Wal-Mart distribution center and where the products Wal-Mart is installing the technology internally.
were stored. RFID readers were also installed in other According to Scherago (2006), more than 2,000 Wal-Mart
places, such as conveyor belts, so that each marked case stores were RFID-enabled with gate readers and hand-
could be tracked. The readers used by Wal-Mart have an helds at loading docs, the entrance, stockrooms, and the
average range of 15 feet. (See Chapter 7 for more on sales floor by the end of 2006.
how RFID works.) The next step in Wal-Marts pilot is to mark each
Wal-Mart set a January 2005 target for its top 100 individual item with a tag. This plan raises a possible
suppliers to place RFID tags on cases and pallets privacy issue: What if the tags are not removed from the
destined for Wal-Mart stores. Wal-Mart believed that the products? People fear that they will be tracked after
implementation of the pilot scheme will pave the way for leaving the store. Wal-Mart also can use RFIDs for many
achieving this goal. According to Linda Dillman, CIO at other applications. For example, it could attach tags to
Walmart, the company's RFID strategy was a success in shoppers children, so if they are lost in the megastore
ISBN: 0-558-13856-X
that by the end of January the required RFID systems they could be tracked in seconds.
were in place and many of Wal-Mart's suppliers were col- Retailers such as Wal-Mart believe that the
lecting data on the delivery of their products (IDTechEX widespread implementation of RFID technology marks a
2005). The system is expected to improve flows along revolutionary change in supply chain management, much
as the introduction of bar codes was seen as revolution- Questions

ary two decades ago.
The RFID initiative is an integral part of improv- 1. Assuming that the cost of RFID is low (less than
ing the companys supply chain (Scherago 2006). The $0.05 per item), what advantages can you see for
RFID along with a new EDI will improve the collabora- tagging individual items in each store? Is it nec-
tion with the suppliers and help reduce inventories. essary to do so?
According to Ferguson (2006), Wal-Marts new CIO 2. Find some information regarding the advantages
has said that he will stand behind the RFID of RFIDs over regular bar codes.
technology. 3. Is this an e-business application? Why or why
not? If it is, what business model is being used?
Sources: Condensed from Lundquist (2003), BusinessWeek Online
(2004), IDTechEX (2005), Ferguson (2006), Scherago (2006), 4. What are some of the business pressures driving
and Kaiser (2004). the use of RFID in retailing?
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ISBN: 0-558-13856-X
APPENDIX
BUILD-TO-ORDER PRODUCTION
2A
2A
The concept of build-to-order means that a firm starts to make a product or service only after an order for
it is placed. It is also known as demand-driven manufacturing (DDM), customization, personalization, and
pull technology. This concept is as old as commerce itself and was the only method of production until the
Industrial Revolution. According to this concept, if a person needs a pair of shoes, he or she goes to a
shoemaker, who takes the persons measurements. The person negotiates quality, style, and price and pays
a down payment. The shoemaker buys the materials and makes a customized product for the customer.
Customized products are expensive, and it takes a long time to finish them. The Industrial Revolution
introduced a new way of thinking about production.
The Industrial Revolution started with the concept of dividing work into small parts. Such division
of labor makes the work simpler, requiring less training for employees. It also allows for specialization.
Different employees become experts in executing certain tasks. Because the work segments are simpler, it
is easier to automate them. As machines were invented to make products, the concept of build-to-market
developed. To implement build-to-market, it was necessary to design standard products, produce them,
store them, and then sell them.
The creation of standard products by automation drove prices down, and demand accelerated. The
solution to the problem of increased demand was mass production. In mass production, a company produces
large amounts of standard products at a very low cost and then pushes them to consumers. Thus began the
need for sales and marketing organizations. Specialized sales forces resulted in increased competition and the
desire to sell in wider, and more remote, markets. This model also required the creation of large factories and
specialized departments such as accounting and personnel to manage the activities in the factories. With
mass production, factory workers personally did not know the customers and frequently did not care about
customers needs or product quality. However, the products were inexpensive and good enough to fuel
demand, and thus the concept became a dominant one. Mass production also required inventory systems at
various places in the supply chain, which were based on forecasted demand. If the forecasted demand was
wrong, the inventories were incorrect. Thus, companies were always trying to achieve the right balance
between not having enough inventory to meet demand and having too much inventory on hand.
As society became more affluent, the demand for customized products increased. Manufacturers had
to meet the demand for customized products to satisfy customers. As long as the demand for customized
product was small, it could be met. Cars, for example, have long been produced using this model.
Customers were asked to pay a premium for customization and wait a long time to receive the customized
product, and they were willing to do so. Note that the process starts with product configuration (Blecker
2006); namely, the customer decides what the product is going to look like, what operations it will
perform, and what capabilities it will have (e.g., the functionalities in Dell).
Slowly, the demand for customized products and services increased. Burger King introduced the con-
cept of having it your way, and manufacturers sought ways to provide customized products in large
quantities, which is the essence of mass customization, as pioneered by Dell. Such solutions were usually
enhanced by some kind of information technology. The introduction of customized personal computers
(PCs) by Dell was so successful that many other industries wanted to try mass customization.
EC can facilitate customization, even mass customization. In many cases, EC is doing it via person-
alization (Anke and Sundaram 2006). To understand how companies can use EC for customization, lets
first compare mass production, also known as a push system, and mass customization, also known as a pull
system, as shown in Exhibit 2A.1.
Notice that one important area in the supply chain is order taking. Using EC, a customer can self-
configure the desired product online. The order is received in seconds. Once the order is verified and pay-
ment arranged, the order is sent electronically to the production floor. This saves time and money. For
complex products, customers may collaborate in real time with the manufacturers designers, as is done at
Cisco Systems. Again, time and money are saved and errors are reduced due to better communication and
collaboration. Other contributions of EC are that the customers needs are visible to all partners in the
order fulfillment chain (fewer delays, faster response time), inventories are reduced due to rapid commu-
nication, and digitizable products and services can be delivered electronically.
ISBN: 0-558-13856-X
A key issue in mass customization is knowing what the customers want. In many cases, the seller can
simply ask the customer to configure the product or service. In other cases, the seller tries to predict what
the customer wants. EC is very helpful in this area due to the use of online market research methods
such as collaborative filtering (see Chapter 4 and Holweg and Pil 2001). Using collaborative filtering,
87
EXHIBIT 2A.1 Push Versus Pull Production Systems

Conventional EC-Based Pull
Push Systems Systems
Process Characteristics Characteristics Process

Goals Produce standard Build products
Manufacturer/assembler products from only after the Customers
long-term customer orders
Product to market; demand them. Orders
quantity based on demand forecasts. Make customer
forecast. Manage stock needs visible to
Use mass production and reactively to allow all parts of the
inventories. for efficient value chain. Manufacturer or retailer
production.
Inventory of standard
Benefits Efficient No stock other items only
Wholesalers production. than that in
Local showroom and
Inventories optimization demonstrators.
of factory No discounting.
operations. Customer pays Ship orders to distribution
before centers, or suppliers,
Retail distribution centers manufacturer if needed
has production
Inventories expenses.
Weaknesses High levels of System is

finished stock in sensitive to short- Orders to manufacturers,
market. term demand if needed
Retail stores
Requires fluctuations;
Inventories, rush orders, alternative method will not
push to customers product work without
specifications proactive demand Manufacturers to
and discounting management. fulfill order
to sell aging Active revenue
Customers stock. management
Customized required to
orders compete maximize profit.
with standard
ones for capacity.
System loses
sight of real
customer
demand.
a company can discover what each customer wants without asking the customer directly. Such market
research is accomplished more cheaply by a machine than by human researchers.
From the production point of view, EC also can enable mass customization. In the factory, for exam-
ple, IT in general and e-commerce in particular can help in expediting the production changeover from
one item to another. Also, because most mass production is based on the assembly of standard compo-
nents, EC can help a company create the production process for a product in minutes and identify needed
components and their location. Furthermore, a production schedule can be generated automatically, and
needed resources can be deployed, including money. This is why many industries, and particularly the auto
manufacturers, are planning to move to build-to-order using EC. By doing so, they are expecting huge
cost reductions, shorter order-to-delivery times, and lower inventory costs.
Mass customization on a large scale is not easy to attain (Zipkin 2001; Warschat et al. 2005), but if
performed properly, it may become the dominant model in many industries.
ISBN: 0-558-13856-X
REFERENCES
Anke, J., and D. Sundaram. Personalization Techniques and Warschat, J., M. Kurumluoglu, and R. Nostdal. Enabling IT for
Their Application, in Khosrow-Pour (2006). Mass Customization. International Journal of Mass
Blecker, T. Product Configuration Systems, in Khosrow-Pour Customization, 1, nos. 23 (2005).
(2006). Zipkin, P. The Limits of Mass Customization. MIT Sloan
Holweg, M., and F. Pil. Successful Build-to-Order Strategies Management Review (Spring 2001).
Start with the Customer. MIT Sloan Management Journal 43,
no. 1 (2001).
Khosrow-Pour, M. (ed.). Encyclopedia of E-Commerce,
E-Government, and Mobile Commerce. Hershey, PA: Idea
Group Reference, 2006.
ISBN: 0-558-13856-X

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QXD 9/4/07 7:54 PM Page 42

Appendix 2A: Build-to-Order Production

The Opportunity jewelry expert offers in a physical store. It features educational

44 Part 1: Introduction to E-Commerce and E-Marketplaces

EXHIBIT 2.1 Functions of a Market

Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 45

EC leverages IT with increased effectiveness and lower transaction and distribution

E-MARKETPLACE COMPONENTS AND PARTICIPANTS

46 Part 1: Introduction to E-Commerce and E-Marketplaces

Section 2.1 REVIEW QUESTIONS

1. What is the difference between a physical marketplace and an e-marketplace (marketspace)?

Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 47

2.2 TYPES OF E-MARKETPLACES: FROM STOREFRONTS

Visualization and Virtual Realty in Shopping Malls

TYPES OF STORES AND MALLS

fashionmall.com/beautyjungle specializes in beauty products, tips, and trends; and

48 Part 1: Introduction to E-Commerce and E-Marketplaces

EXHIBIT 2.2 Virtual Reality Shopping

User modeling Virtual Worlds Worlds,

User profile User activity

Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 49

50 Part 1: Introduction to E-Commerce and E-Marketplaces

phone. AOLbyPhone is an example of a service that allows users to retrieve

EXHIBIT 2.3 Agent-Based E-Marketplace

Other owner hosts in SAFER

Source: Guan, S. U. E-Commerce Agents and Payment Systems, in Khosrow-Pour, 2006.

Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 51

Section 2.2 REVIEW QUESTIONS

2.3 TRANSACTIONS, INTERMEDIATION, AND PROCESSES

SELLERS, BUYERS, AND TRANSACTIONS

EXHIBIT 2.4 EC Activities

B2B Intrabusiness B2B, B2C, B2G

52 Part 1: Introduction to E-Commerce and E-Marketplaces

Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 53

For a study on how different strategies of intermediation affect the efficiency

54 Part 1: Introduction to E-Commerce and E-Marketplaces

EXHIBIT 2.5 Buying Process in E-Market

Item delivered Submit

Post shopping activities

Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 55

Section 2.3 REVIEW QUESTIONS

2.4 ELECTRONIC CATALOGS AND OTHER MARKET

stocks (and commodities) on stock exchange tickers.

56 Part 1: Introduction to E-Commerce and E-Marketplaces

Online Catalogs Versus Paper Catalogs

EXHIBIT 2.6 Comparison of Online Catalogs with Paper Catalogs

Ease of connecting order processing,

Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 57

can access databases of

58 Part 1: Introduction to E-Commerce and E-Marketplaces

customers to configure their products by specifying their technical requirements.

Chapter Two: E-Marketplaces: Structures, Mechanisms, Economics, and Impacts 59

Section 2.4 REVIEW QUESTIONS

2.5 AUCTIONS AS EC MARKET MECHANISMS

DEFINITION AND CHARACTERISTICS

TRADITIONAL AUCTIONS VERSUS E-AUCTIONS

Limitations of Traditional Offline Auctions

60 Part 1: Introduction to E-Commerce and E-Marketplaces