ELECTRONIC COMMERCE

1. The Scope of Electronic Commerce

Electronic Commerce (e-Commerce) is a term popularized by the advent of commercial services on the
Internet. Internet e-Commerce is however, only one part of the overall sphere of e-Commerce. The commercial use of
the Internet is perhaps typified by once-off sales to consumers. Other types of transactions use other technologies.
Electronic Markets (EMs) are in use in a number of trade segments with an emphasis on search facilities and
Electronic Data Interchange (EDI) is used for regular and standardized transactions between organizations. The
mainstream of e-Commerce consists of these three areas; these are represented as a diagram and outlined in a little
more detail below.

 Electronic Markets:
An electronic market is the use of information and communications technology to present a range of offerings
available in a market segment so that the purchase can compare the prices (and other attributes) of the offerings and
make a purchase decision. The usual example of an electronic market is an airline booking system.
 Electronic Data Interchange (EDI):
EDI provides a standardized system for coding trade transactions so that they can be communicated directly
from one computer system to another without the need for printed orders and invoices and the delays and errors
implicit in paper handling. EDI is used by organizations that make a large number of regular transactions. One sector
where EDI is extensively used is the large supermarket chains which use EDI for transactions with their suppliers.
 Internet Commerce:
Information and communications technologies can also be used to advertise and make once-off sales of a
wide range of goods and services. This type of e-Commerce is typified by the commercial use of the Internet. The
Internet can, for example, be used for the purchase of books that are then delivered by post or the booking of tickets
that can be picked up by the clients when they arrive at the event. It is to be noted that the Internet is not the only
technology used for this type of service and this is not the only use of the Internet in e-Commerce.

2) Definition of Electronic Commerce? Explain the advantages and disadvantages?

Meaning – e‐business means using the internet to connect people and processes for doing business. It also includes
providing service to customers and collaborating with business partners across the globe. The internet and the
emergence of e‐business has provided entrepreneurs with many new advantages. However, it has few limitations too.
Advantages of e‐Business:
The advantages of e‐ business are as follows:
i. Flexible Business Hours:
The internet is accessible 24 x 7. This means that buyers and sellers can conduct transactions at any time as opposed to
the regular trading hours of traditional business models.
ii. Availability of Wide Range of Products:
Consumers have access to a broader range of products and services from which they can select the products as per their
choice.
For e.g.: flipkart, amazon etc. offer a wide range of services and products to select from.
iii. Very Low Start Up Cost:
The initial investment for starting an e‐business is generally lower than the cost associated with starting the same
business using a traditional model.
iv. Quick and Easy Communication:
Through e‐business, it is easier and faster for the business organizations to communicate with their suppliers and their
customers as there is no face‐to‐face interaction.
v. No Physical Space:
e‐business does not require physical space for operation. It requires highly qualified technical professionals.
vi. Government Support:
e‐business gets a lot of support from the government.
vii. Establishes Strong Relationship:
e‐business enables strong relationship building between suppliers and consumers as there is direct contact between
both the parties.
viii. Renders a Global Platform:
e‐business provides the business organizations with the opportunity to transact with buyers across the globe. It
connects the consumers and the business organizations anywhere from the world through internet
ix. Easy Set Up:
It is very easy to set up e‐business as compared to traditional business.
x. Sound Communication:
e‐business provides a platform for sound and direct communication between suppliers and consumers.
Disadvantages of e‐ business:
The disadvantages of e‐business are as follows:
i. High Transaction Risk:
There are many internet frauds that are committed through hacking etc. There is a possibility of misuse of the buyer’s
bank details and this makes buyers insecure to perform online transactions and payments.
ii. No Face‐to‐Face Interaction:
The absence of face‐to‐face interaction with the sellers makes the buyers insecure at times.
iii. Personal Touch of Seller:
Since the transaction is online, the personal touch of the seller is missing and this may make the buyer insecure.
iv. Government Interference:
Sometimes government monitoring can lead to interference in the business.
v. Ineffective Return Policies:
Usually, all the online shopping sites come with a money back/product return policy.
However, they do not work as effectively and spontaneously, in case of dissatisfaction of the customer.
vi. Issues in Delivery:
Sometimes it becomes difficult for suppliers to deliver goods on time due to the lack of sound transport system in
many parts of our country.
vii. Lack of Personal Inspection:
Since the buyer cannot touch and feel the product before purchasing, many consumers avoid online transactions

3. Define E-Commerce? Features of E-commerce:

Meaning – e‐business means using the internet to connect people and processes for doing business. It also includes
providing service to customers and collaborating with business partners across the globe. The internet and the
emergence of e‐business has provided entrepreneurs with many new advantages. However, it has few limitations too.

Seven Unique features of E-commerce

1. Ubiquity- The traditional business market is a physical place, access to treatment by means of document
circulation. For example, clothes and shoes are usually directed to encourage customers to go somewhere to
buy. E-commerce is ubiquitous meaning that it can be everywhere. E-commerce is the worlds reduce cognitive
energy required to complete the task.
2. Global Reach- E-commerce allows business transactions on the cross country bound can be more convenient
and more effective as compared with the traditional commerce. On the e-commerce businesses potential
market scale is roughly equivalent to the network the size of the world’s population.
3. Universal Standards- E-commerce technologies is an unusual feature, is the technical standard of the
Internet, so to carry out the technical standard of e-commerce is shared by all countries around the world
standard. Standard can greatly affect the market entry cost and considering the cost of the goods on the market.
The standard can make technology business existing become more easily, which can reduce the cost, technique
of indirect costs in addition can set the electronic commerce website 10$ / month.
4. Richness- Advertising and branding are an important part of commerce. E-commerce can deliver video, audio,
animation, billboards, signs and etc. However, it’s about as rich as television technology.
5. Interactivity- Twentieth Century electronic commerce business technology is called interactive, so they allow
for two-way communication between businesses and consumers.
6. Information Density- The density of information the Internet has greatly improved, as long as the total
amount and all markets, consumers and businesses quality information. The electronic commerce technology,
reduce the information collection, storage, communication and processing cost. At the same time, accuracy and
timeliness of the information technology increases greatly, information is more useful, more important than
ever.
7. Personalization- E-commerce technology allows for personalization. Business can be adjusted for a name, a
person’s interests and past purchase message objects and marketing message to a specific individual. The
technology also allows for custom. Merchants can change the product or service based on user preferences, or
previous behavior.
4. Electronic Commerce and the Trade Cycle
e-Commerce can be applied to all, or to different phases, of the trade cycle. The trade cycle varies depending on:
 The nature of the organizations (or individuals) involved.
 The frequency of trade between the partners to the exchange.
 The nature of the goods or services being exchanged.
The trade cycle has to support
 Finding goods or services appropriate to the requirement and agreeing the terms of trade (referred to as search
and negotiation).
 Placing the order, taking delivery and making payment (execution and settlement).
 After-sales activities such as warrantee, service, etc.
There are numerous versions of the trade cycles depending on the factors outlined above and, for many transactions,
further complicated by the complexities of international trade. That said, three generic trade cycles can be identified:
 Regular, repeat transactions between commercial trading partners (repeat trade cycle).
 Irregular transactions between commercial trading partners where execution and settlement are separated
(‘credit’ transactions).
 Irregular transactions in once-off trading relationships where execution and settlement are typically combined
(‘cash’ transactions).
The trade cycles for these three categories are shown. The applicability of each of the three forms of e-Commerce to
these trade cycles is discussed in the following sections.

5.Electronic Markets
An electronic market is an inter-organisational information system that provides facilities for buyers and
sellers to exchange information about price and product offerings (been, et al., 1995). The electronic market is
primarily about the search phase of the trade cycle. The electronic market is most effective in assisting the buyer in a
commodity market where products are essentially identical across all sellers. In a differentiated market there is a
variety of product offerings and the search problem is more complex. An effective electronic market increases the
efficiency of the market, it reduces the search cost for the buyer and makes it more likely that the buyer will continue
the search until the ‘best buy’ is found. ‘The effect of an electronic market in a commodity market is a more efficient
distribution of information which causes decreasing profit possibilities for sellers.

Electronic Commerce and trade Cycles

 Electronic Markets (and electronic information services giving product and price data) exist in commodity
exchanges, financial markets and they are also extensively used in the airline industry for passenger seat sales.
‘…the overall effect of this technology will be to increase the proportion of economic activity co-ordinated by
markets’.
The importance of electronic markets in the sectors where they operate has increased but there has not been
any dramatic expansion of the use of electronic markets to additional economic sectors. Part of the difficulty of
establishing new electronic markets relates to activities by vendors to gain competitive advantage by product
differentiation and techniques to lock-in customers.
Alternatively a public access network can be seen as an electronic market and can be used with an index or a
search engine to find vendors of the required product or service.
6.Electronic Data Interchange
EDI is based on a set of standardized messages for the transfer of structured data between computer
applications. It can have many applications, e.g. sending test results from the pathology laboratory to the hospital or
dispatching exam results from the exam boards to schools, but it is principally used for trade exchanges: orders,
invoices, payments and the many other transactions that can be used in national and international trade exchanges.
Notable users of EDI are vehicle assemblers, ordering components for their production lines, and supermarkets (and
other multiple retailers), ordering the goods needed to restock their shelves. EDI allows the stock control/materials
management system of the customer to interface with the stock control/production systems of the suppliers without the
use of paper documents or the need for human intervention.
EDI is used for regular repeat transactions, it takes quite a lot of work to set up systems to send and retrieve
EDI messages and, in general, it is not applicable to one-off exchanges. Also EDI is a formal system and it does not
really have a place in the search and negotiation phases.

EDI tends to be limited to (or ‘owned by’) large organizations which set up their purchasing and logistics
systems to utilize EDI and then demand that their immediate suppliers fit in with the arrangement.
EDI is part of schemes for just-in-time manufacture and quick response supply.

7. Internet Commerce
e-Commerce can be and is used for once-off transactions. This area of trade is typified by the consumer
purchasing over the Internet but there are (or have been) other networks:
 Television sales channels are in use in the US;
 The French Minitel is a mature example of an interactive, public access network; and this type of e-Commerce
is also used by organizations to make once-off or infrequent purchases of items such as computer and office supplies.
This form of e-Commerce may give its customers credit facilities but is typified by the ‘cash’ trade cycle. The Internet
can be used for all or part of the trade cycle:
  The first stage of the trade cycle is search and the facilities of the Internet can be used to locate sites offering,
or advertising, appropriate goods or services; a function, as already mentioned, that is similar to an electronic
market. In many instances, Internet sites offer only information and any further steps down the trade cycle are
conducted on the telephone or at a conventional shop outlet.
 An increasing number of sites offer facilities to execute and settle the transaction, or in normal parlance to
make a purchase – delivery may be electronic or by a home delivery service depending on the nature of the
goods or service being offered. The use of the Internet for on-line purchasing may or may not follow a search
– publishing a web site address is an increasingly common feature on conventional advertising.
 The final use of Internet e-Commerce is for after-sales service. Many IT providers now offer on-line support
and on-line services such a banking are, arguably, a special case of the use of after-sales transactions. Again the
use of the Internet for after-sales may or may not be a follow on to an earlier on-line transaction.
Internet trade is not suited to all goods or to all people. Marketing strategy is popularly enshrined in the
concept of the four Ps: product, price, promotion and place (Needle, 1994). The Internet as a marketing and sales
channel can be examined in this context:
 Product: Some products are more suited than others to selling over the Internet. Existing mail order
operations give an indication and technical products, that would appeal to an Internet audience, could be added
to the list.
 Price: The Internet can have a price advantage. There is no need for a retail outlet and the business facilities
needed by an Internet vendor could be relatively cheap. Set against this is the cost of delivering goods and the
premium rate currently being charged by credit card companies to some Internet vendors.
 Promotion: The Internet provides a very cheap way of promoting a company and a product. That said,
promotion on the Internet, unlike almost any other form of advertising, relies an the customer having the
facility to access the Internet and then using it to find the promotional material.
 Place: Internet purchases have to be delivered to the client. Information services can be delivered
electronically but tangible goods require costly physical delivery.
8. Supply Chains
The products sold in shops and purchased for use in organizations are the result of a complex web of
relationships between manufacturers, component suppliers, wholesalers, retailers and the logistic infrastructure that
links them together. Superimposed on this web of co-operating trading partners is a further layer of organizations that
provide services such as the machinery used by manufactures, advertising for the product and so on. Most
organizations have a large number of trade relationships.
The web of trade relationships is referred to as the supply chain or the value chain (as each stage adds value to
the product before passing it on). Value chains differ between trade sectors.
 Each trade exchange in the supply chain is a transaction that adds cost without adding intrinsic value. e-
Commerce is, borrowing from Wigland’s definition the application of information and communications technology to
the value chain to enable the accomplishment of a business goal. The business goal can be to reduce costs, improve
service or to tap into a new market. The form of e-Commerce that is appropriate is dependant on the circumstances of
the party to the exchange and the nature of the trade relationship.
9. Porter’s Value Chain Model
Porter’s model was essentially concerned with the internal activities of the company. The three (basic) primary
activities of a product process are:
 Inbound Logistics: Handling goods that are bought into the company, storing them and making them
available to operations as required.
 Operations: The production process, in many cases a series of sub activities that can be represented on a
detailed value chain analysis.
 Outbound Logistics: Taking the products of the company, storing them if necessary and distributing them to
the customer in a timely manner.
To these basic primary activities Porter adds two further primary activities:
 Marketing and Sales: Finding out the requirements of potential customers and letting them know of the
products and services that can be offered.
 Service: Any requirement for installation or advice before delivery and then after-sales service once the
transaction is completed.
To support these primary functions there will be a company infrastructure that performs a number of support activities.
Porter classifies these activities as:
 Procurement: The function of finding suppliers of the materials required as inputs to the operations of the
organization. Procurement is responsible for negotiating quality suppliers at an acceptable price and with
reliable delivery.
 Technology Development: The organization needs to update its production processes, train staff and to
manage innovation to ensure that its products and its overall range of goods and services remain competitive.
 Human Resources Management: The recruitment, training and personnel management of the people who
work for the organization.
 Firm Infrastructure: The overall management of the company including planning and accountancy.

The generic value chain is just the starting point to constructing a specific value chain for a company or
division of a company. Having identified the component activities and linkages each element can be analyzed in terms
of cost and value added so that the overall efficiency of the value chain can be established. Once analyzed any
performance deficits can be addressed to improve product quality, customer service and /or price competitiveness.
The efficiency of the linkages may be enhanced by the use of information and communications technologies
(ICTs). Internal linkages can be co-ordinated using e-Commerce technologies but they are more likely to be embedded
in point-of-sale/stock control systems or production/materials requirement planning systems. The production planning
and control process can inform the inbound logistics system of the quantity and timing of components/stock
requirements. The marketing and sales system can be interfaced with production and outbound logistics to improve the
quality of service delivery.
 ICTs can also be used in other value chain activities; possible applications are:
 Human Resources Management using electronic media to advertise vacancies in the organization;
 Procurement using online searches to identify appropriate sources of supply;
 Marketing using online advertising or portable sales terminals;
 Servicing providing online assistance and/or fault diagnosis.

10. Inter Organisational Value Chain

The value chain within a company is a microcosm of the overall value chain; the overall competitive
advantage of an organization is not just dependant on the quality and efficiency of the company and the quality of its
products but also upon that of its suppliers and of any wholesalers and retailers it may use.
The analysis of the overall supply chain is called the value system; value chains differ considerably across
trade sectors and between different organizations within a trade sector.

 Automobile assembly uses a vast number of components; the making of a car is a component assembly job.
Some of the components, such as engines and body panels, may be produced by the company (possibly in
other plants), whereas most of the parts: lights, brakes, wheels, tyres etc are bought in from suppliers.
Components are delivered to the production line on a just-in-time basis; larger components might be
‘sequenced delivery’ with their arrival synchronized to match the order of the vehicles on the assembly line.

The sales channel is the dealer network; each vehicle assembler sells through a chain of dealers tied by
contract to that marque. Each dealer is assigned a sales territory and the cars are not normally available through any
other sales channel. Vehicle supply to the network is a mixture of the carmaker instructing the dealers what to stock
and the dealers ordering to meet demand. The dealer network also has a system of swapping vehicles so that the
specific requirements of a customer can be met.

 Food retailers divide into those, such as the large supermarket chains, who deal direct with the manufacturers
and the small retailers who need to deal with a wholesaler.
The supermarket supply chain is from the food manufacturer. Produce is either delivered to a regional
distribution depot or direct to the shop. Items that are relatively small or are sold in modest quantities can be delivered
by the manufacturer to the regional depot where the load can be split up and sent on to the shops where they are
needed. Items required in large quantities or that need to be very fresh can be delivered direct from the supplier to the
supermarket. The supermarket sells directly to the consumer there is no requirement for any intermediary or ‘channel’.
 The supply chains of the supermarkets differ from smaller retailers who get much of their produce from a
wholesaler rather than direct from the manufacturer.

 Insurance is a service industry and, unlike the manufacture and retail value systems outlined above, it is not
directly reliant on its suppliers. Its value system is therefore focused on sales. Insurance policies to the public
can be:
 Sold by an agent employed by the Insurance Company;
 Sold by a intermediary (the ‘channel’), typically an insurance broker;
 Direct sales using telesales or the Internet.

11. Competitive Advantage

The ability of an organization to prosper arises from its competitive advantage over the other organisations
operating within its market sector. The ability of the organization to survive requires that is competitive position is not
significantly less than the other firms operating within the market sector.
The three basic strategies for competitive advantage are cost leadership, differentiation and focus (Porter,
1980). Cost leadership is simply to be able to sell the goods or provide the service at a price that is lower than that of
the competition. Differentiation is where the goods or services provided have some quality that makes them more
attractive than competing products even though the competition may have a somewhat lower price. Focus is
concentration on a single aspect of the market, a product niche.
Information and communications technologies (ICTs) can have a considerable part to play in a competitive
strategy. The appropriate use of IS and IT can lower the administrative costs of the organization and the use of ICTs, in
the logistics supply chain, can add to that advantage. The use of ICTs, in addition to cost reductions, can also
differentiate a product in terms of quality of service and responsiveness to customer requirements. Eventually quick
response supply and just-in-time manufacture, enabled by ICTs, can provide the capability to evolve new products and
services and to facilitate customization.
Porter’s Model
The basis of much of the thinking on competitive advantage has been the writing of Michael Porter.
Porter’s model helps a firm identify threats to its competitive position and to lay plans, that may include IT
and e-Commerce, to protect or enhance that position. The model shows five forces of competitive rivalry:
 Competitive rivalry among existing firms in the trade sector;
 Threat of potential new entrants to the sector;
  Threat of a substitute product or service to the existing trade;
 The bargaining power of the buyers;
 The bargaining power of the suppliers.
Typically one or two of these forces dominate in an analysis of the competitive position of an organization in a
trade sector. Each of these threats is further examined below.
 Threat of New Entrants
The threat of new entrants relates to the ease with which a new company, or a company in a different product
area can enter a given trade sector. Barrier to entry into a particular market include the need for capital, knowledge and
skills. The barriers to entry, for example, to the vehicle assembly sector are massive; to start building cars there is the
need to develop a new model range, build a car assembly plant, contract a large number of component suppliers and
sign up a dealer network.
IT can be a barrier to entry to a given market place. Existing players in the sector may well have a substantial
investment in IS/IT, including for instance the use of EDI to co-ordinate their supply chain. This experience and
investment can be difficult for a new entrant to match. The converse is that developments in IT and e -Commerce may
leave existing players with a heavy investment in expensive, obsolescent technologies giving the new entrant the
opportunity to enter the market with fresh ideas and a business plan facilitated by a new generation of IT provision.
Internet e-Commerce is a technology that can facilitate new entrants to existing markets without the need to match the
IT and infrastructure investment of the existing players.
 The advent of Internet bookshops where new operators, with amazon.com being the obvious example.
 Internet banks where setting up online has, like the bookstores, avoided the need to invest in a branch network.
Threat of Substitution
Substitution is a threat to existing players where a new product becomes available that supplies the same
function as the existing product or service. The classic examples are the (partial) substitution of natural fibers such as
cotton and wool by synthetic fibers or the replacement of glass bottles by a plastic alternative in some sectors of the
packaging industry.
The IT industry has itself substituted many products previously used in business with the replacement of the
typewriter by the word processor being but one example.
 Bargaining power of Buyers
For a business to be profitable the cost producing and distributing its product has to be less than the price it
can fetch in the market place. Where there are a number of competitors in the market or a surplus of supply the buyer
is in a strong position to bargain for a low price and for other favourable conditions of trade. Over recent years the
large retail chains have developed a strong bargaining position vis-à-vis their suppliers.
The bargaining strength of the buyer is of least threat to the low cost producer; that organization can agree to
tight terms of trade that competitor firms could not profitably match.
The use of IS/IT may help companies achieve efficiencies that enable them to meet the price requirements of
the powerful buyer. Another approach is to use ICTs to facilitate a level of service that will keep the customer loyal.
Short cycle times, quick response supply and reliable service are features that can be enabled by e-Commerce
technology.
e-Commerce can also be used to reshape the supply chain. Intermediate such as wholesalers and agents can
become unnecessary when an organization can efficiently deal directly with small traders and members of the public
using e-Commerce systems. Competitive advantage, in all three categories, can be achieved using e-Commerce for
direct sales.
 Bargaining power of Suppliers
The organization, whilst trying to get an adequate price from its buyers, will be looking to get favourable
terms from its own suppliers at the next stage along the value chain. The organisation’s ability to get a good deal is the
mirror image of its position with its buyers. If the supply is plentiful and/or there are several suppliers it should get a
good price. If the product is scarce or the number of suppliers that are able to meet its needs is limited then the supplier
is in a more favourable position.
 For the supplier, the strategies of price advantage and differentiation such a branding or quality of service give
a stronger competitive position.
 Competition between Existing Players
The final force is the competition between existing players in the market. The competition is to get the buyers
and to trade at a price that produces an acceptable profit. That competition is won on the basis of the generic
competitive advantage of price, differentiation or focus. The competitive position of each organization is determined,
in part atleast, by the deal it is able to make with its suppliers.
e-Commerce is a factor in competition between existing players. The use of e-Commerce can:
 Reduce the administrative costs of trading (transaction costs);
 Increase the logistic efficiency of the supply chain and hence facilitate reduced stockholding and greater
reliability of supply;
 Meet the requirements of a trading partners that trade is conducted electronically;
 Differentiate the product or service that is offered from that of competitor organizations;
 Cut out intermediaries in the supply chain, e.g. replacing ticket sales through an agent with direct sales to the
public;
 Provide a new marketing and servicing channel.
12. First Mover Advantage
The ability to gain advantage from the innovative use of IS/IT can owe a lot to timing. The first organization to
implement a new type of ICT system will, if the system is successful, gain the price advantage or the differentiation
while competitors are still operating with traditional methods and systems.
The first mover can gain advantage but it is a risky business. New technologies and new ways of using them
are expensive to develop and are often not successful. There are advantages to being a late mover: the idea has been
tried, its effectiveness can be assessed and the late mover can implement an improved version of the system. In terms
of the technology, the advantages are that it has been tested and will be cheaper and easier to implement the second
time round; it may be that standard components have been developed or that packaged solutions are available,
advantages that were not available to the first mover. Newcomers to the e-Commerce scene, using EDI or Internet e-
Commerce, have the advantages of being able to benefit from the work of the pioneers without the need to contribute
to the development effort. The late move does not, however, have the ability to surprise competitors or the market; it is
essentially a catching up operation.

13. Sustainable Competitive Advantage

Having gained competitive advantage the problem is then to exploit and sustain it. The idea of giving the
customer access to tracking information via the Internet was new one that had considerable appeal to the customer.
To gain competitive advantage using IS and IT usually needs an element of surprise; the system heeds to be
out in the market place before competitors make a start in copying the idea. Sustaining that competitive advantage
requires either that the technical advantage is converted into brand advantage, e.g. amazon.com, or that the technical
lead is sustained by continuous product and service development.
Sustainable competitive advantage from EDI systems has been rare. Most EDI systems have been
implemented in trade sectors where all competitors have a mature use of IT and IS and hence the use of EDI by one
player is readily emulated by the competition.
Sustainable competitive advantage appears to be more common with Internet e-Commerce; probably to be
expected with a new technology where the element of surprise can be greater. The notable names in Internet e-
Commerce, have entered existing markets or created new markets using web technologies at a time when the entry
costs to those markets were low and the element of surprise was greatest.

14. Competitive Advantage using e-Commerce

 The discussion of competitive advantage in this chapter has been illustrated with a number of examples
including e-Commerce systems. The possible competitive use of e-Commerce is

Force System Competitive Advantage

New Entrants/Substitution Internet e-Commerce  Reduced entry costs

 New sales channel
 New service opportunities

Suppliers (& Trade Buyers) e-Commerce Logistics  Cost reductions

(EDI/leC)  Quick response
 Lockin

Buyers (Consumers) Internet e-Commerce  New sales channel

 dis-intermediarisation
 customer information

Competitive Rivalry e-Commerce  Cost leadership

 Differentiation
 Focus

15. Introduction to ‘Business Strategy’

The strategy can be a formal plan, be implied by the mission statement and /or be evident from the way the
orgainsation goes about its business. There are four stage process of strategy formulation:
 Consideration of environmental changes which bring about new opportunities and pose new threats.
 Assessment of the internal strengths and weaknesses of the institution and in particular its ability to respond to
those opportunities and threats.
 A decision-making process influenced by the values, preferences and power of interested parties.
 A strategy generating process concerned with generating options and evaluating them.
The process of strategy formulation, as can be seen from the above, is a mixture of the rational and the non-
rational. Two organizations faced with the same environmental circumstances and with similar business capabilities
may well develop entirely opposite strategies.
Strategy formation is an ongoing process. As the environment changes and the capabilities of the business
evolve the strategy needs to evolve; not as a knee-jerk reaction to short-term changes but as a considered process over
time. The strategy also needs to become part of the fabric of an organization.
The overall business strategy can lead to, and be supported by, a structure of departmental or functional
strategies including as IS/IT strategy. This IS/IT strategy is a way of ensuring a rational development of the
organizations computing infrastructure within the context of the overall corporate strategy.
Strategic Implications of IT
Each development in computer technology has presented new opportunities for business, opportunities that
took many years to be fully evaluated and adopted. The early data processing systems were little more than manual or
punched card accounting systems transferred directly into computer systems.
The extension of the network outside the company gave birth to the inter-organisational system and the use of
EDI. The development of EDI was a slow process, evolving over many years, and one that is still going on.
The evolution of the network from an intra-organisational and inter-organisational facility to one that reaches
out to almost any member of the public (but only in the ‘developed nations’) sets new horizons in many areas and e-
Commerce is one of these.
 Taking advantage of the opportunities offered by new technology requires imagination and flair. Inter-
organisational e-Commerce was, in the main, the domain of the large organization; it was for many organizations a
way of automating and increasing the efficiency of existing trading arrangements (but often with small, start-up
companies providing the new software facilities required to support the operation). Internet e-Commerce has been, in
contrast, in its initial phases, the province of the individual entrepreneur with a bright idea and often without any
investment in current sales channels.
Technology
Technology, it is generally agreed, is not the place to start developing a systems strategy or a system design;
methodologies usually start with the business requirement, ‘the problem’ and move through design onto the
technology, ‘the solution’.
e-Commerce applications, however, are not necessarily like other systems. In some cases it is a technological
solution to a business problem:
 EDI used to process large numbers of invoices, reduce queries and speed payments;
 Internet e-Commerce used to replace telesales as a way of taking orders from business customers;
The business strategist intending to develop e-Commerce systems.
 EDI: A technology that helped streamline supply logistics and facilitated dramatic decreases in trade cycle
times between businesses. Now a standard solution to inter-organisational business requirements but also a
possible component to facilitate small batch production, quick response supply and new e-Commerce systems.
 Electronic Markets: An opportunity to redefine the way that a market operates but a system that requires co-
operation between rivals within a trade sector.
 Internet e-Commerce: The new technology of business to consumer direct trade but also applicable to
numerous business to business applications.
These elements indicate the scope of e-Commerce as a technology.
 Product Promotion: The web is a new medium of advertising that escapes from the fixed format of paper and
the limited time slot of broadcast media. It is available at any time, it is interactive, it can be changed for the
individual customer and it can take input from the customer.
 New Sales Channel: Internet e-Commerce is a new form of direct selling. It does not require premises
(although there are interesting possibilities for combining e-Commerce and retail premises). It combines many
of the advantages of catalogue selling and telesales and it can extend the applicability of direct sales to new
markets, products and services.
 Direct Savings: Selling online cuts out the costs of retail premises and potentially reduces the staff
requirement. Using a public access network cuts the cost of network facilities. Order entry is by the customer
straight into the system. Information (such as bank statements) can be made available without the paperwork,
postage and handling costs.
 Time to Market: New products can be put online as soon as they are ready. Time can be saved on many
aspects of conventional product launch and promotion cycle. Some information and investment products have
a limited lifecycle and online they can be delivered direct to market.
 Customer Service: Customer service differs greatly between conventional and direct retail sales. Internet e-
Commerce, as an information rich environment, gives new opportunities for direct retailers to excel in many
areas of customer information and customer support.
 Brand Image: It is new, it is cool, it gives an up-to-date image to be on the web. The aura gained from being
online can give charisma to conventional operations irrespective of online sales.
 Technological and Organisational Learning: Companies taking part in e-Commerce markets, using evolving
technologies, need to be flexible and agile. An organization at the forefront of e-Commerce learns new
capabilities that can be potentially exploited in the future.
 Customer Relations: e-Commerce allows an organization to develop a closer relationship with the customer.
The organization can learn the customer’s needs and evolve its product or service options to meet that
requirement.
 New Product Capabilities: Information from customers can be used to customize products or could be the
spark that inspires new products or services. Examples could be an insurance policy or a car with features that
the customer selected as opposed to accepting the package the supplier determined.
  New Business Models: The online entrepreneur is not limited by time and geography in the way that existing
businesses have been. The use of networking gives opportunities to develop new business models and
networked organisational structures.
Business Environment
All business operates within an external environment. They can influence that environment but their activities
are also enabled or constrained by that environment. Environmental factors are the economy, the state, technology,
labour and cultural factors. All of these factors need consideration in developing a business strategy; some of the ways
they might be relevant to an e-Commerce strategy are:
 The Economy is general and as it affects the relevant market sectors are obvious factors in strategy
formulation; the view taken of the economy needs to focus on long-term trends as opposed to immediate
problems. e-Commerce can give an organization the opportunity to spread its reach and hence the spread of
any economic analysis needs to be broader.
 The state influence the economy and sets the regulatory framework within which businesses operate. e-
Commerce has (or can have) a global spread and the applicability of the regulation of any individual state to
this activity.
 Technology was the topic of the previous section.
 The Labour market will determine if an organization can get the people and skills it needs for its operations.
For e-Commerce the availability of people with the requisite technical skills can be an issue. Also an issue is
trade union reaction to any restructuring or downsizing resulting from e-Commerce implementation.
 Culture varies in different countries and an appropriate way to operate in one country would not necessarily be
successful in another; For an organization wishing to use Internet e-Commerce the availability of home
computers and the acceptance of their use for e-Commerce, within a society, are important factors.
Business Capability
A business idea, backed up by the imaginative use of technology, will only work if the business has the skills
and infrastructure to operate it.
This analysis is often referred to as gap analysis. At the basic level the need is to check that existing capacity
can cope with the expected demand or can be expanded to do so.
The introduction of e-Commerce needs new skills and, in all probability, alters the way that business is done.
Existing Business Strategy
Very possible the organization already has a business strategy and this can and should be part of the evaluation
of the e-Commerce strategy. A simple model for evolving a corporate business strategy has already been outlined in the
first section of the chapter.
The adoption of e-Commerce by an oranisation may be in a marginal activity or may involve the automation of
an existing process, part of the normal evolution of business practice. Alternatively the adoption of e-Commerce may
imply a major change in the infrastructure of a business or the way that it conducts business. Examples of where e-
Commerce strategy could radically affect business strategy might be:
 A decision to close down retail outlets and serve customers online.
 Expansion into new geographical markets where the company previously did not operate.
 A move from selling through local agents to selling direct.
In all cases the corporate business strategy needs to be an input to the e-Commerce strategy. In cases where
e-Commerce is seen as a strategic system the business strategy will be modified or reshaped by the adoption of the e-
Commerce strategy making the business strategy an output from the process.
Strategy Formulation and Implementation Planning
The inputs to the strategy formulation process are the results of evaluating e-Commerce technology, the
business environment, the capabilities of the organization plus the existing business strategy.

The strategy formulation stage can be a somewhat unstructured process with interest groups lobbying for their
favoured options and alliances forming and reforming. There is no set pattern to the process as it is so dependant on the
personalities involved.
Q) e-Commerce Implementation
 The strategy once devised then needs to be implemented and the use of e-Commerce in business is the subject
of the remaining chapters of this book. The strategy diagram divides implementation into the technical and the business
aspects and these are briefly considered below:
 Technical Implementation
The approach to technical implementation of an e-Commerce system depends on the business objectives,
business requirements and the technologies that have been selected. It is noted that many Internet e-Commerce systems
are cobbled together rather than designed and that is often apparent. It is important that the design process considers:
 The ease of use of the system by the intended end users; always an important factor in system design but
crucial if the end users are to be members of the public with perhaps limited computer literacy and the option
to switch to an alternative web site if not satisfied.
 The functionality that the users need; this has to be what the users want rather than what the organization
thinks they need. Users of e-Commerce are not a captive audience that can be interviewed and evaluated like
the users of a traditional IS development.

 The back office systems: Customers of an online service quite reasonably expect a rapid response and the back
office systems need to be able to meet this requirement. For a volume e-Commerce system this requires that
the customer front end integrates with the IS systems.

The approach to design for an Internet e-Commerce system would sensibly be based on a prototyping lifecycle
as the design of the user interface is crucial to the success of the overall project. That said the use of prototyping is not
intended to be an excuse for the absence of design. A thorough evaluation of each stage of the transaction lifecycle is a
good starting point to make sure that the full requirements are included.
 Business Implementation
As well as building its e-Shop (or other e-Commerce facility) the organization needs to:
 Put in place the business infrastructure to support the new e-Commerce facility.
 Market the new e-Commerce facility to the intended users.

Most organizations moving into e-Commerce will take a staged approach. Initial implementations may have
limited functionality and be offered to a limited audience. As already indicated, full implementation of e-Commerce
can have a considerable effect on the shape of the business and the way it does business.
e-Commerce Evaluation
All new IS systems should be properly evaluated after implementation and this is particularly important for a
system that is used by people outside the company. Evaluating an e-Commerce system will include the internal
stakeholders but crucially there needs to be a way of assessing customer reaction to the system (and potential
customers who gave up before completing a transaction are particularly inaccessible).

Loopback from the evaluation is shown at three levels:

 Improve it: Implementing an e-Commerce site remains an inexact science (if there is much science to it at all).
Feelback from customers and testing using people not involved in the site development can indicate where
changes are needed; the site can be improved.
 Revise it: Business results from the use of e-Commerce may indicate the need to change the e-Commerce
strategy and the implementation plan; the planning can be revised.

 Update it: Developments in the competitive position, changes in the company or the emergence of new e-
Commerce technologies may indicate the need to re-visit the strategic process; the strategy can be updated.
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Practicle Question:

CASE STUDY: E-COMMERCE IN PASSENGER AIR TRANSPORT

CHOICES
 For anyone wanting to travel across the Atlantic: London to New York, Washington to Paris or Toronto to
Frankfurt; what is the choice? At one level there is a lot of choice. That is the choice between British Airways (BA),
United, Air France, American Airways (AA), Lufthansa, etc. and each of these airlines would like you to see them as a
superior product, your preferred option. For many customers, the real choice between airlines is price and, as the
supply of airline seats has increased and the customers have become increasingly price conscious, this has not been
good for profitability in the airline industry.
Airline Booking Systems
For any airline other than a very small point-to-point operator, selling tickets is a complex operation. Sales take
place through several channels and a multiplicity of vendors and the airline needs to know what seats are sold and
which are available at any time. Sell too many seats and there will be a group of very cross passengers left behind, sell
too few seats and a tight margin quickly turns into a loss.
The development of these three major systems is summarized.
Sabre – as follows sabre, Galiled & Amadeus
Sabre was started by AA in the early 1960’s installed its first terminal in a travel agency in 1976 and provided
for direct consumer access in 1985.
Galileo
Galileo started in 1971 as a partnership between the United’s Apollo system and the Galileo system that has
been developed by a number of European airlines.
Amadeus
Amadeus was founded in 1987 by four European airlines, one of which is no longer a shareholder. In 1995 the
US carrier Continental migrated its systems to Amadeus).
Competition and Customer Loyalty
 Advertised their airline suggesting that it is distinctive and in some way superior to the competition. Thus there is
United with ‘the friendly skies’ and BA as ‘the world’s favourite airline’.
 Set up hub operations to facilitate easy connections and hence more journey opportunities.
 Instigated loyalty programs, referred to as frequent flyer programs. Each flight taken earns points and sufficient
points can mean priority treatment at airports and the possibility of a free flight or an upgrade to business class.
 Formed alliances. The two biggest alliances are the Star Alliance, led by United in partnership with Lufthansa and
Our World led by BA and AA. Both these alliances include a number of other airlines and offer extensive coverage
across the world. These and other alliances facilitate code sharing and through routing, using the network of the
partner airlines.

Web Booking Systems

The Internet offers the airlines a new sales channel but also, it is suggested, a way to escape from the current
price competitive system. A customer using the airline’s own web site does not (in most cases) see the available range
of prices from competing airlines; they are presented with only the flights of the airline providing the web page.
 Online presentation of the customer’s frequent flyers account;
 Facility for the customer to pre-allocate their seat and select meal options;
 Additions travel services such as hotel booking and car rentals;
 Travel and airport information;
 Access to bargain offers and auctions of airline seats (some auctions are paid for with frequent flyer points);
 Personalization of the web site to suit the customer’s expected travel requirements.

Competitive Outcomes
The intending passenger now has a number of channels to choose from when booking an airline seat. They
can:
 Go direct to the airline. This can be:
 At an airline’s sales counter (typically at the airport);
 Using the airline’s direct telesales office;
 Via the airlines web page
 Use an intermediary:
 A high street travel agent;
 An online travel intermediary;
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