Introduction to E-Commerce

Prepared by
Risala Tasin Khan
Associate Professor
IIT, JU
 What is E-Commerce
• Electronic commerce, abbreviated as E-Commerce, is doing
business activities over an electronic medium such as the
Internet.
• In other words, Sharing Business Information, Maintaining
Business relationships and Conducting business transactions
using computers connected to a Telecommunication Network
is called E-Commerce.
• The fundamental purpose of e-commerce is to execute
business transactions which include orders sent to vendors to
supply items, invoices sent by vendors, payments made by
credit cards, cash or e-cash.
 Definition of E-Commerce on Various
Perspective
• From a communication perspective:
– From a communication perspective, e-commerce is the ability to deliver
products, services, information, or payments via networks like the
Internet.
• From a business perspective:
– From a business perspective, e-commerce is the application of technology
that automates the business transactions and work-flows.
• From a buyer’s perspective:
– From a buyer’s perspective, e-commerce is the process of buying or
acquiring goods or services through-
• Realizing the need
• Researching a product
• Selecting a vendor
• Providing payment
• Accepting delivery
• Using product support
From a seller’s perspective (Continue..)

• From a seller’s perspective, e-commerce means sellers

business practices by-
– Market research to identify customer needs.
– Manufacturing products or supplying services that meet customer
needs.
– Marketing and advertising to make customers aware of available
products and services.
– Providing a method for acquiring payments.
– Making arrangements for delivery of the product.
– Providing after-sales support.
 Early generation of Internet
• Mid-1990s, the prediction of using Internet in Business
World was not even in consideration.
 Web sites were viewed as optional extras that looked
impressive, but didn’t actually do very much.
 E-mails were treated with suspicion and considered by many as
either an impersonal or an impractical way of communicating.
• Cheaper Internet access, ever faster and more powerful
connections and the rise of the “mobile Internet” have all
played their part in the online revolution.
• The main factor, though, is the “INTERNET” itself: a vast
network of information and resources that allows people to
interact with each other from anywhere in the world.
 Reasons behind the success of E-
Commerce
• There are four main reasons for people going on the Internet:
1. To find information;
2. To be entertained;
3. To interact;
4. To shop;
• If a Web site cannot satisfy any of the above criteria, it is unlikely to
become a cyber success.
• Therefore, any e-commerce site should be designed from the perspective
of end-user.
• This “outside in” approach is the key to every effective site, from Amazon
to Yahoo!
• Even if your online activity is only intended to support or supplement your
offline business, you must be able to offer something of real substance, be
it information, entertainment, interaction or fantastic product.
 Difference between E-Commerce and Traditional
Commerce
• Different Practice:
– Online shopping is completely different practice to
shopping on the high street.
– People who arrive at your site are there because they
have sought you out, not because you have an attractive
workplace or because you are conveniently located.
– Businesses are now expected t inform and interact with
their customers at a closer level than ever before.
– The old business cry of “location, location, location” has
now been over-shadowed by the voice of e-business:
“information, information, information”.
• Another difference is that you have lot more
competition.
 Five Web watch words
• Speed:
– The Internet is said to move at seven times the speed of normal
time.
– It is expected that e-mail messages are responded to on the
same day, Web sites are continually being updated and online
markets evolve within a matter of weeks.
• Intimacy:
– Although the Internet is often viewed as cold and inhuman, it
actually allows businesses to get closer to their customers than
ever before.
– As Kevin Roberts, CEO of Saatchi & Saatchi Worldwide, says,
“people open up and share how they feel on the Net---
something they just don’t do in more classical research formats
such as focus groups.”
 Five Web watch words(cont…)
• Communication:
– The Internet aids communication both between a business and
its customers and within the business.
– The convenience of e-mail and the accessibility of Web sites
mean that employers and customers are less likely to be kept in
the dark.
• Information:
– The Web is the world’s largest and most up-to-date research
library.
– You can find out more information about more information
about your competitors, your customers and your industry than
even before.
– At the same time, people will also be able to find out more
about you.
 Five Web watch words(cont…)
• Interactivity:
– Unlike traditional media, the Internet is highly interactive.
– One of the consequences of this is that people pull information
towards them.
– This means that on the Net more effort is sometimes needed to
differentiate your business from its competition.
– The Net’s interactivity makes it possible for users to tailor more
information according to their own particular requirements.
– It therefore allows a business to communicate on a one-to-one
level with all its customers simultaneously.
– Instead of broadcasting your message to the world, the Net
enables you to narrowcast and communicate with individual on
their own terms.
 Net Benefits
• Saving Money:
– The Internet can help your business save on the administration
costs of taking orders by automating the process.
– E-mail can help you save on stationary costs and online
marketing often proves a lot more cost-effective than marketing
offline
• Improving Customer Service:
– By increasing the possibilities for communication between your
business and its customers, you can often offer an improved
level of service to your existing customers.
• Keeping Records of Your Activity:
– Because the Internet enables you to store information, you can
keep track of all business correspondence very easily.
 Net Benefits(Cont…)
• Attracting New Staff:
– The World Wide Web is now one of the most important
resources for job seekers.
– According to a survey conducted by the UK organisation
Jobtrack, 79 per cent of college and university students say that
the quality of a potential employer’s Web site is an important
factor when deciding whether or not to apply for a job there.
• Preserving Your Market Share:
– The Internet is not only a means of expanding your business, it
is also a way to protect and hold on to the market you have
already established.
– Real world businesses risk losing out to slick start-ups if they
don’t embrace the Internet with open arms.
 Net Benefits(Cont…)
• Making Money:
– The Internet offers businesses new ways of making additional
revenue by affiliate programs, selling advertising space, securing
sponsorship and various other methods.
• Going worldwide:
– Your Web site can help you reach a worldwide market as
geographical limitations are all but eliminated.
• Being in a Constant Contact:
– The Internet transforms your 9 to 5 business into a 24-hour
operation. Your Web site works while you are asleep.
• Knowing your Market:
– As the Internet is interactive, you can receive constant feedback
from your audience
 Types of E-Commerce
• There are FOUR main modes of e-commerce:
– Business-to-Business E-Commerce (B2B)
– Business-to-Consumer E-Commerce (B2C)
– Customer-to-Consumer E-Commerce (C2C)
– Consumer-to-Business E-Commerce (C2B)
• Another new entrant is Government to Customer (G2C) and
Government to Business (G2B) in which individuals and
business organizations can transact business with the
government using the Internet
 Business-to-Business E-Commerce (B2B)

• Business-to-business (B2B) describes commerce transactions

between business companies, such as between a manufacturer and
a distributor, or between a wholesaler and a retailer. Businesses
focus on selling to other businesses.
 Business to business e-commerce (B2B e-commerce) is perhaps the
most important of the three e-commerce modes.

 It is growing very fast and it is predicted that most businesses in

the world will participate in B2B e-commerce during this decade.

 We will illustrate B2B e-commerce with an example of a business

purchasing goods electronically from a vendor.
 How B2B transaction works
 The two parties are the purchaser and the vendor. Business
organizations normally have their own local area network
which connects all computers of their organization.
 A purchase transaction initiated by a purchaser proceeds as
follows:
1. purchase order is entered by the purchaser's office using a
computer and transmitted by e-mail to the vendor.
• A standard format for purchase orders (sent by e-mail) is called
Electronic Data Interchange. (EDI) standard may be used or a mutually
agreed format may be used.
• There is also a need to sign the purchase order electronically to meet
legal requirements.
 B2B(Cont…)
2. When the purchase order is received, the vendor immediately
acknowledges it electronically.
– Observe that the purchase order need not be entered manually again
by the vendor's clerk.
• This is in contrast to current computerized systems in which a vendor's
clerk has to enter manually the purchase order on a PC (when it is
received) for further processing.
• Manual entry is slow, prone to errors and expensive as a clerk's time
has to be allocated for this.
• The inventory database is now searched for the availability of ordered
items and appropriate action is taken to (electronically) acknowledge
the purchase order.
 Cont..
• The inventory database of the vendor is updated and a
delivery note is prepared to be sent to the receiving office of
the purchaser.
• Concurrently an invoice for items supplied is transmitted by e-
mail to the purchaser's accounts office.
• The vendor dispatches the items physically along with a hard
copy of delivery note. The delivery note is needed for physical
inspection of items received and reconciling them with
electronic delivery note and invoice to facilitate payment.
 Cont…
3. The items received from the vendor are sent to an inspection
office of the purchaser along with the delivery note.
– The inspection office physically checks the items for both quantity and
quality and sends a discrepancy note of items rejected to the purchase
office.
4. The accepted items are sent to the store along with an
electronic intimation.
– The stores office takes items into stock and also updates the inventory
database.
4. Simultaneously the purchase office is intimated to enable it to
handle rejected items and to authorize accounts departments
to pay for the accepted items
 Cont…
5. The accounts office electronically pays for items accepted and
taken into stock.
– Electronic payment is made by the accounts office by informing its
banker to debit authorized amount from its account and credit it to
the vendor's bank account.
– The vendor's account may be in a different bank. The electronic
transfer of funds from one bank account to another bank account is an
important aspect of e-commerce.
– This is called Electronic Funds Transfer (EFT) and is already used in
India for dividend payments, interest payment, etc. Observe that if EFT
is used, no hard copy of cheques are sent by mail and the funds
transfer is fast.
 Important Aspect of B2B
• All business organizations must have a LAN interconnecting
computers in their respective offices and the offices
themselves should have computers for data entry/receipt,
comparison, etc.

• The system may be a distributed client/server type system

with each office being a client and the databases being,
stored in appropriate servers.

• The internal system architecture is not a major issue.

However, the protocol used by the LAN is usually the same as
that used by the Internet, namely, TCP/IP.
 Cont…
• A business organization must already have a good operational computer-
based information system for it to successfully participate in B2B e-
commerce.

 The two intranets must be interconnected. There are three alternative

methods available to do this.

 One is to connect each of the intranets to the Internet which is an

inexpensive solution but may be insecure.

 The second solution is to connect the intranets using a private

communication network to constitute what is known as an extranet.

 Extranet is a private interconnection of the intranets of business

associates.
 Cont…
 Each intranet supports web pages which can be accessed by the members
of the extranet.

 The third alternative is to interconnect the intranets of the two

businesses by what is known as a Virtual Private Network (VPN).

 A VPN uses the Internet but implements special security measures to

protect data.

 There must be an agreement on a method of paying-for goods or services

received electronically.

 This implies that the business partners must know one another's bank
account details. Further, funds transfer must be secure and each
transaction should be authorized electronically.
 Cont…
 We have assumed that documents are interchanged by e-
mail.

 This is acceptable between close business associates but is

not secure and there is no authentication of documents sent
and received.

 For more secure transactions e-commerce has introduced

data encryption and a method of digitally signing documents
which we will discuss later
 Business to Consumer E-Commerce
(B2C)
• When an individual buys items from a shop using the Internet
and the entire transaction is carried out electronically, we call
it business to customer e-commerce and it is abbreviated as
B2C e-commerce.
• The shops which transact business using the Internet are
called by various names, some of which are e-shop, virtual
store, dot com shop and cyber shop.
• One of the earliest e-shops was a bookstore called
amazon.com set up in USA which primarily sells books and has
now added other items such as gifts, music CDs, etc.
 How B2C model works
1. Persons who want to shop have to use the Internet. They may
have Internet access from home or workplace or an Internet kiosk
(i.e., public Internet access point such as cyber cafes).
• A customer normally knows the web address of the shop with whom
he or she wants to transact business and typically uses a web
browser such as Firefox or Internet Explorer and enters the web
address of the shop.
2. The home page of the shop is displayed which provides various
options to a customer.
– If a customer wants to buy a book, he or she keys in its particulars.
– He or she may also request books available on a particular subject in
which case the shop would search its database and give a list of books
available on that subject.
– The shop may also display the contents page of a book selected by the
customer, reviews of the book, its cost and discount if any.
 Cont…
3. If the customer wants to buy one or more books, he or she points to
the book details displayed on the screen using the mouse and
clicks.
– The vendor's computer enters the prices of the book(s) selected by the
customer, provides discount (if any) and displays the net amount payable.
– The customer enters the shipping address and payment is usually by credit
card. The credit card number is entered which is used for charging the
customer.
– Sometimes option is_ also given to pay cash on delivery. Credit card
payments are more common, As the Internet is not very secure, it is
necessary to hide the details of the credit card number. from snoopers and
also from the merchant.
– The credit card details should be available only to the bank authorizing
payment. It is done by using a protocol called Secure Electronic
Transaction protocol (abbreviated as SET protocol)
 Cont…
4. The credit card details entered by a customer is sent in an encrypted
(i.e., secret coded) form over the Internet and is forwarded to the
authorizing bank by the merchant.
5. If the credit is OK, the bank authorizes the transaction.
6. The e-shop acknowledges the order and gives the details of delivery-
period and mode of shipment as desired by the customer.
7. The e-shop may not stock the items in its warehouse. It sends an
electronic request to the distributor to ship the items either directly
to the customer or to the e-shop for packing and forwarding.
8. If it is a fast moving item, e-shop will normally stock the item and
dispatch it to the customer.
9. The credit card company's bank credits the shop's bank account
electronically and sends a bill to the customer.
 Customer to Customer E-Commerce
Customer to customer e-commerce (C2C e-commerce) is one in
which two individuals want to sell/buy items. The items are usually
used items, collector's items such as stamps; coins or antiques.

The seller posts the description of the item and the expected price
of the item on a web site maintained by a company which acts as a
broker

An individual who logs on to this site looking for items may be
interested in the item advertised for sale.

He/she then offers to buy the item and may quote a price.

The price is mutually settled between the two parties by exchanging

messages through e-mail.
The broker then-arranges to collect the item from the seller and
dispatches it to the buyer and collects payment for the item and a
fee from the buyer and the seller for services.

 The primary advantage of this transaction is that the Internet

enables two individuals located at distant places to come together to
buy and sell using an intermediary's web address.
 Customer to Customer E-Commerce

Customer1 Internet Customer2

Wants to sell Item 1 Wants to buy Item 1

Broker’s website
•Advertises - "for sale"
•Brings together buyer and seller
•Transports items
•Collects fee from both Seller
&Buyer
 ADVANTAGES AND DISADVANTAGES OF E-
COMMERCE

There are, many advantages of B2C and C2C e-commerce which are
enumerated below:

•One can buy/sell items from anywhere in the world using one's
computer and Internet connection. Transactions can go on 24 hours a
day, 7 days a week as the servers maintained by businesses to cater to e-
commerce are usually never switched off.

•Besides goods, services such as financial, legal and medical

consultation may also be obtained using the World Wide Web
infrastructure.
 The major advantages which accrue to businesses that
participate in e-commerce are as follows:

•Businesses can reach out to customers worldwide at low cost.

A well-designed web page will be an asset to any business to
publicize their goods and services and also to sell their
merchandise.

•Order processing time and cost are reduced as manual entry of

data is reduced. When a vendor receives a purchase order, he
or she need not re-enter it on his system for data processing.
Businesses are also carried out faster as electronic exchange of
documents is instantaneous across the world.

•A manufacturing organization requires components which are

supplied by several vendors.
•Electronic funds transfer is fast and safe.

•A large number of potential business partners can be quickly found

and contacted by searching the World Wide Web.

•Certain types of goods can be customized and sold directly by a

manufacturer or assembler eliminating middlemen. For example, Dell
Computers sells PCs directly to customers configuring them as per
individual's requirements. Middlemen such as distributors and retailers
are eliminated.
•Supply chain management is improved as manufacturers can adjust
their inventory level of items and order processing based on customer
orders in hand and, customer preferences gathered over a period of
time.
•The cost of setting up an e-commerce site is quite small compared
to the cost of having large premises.

•The cost of transactions is quite low. It is estimated that,

transaction costs are less than a fifth of that of traditional business.

•There are some items such as airline tickets where competing

airlines provide several special packages and prices. Quick
comparison is possible on the World Wide Web and a confirmed
booking obtained on-line.

•Companies can maintain on-line e-catalogue of items and a price

list which can be quickly updated.
 Disadvantage of E-Commerce

• Payment by credit card requires faith in the system security.

Customers are wary of giving their credit card numbers to
vendors who have only a "web presence". Secure credit card
transactions in which credit card numbers are encrypted and
sent to a vendor are essential.

• Electronic Data Interchange standards have to be in place

before business to business e-commerce can increase. Small
businesses may find it difficult to conform. Data interchange
using XML (a new document description language) is expected
to solve this problem.
• Many persons go shopping for social contacts, touch and feel
and bargaining before buying items. E-commerce will de-
personalize transactions.

• A major concern is security of transactions on the Internet. Spies

or hackers can steal and misuse credit card numbers, purchase
orders, invoices, etc., if appropriate care is not taken.

• Shopping portals will be vulnerable to attacks by hackers unless

special precautions are taken. One type of nuisance is called denial
of service in which a large number of frivolous enquiries are
posted to a portal making it inaccessible to legitimate customers.

• Portals have to be protected by special security systems from

virus attacks and other electronic vandalism and espionage.
• Customers privacy may be lost if regular log is kept of their buying
habits.

• The web site of vendors should have the capability of being scaled
up quickly when the number of users suddenly increases. If the
server's capability is limited, the response time of the site will be
unacceptably high if a large number of customers decide to use the
site. Thus, a vendor should be able to add more servers quickly when
this happens.

• If there is a sudden increase in orders, there may be logistical

problems in physically delivering items to customers. Long delays in
receiving ordered goods will adversely affect future sales. Being
prepared to handle seasonal surge in demand requires pre-planning.
• When a successful e-business is launched, immediately there
will be many copy cats who will attempt to duplicate it.
Duplication is much simpler in e-commerce compared to
traditional business as it is easy to quickly build a web site and
start a competitive business. Thus, to maintain the advantage of
being first with the idea requires continuous innovation and
improvement.

• On-line businesses expose their catalogues and price lists to

competitors. The advantage of secrecy of traditional mode of
doing business is lost.

• Not every item is suitable for sale in the web. For example
saris, fancy furniture, etc., which require touch and feel are
unsuitable for sale through the web.
In spite of these disadvantages, e-commerce is bound to
rapidly increase due to its convenience, cost saving and wide
reach.
 SUPPLY CHAIN MANAGEMENT IN E-
COMMERCE
• A good supply chain management ensures having the right
product, at the right time, at the right place and at the right
price.
• The primary aim is to reduce the volume of unsold items and
ensure that items are not out-of-stock when required.
• Most organizations participating in e-commerce would like to
have guaranteed delivery of items when required.
• There are two strategies that can be followed.
 Cont…
1. If it is a commonly available commodity, then one can follow
an e-auction path.
– In this strategy a request for e-quotation is publicized in the web on
the organization's web site or on an intermediary site specializing in
B2B auctions.
– Based on the quotes the best option can be picked. This can be done
periodically. Based on sales forecasts, delivery schedules can be
arranged to ensure just-in-time availability.
– This will minimize the cost of procurement and minimize inventory
holding cost.
 Cont…
2. If the item is specialized where it is important to develop
vendors, a cooperative strategy can be followed.
– In this case, the cooperating vendor can be allowed access to the
demand forecasts and the actual stock position in the database via the
extranet or VPN.
– Using this information the cooperating vendor can plan the production
schedule to meet the expected demand.
– When the stock position of the purchaser goes down, the vendor
knowing the position can automatically prepare to deliver the items
and inform the purchaser electronically.
– Such a system ensures for the purchaser and vendor a well
coordinated seller-buyer relationship and both parties gain.
 Characteristics of E-Commerce
1. Geographic location, abundance of capital or the ownership of the
retail outlets is irrelevant to this type of transaction.
2. Anyone can freely participate in economic activities through e-
commerce over a wide range of sectors. That is, anytime,
anywhere, anyone can do e-commerce.
3. E-commerce allows products to be marketed worldwide, while
providing a wide array of options to the consumers.
4. E-commerce must be scalable and adaptable.
5. It requires security properties such as secrecy, privacy, reliability,
and no repudiation. These are the challenges of e-commerce.
6. Trust and confidence must be established if it is to reach its full
potential. E-commerce can survive only if all involved parties can
trust the system.
8. E-commerce should be guided by laws.
 Three Factors that make E-Commerce
Attractive
• (1) Choice:
– Customers in general enjoy having choices before they decide whether
to buy or what price they are willing to pay for a product.
• (2) Vast selection:
– Online products can be displayed, reviewed, and compared at no cost
in time or funds. This feature makes online shopping much more
efficient than having to visit after store.
• (3) Quick comparison:
– Consumers can quick compare products in terms of price, quality,
shipping terms and so on before making a final choice.
 Business Models for E-Commerce
• Business model is a way of doing business to sustain it for
generating revenue.
• It is a set of planned activities designed to result in a profit in
a marketplace.
• Key Ingredients of a Business Model:
– Value proposition: Why should the customer buy from you?
– Revenue model: How will you earn money?
– Market opportunity: What market space do you intend to serve?
– Competitive environment: Who else occupies you intended market
space?
– Competitive advantage: What special advantages does your firm bring
to the market space?
 Key Ingredient of Business Model
• Market strategy: How do you plan to promote your products
or services?
• Organizational development: What types of organizational
structures are necessary to carry out the business plan?
• Management team: What kinds of experiences and
background are important for the managers to have?
 Some Business Models
• There are different business models in e-commerce.
• Each model has its own unique features and offerings.
• An online business can adopt one business model or more
than one models simultaneously.
 Storefront model:
• This is a true e-commerce site that offers products or goods
for a price.
• The business provides a website with product information, a
shopping cart, and an online ordering mechanism.
• Users select the products they want to buy and place an order
through the shopping cart. The product price is usually fixed,
but can be negotiable.
• This model is typical of physical goods and services like books,
computers, pizza delivery service etc.
• Using this model, the merchant reaches the customers
directly and sells without retailers or intermediaries.
 Click-and-mortar model:
• A click-and-mortar model shop combines a website with a
physical store.
• The additional advantages are that it already has an
established brand name, and that it can use its physical store
to promote the website.
• Further, users can return unwanted or detective items simply
by going to the physical store rather than mailing it to a
website operator.
 Built to order merchant model:
• A manufacturer such as a computer vendor can use this
model by offering goods or services and the ability to order
customized versions.
• The customized product is then assembled individually and
shipped to the customer.
• This model provides added value to consumers and allows the
manufacturer to create only those products that will be sold.
 Subscription-based access model:
• Many service operators provide subscription-based access to
their service.
• A visitor pays a fixed fee per month or year in return for
unlimited access to the service. Access beyond a certain limit
is subject to a surcharge.
• This model is typical for accessing databases with articles,
news, and patterns as well as online games or adult website.
• However, the viability of this model is doubtful. This model is
slowly gaining acceptance, because many Internet users are
reluctant to pay to view content on the web.
 Broker model:
• Brokers are market makers.
• As intermediaries, they bring buyers and sellers together and
facilitate transactions between them.
• Those can be business-to-consumer (B2C), business-to-
business (B2B), or consumer-to-consumer (C2C) markets.
• A broker makes money by charging a fee for every facilitated
transaction or a percentage of the price of the transaction.
 Free access model:
• Users are given something free, but with advertisements.
• A free web space provider typically provides advertising
banners at the top or bottom of its sites.
• Electronic greeting cards are sent with a personal message
and an advertisement.
• Since the visitor base is diverse, it is hard to target the right
advertisements, making the revenue low.
 Virtual community model:
• It is also called a vanity site. A virtual community is a website
that attracts a group of users with a common interest who
work together on the site.
• Users share information and make contributions in other
ways.
• Since they have contributed to it themselves, users feel highly
loyal to the site and will visit it regularly.
• A specialized type of virtual community is the knowledge
network or expert site, where laymen and experts share
expertise.
• These sites operate like a forum. Participants get questioned
answered or raise topics for discussion.
 Infomediary model:
• An infomediary collects, evaluates, and sells information on
consumers and their buying behavior to other parties who
want reach those consumers.
• Initially, a visitor is offered something for free, like free
hardware or free Internet access, which allows the
infomediary to monitor the visitor’s online activities.
• The information gathered can be extremely valuable for
marketing purposes.
• The infomediary needs to keep track of its users.
• A simple way to achieve this is to require registration for
access to the site, preferably for free.