Electronic commerce

• To many people the term electronic commerce,

often shortened to e-commerce, is equivalent
to shopping on the web.
• The term electronic business is sometimes used
to capture the broader notion of e-commerce.
• In this course, we will use e-commerce in its
broadest sense. It encompasses both web
shopping and other business conducted
electronically.

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 E-commerce is not new
• Banks have used electronic funds transfers
(EFTs), also called wire transfers, for decades.

• Businesses have been engaging in electronic

data interchange for years. EDI occurs when
one business transmits computer readable data
in a standard format to another business.

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 Electronic data interchange
• In the 1960s businesses realized that many of
the documents they exchanged related to the
shipping of goods and contained the same set
of information for each transaction.
• By sending the information electronically in a
standard format, the businesses could save
money on printing, mailing, and re-entry of
data.
• Electronic transfer of data also introduces fewer
errors than manual transfer.
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 Technology and commerce
• In order to understand how technology can aid
commerce we need to understand traditional
commerce.
• Once we have identified what activities are
involved in traditional commerce, we can
consider how technology can improve them.
• Note that technology does not always improve
commerce. Knowing when technology will
NOT help is also useful.

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 Origins of commerce
• The origins of traditional commerce predate
recorded history.
• Commerce is based on the specialization of
skills. Instead of performing all services
and producing all goods independently,
people rely on each other for the goods and
services they need.
• Example: My mother trades eggs to one of
her neighbors in exchange for repairs to the
fences on her ranch.
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 Traditional commerce
• Although money has replaced bartering, the basic
mechanics of commerce remain the same: one
member of society creates something of value
that another member of society desires.

• Commerce is a negotiated exchange of valuable

objects or services between at least two parties
and includes all activities that each of the
parties
undertakes the complete the transaction.
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 Views of commerce
Commerce can be viewed from at least two
different perspectives:
1. The buyer’s viewpoint
2. The seller’s viewpoint

Both perspectives will illustrate that commerce

involves a number of distinct activities, called
business processes.

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 The buyer’s perspective
From the buyer’s perspective, commerce involves
the following activities:
1. Identify a specific need
2. Search for products or services that will satisfy
the specific need
3. Select a vendor
4. Negotiate a purchase transaction including
delivery logistics, inspection, testing, and
acceptance
5. Make payment
6. Perform/obtain maintenance if necessary 8
 The seller’s perspective
From the sellers’ perspective, commerce involves
the following activities:
1. Conduct market research to identify customer
needs
2. Create a product or service to meet those needs
3. Advertise and promote the product or service
4. Negotiate a sales transaction including delivery
logistics, inspection, testing, and acceptance
5. Ship goods and invoice the customer
6. Receive and process customer payments
7. Provide after sales support and maintenance 9
 Business processes
Business processes are the activities involved in
conducting commerce.

Examples include:
• Transferring funds
• Placing orders
• Sending invoices
• Shipping goods to customers

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 E-commerce
We will define e-commerce as the use of electronic
data transmission to implement or enhance any
business activity.

Example (Figure 1-4): A buyer sends an electronic

purchase order to a seller. The seller then sends an
electronic invoice back to the buyer.

When used appropriately, electronic transmission

can save both time and money.
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 Impact of e-commerce
E-commerce is changing the way traditional
commerce is conducted:
• Technology can help throughout the process
including promotion, searching, selecting,
negotiating, delivery, and support.
• The value chain is being reconfigured.

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 Value chain analysis
A way of looking at the activities of an industry
or organization.
• Primary activities
Costs are directly allocated to a product
• Support activities
Costs are associated with the overall operation
of the organization

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Example: Figure 1-12

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 Origin of the name
An organization is a “chain” of activities, each
providing a value:
• R&D develops the products
• Sales promotes the products
• Production manufactures the products
• Final inspection assures quality
• Logistics delivers the products
• Technical support maintains the products

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 A typical company value chain
Primary Activities and Costs

Inbound Outbound Sales and Profit

Operation Service
Logistics Logistics Marketing Margin
s

Product R&D, Technology, Systems

Development
Human Resources Management Support
Activities
General Administration and Costs
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 Reconfiguring the value chain
1. Vertical
Forward integration: Gaining ownership
or increased control over distributors
or retailers.
Example: United Airlines buys Priceline
Backward integration: Gaining ownership
or increased control over suppliers.
Example: Amazon buys RCA records
2. Horizontal: Seeking increased control over
competitors.
Example: Amazon buys BestBooksBuys.com
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 Appropriateness
It is important to identify which business processes
can be streamlined using e-commerce technologies.

It is equally important to realize that some processes

make effective use of traditional commerce and can’t
be improved upon using technology.

Technology is not a panacea. Using it when it is

not necessary or helpful can be a costly mistake.

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 Well-suited for e-commerce
Business processes that are well-suited for electronic
commerce:
• Sale/purchase of new books and CDs
• Online delivery of software
• Advertising and promotion of travel services
• Online tracking of shipments

The business processes that are especially well-suited

to e-commerce include commodity items, that is, a
product or service that has become standardized.
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 Best for traditional commerce
Business processes that are well-suited to traditional
commerce:
• Sale/purchase of high fashion clothing
(Any possible exceptions?)
• Sale/purchase of perishable food products
• Small-denomination transactions (Future?)
• Sale of expensive jewelry and antiques

In general, products that buyers prefer to touch, smell,

or otherwise closely examine are difficult to sell using
e-commerce. 20
 Questionable cases
Would e-commerce or traditional commerce work
best for the following activities?

• Sale/purchase of rare books

• Browsing through new books
• Sale/purchase of shoes
• Sale/purchase of collectibles (trading cards,
plates, etc.)

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 Combinations of both
Some business processes can be handled well using
a combination of electronic and traditional methods:
• Sale/purchase of automobiles
• Online banking
• Roommate-matching services
• Sale/purchase of investment/insurance products

In this course we will discuss the issue of evaluating

the advantages and disadvantages of e-commerce.
Let’s consider a few examples now.
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 Advantages of e-commerce
For the seller:
• Increases sales/decreases cost
• Makes promotion easier for smaller firms
• Can be used to reach narrow market segments

For the buyer:

• Makes it easier to obtain competitive bids
• Provides a wider range of choices
• Provides an easy way to customize the level of
detail in the information obtained
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 Advantages of e-commerce II
In general:
• Increases the speed and accuracy with which
businesses can exchange information
• Electronic payments (tax refunds, paychecks,
etc.) cost less to issue and are more secure
• Can make products and services available in
remote areas
• Enables people to work from home, providing
scheduling flexibility

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 Disadvantages of e-commerce
• Some business processes are not suited to
e-commerce, even with improvements in
technology
• Many products and services require a critical
mass of potential buyers (e.g. online grocers)
• Costs and returns on e-commerce can be
difficult to quantify and estimate
• Cultural impediments: People are reluctant to
change in order to integrate new technology
• The legal environment is uncertain: Courts and
legislators are trying to catch up 25