Chapter 1

Overview of Electronic Commerce

1
Marks & Spencer—A New
Way to Compete
• The Problem
– UK-based, upscale, global retailer of
high-quality, high-priced merchandise
faces stiff competition, since economic
slowdown that started in 1999
– Critical success factors
• Customer service
• Appropriate store inventory system
• Efficient supply chain activities
 Marks & Spencer (cont.)

• The Solution
– M&S realized that digital era survival
depends on the use of information
technology in general and electronic
commerce in particular
– Electronic commerce (EC, e-commerce)—
a process of buying, selling, transferring,
or exchanging products, services, and/or
information via electronic networks and
computers
 Marks & Spencer (cont.)
– M & S initiated several EC initiatives,
including:
• Security
• Warehouse management
• Merchandise receiving
• Inventory control
• Speeding up the supply of fashion garments
• Collaborative commerce

© Prentice Hall
2004
 Marks & Spencer (cont.)

• The Results
– As of summer 2002, a turnaround is
underway
– M & S has become a leader and example
setter in retailing, resulting in increased
profitability and growth
 Marks & Spencer (cont.)

• What can we learn…

– Traditional brick-and-mortar companies face
increasing pressures in a competitive marketing
environment
– A possible response is to introduce a variety of e-
commerce initiatives that can improve
• supply chain operation
• information
• money from raw materials through factories
• increase customer service
• open up markets to more customers
 Electronic Commerce:
Definitions and Concepts

• The Internet has emerged as a major, perhaps

eventually the major, worldwide distribution channel for
goods, services, managerial and professional jobs
• This is profoundly changing economics, markets and
industry structure, products and services and their
flow, consumer segmentation, consumer values,
consumer behavior, jobs, and labor markets
• The impact may be even greater on societies and
politics, and on the way we see the world and
ourselves in it

9
 Electronic Commerce:
Definitions and Concepts (cont.)

• E-commerce defined from the following

perspectives:
– Communications: delivery of goods, services,
information, or payments over computer
networks or any other electronic means
– Commercial (trading): provides capability of
buying and selling products, services, and
information on the Internet and via other online
services
 Electronic Commerce:
Definitions and Concepts (cont.)

• Business process: doing business electronically by

completing business processes over electronic
networks, thereby substituting information for
physical business processes
• Service: a tool that addresses the desire of
governments, firms, consumers, and management
to cut service costs while improving the quality of
customer service and increasing the speed of
service delivery
 Electronic Commerce:
Definitions and Concepts (cont.)

• Learning: an enabler of online training and

education in schools, universities, and other
organizations, including businesses
• Collaborative: the framework for inter- and
intraorganizational collaboration
• Community: provides a gathering place for
community members to learn, transact, and
collaborate
 Electronic Commerce:
Definitions and Concepts (cont.)

• e-business: a broader definition of EC,

which includes:
– buying and selling of goods and services
– servicing customers
– collaborating with business partners
– conducting electronic transactions within
an organization
 Electronic Commerce:
Definitions and Concepts (cont.)
• Pure vs. Partial EC • Brick-and-Mortar
depends upon the organizations are old-
degree of digitization economy organizations
(the transformation from (corporations) that
physical to digital) of: perform most of their
1. the product (service) sold; business off-line, selling
2. the process; and for physical products by
3. the delivery agent (or means of physical agents
digital intermediary)
 Electronic Commerce:
Definitions and Concepts (cont.)
• Virtual (pure-play) • Electronic market (e-
organizations conduct marketplace) online
their business activities marketplace where
solely online buyers and sellers meet
• Click-and-mortar to exchange goods,
organizations conduct services, money, or
some EC activities, but information
do their primary business
in the physical world
 Electronic Commerce:
Definitions and Concepts (cont.)
• Interorganizational • Intraorganizational
information systems information systems
(IOSs) allow routine enable EC activities
transaction to go on within
processing and individual
information flow organizations
between two or more
organizations
Exhibit 1.1: The Dimensions of
Electronic Commerce
 The EC Framework,
Classification, and Content
• Two major types of e-commerce:
– business-to-consumer (B2C) : online
transactions are made between businesses
and individual consumers
– business-to-business (B2B): businesses
make online transactions with other
businesses
intrabusiness EC: EC conducted inside an
organization (e.g., business-to-employees B2E)
 The EC Framework,
Classification, and Content (cont.)
• Computer environments
– Internet: global networked environment
– Intranet: a corporate or government network
that uses Internet tools, such as Web
browsers, and Internet protocols
– Extranet: a network that uses the Internet to
link multiple intranets
 EC Framework
• EC applications are supported by
infrastructure and by five support areas:
– People
– Public policy
– Marketing and advertising
– Support services
– Business partnerships
Exhibit 1.2: A Framework for
Electronic Commerce
 Classification of EC by
Transactions or Interactions
• business-to-consumer (B2C) : online
transactions are made between
businesses and individual consumers
• business-to-business (B2B): businesses
make online transactions with other
businesses
• e-tailing: online retailing, usually B2C
 Classification of EC by
Transactions or Interactions (cont.)
• business-to-business-to-consumer (B2B2C): e-
commerce model in which a business provides
some product or service to a client business that
maintains its own customers
• consumer-to-business (C2B):
e-commerce model in which individuals use the
Internet to sell products or services to
organizations or individuals seek sellers to bid
on products or services they need
 Classification of EC by
Transactions or Interactions (cont.)
• consumer-to-consumer (C2C):
e-commerce model in which consumers sell
directly to other consumers
• peer-to-peer (P2P): technology that enables
networked peer computers to share data and
processing with each other directly; can be used
in C2C, B2B, and B2C e-commerce
 Classification of EC by
Transactions or Interactions (cont.)
• mobile commerce ((m-commerce):
e-commerce transactions and activities
conducted in a wireless environment
• location-based commerce (l-commerce):
m-commerce transactions targeted to
individuals in specific locations, at
specific times
 Classification of EC by
Transactions or Interactions (cont.)
• intrabusiness EC: e-commerce category that
includes all internal organizational activities that
involve the exchange of goods, services, or
information among various units and individuals
in an organization
• business-to-employees (B2E): e-commerce
model in which an organization delivers
services, information, or products to its individual
employees
 Classification of EC by
Transactions or Interactions (cont.)
• collaborative commerce (c-commerce):
e-commerce model in which individuals or
groups communicate or collaborate online
• e-learning: the online delivery of information for
purposes of training or education
• exchange (electronic): a public electronic market
with many buyers and sellers
 Classification of EC by
Transactions or Interactions (cont.)
• exchange-to-exchange (E2E): e-commerce
model in which electronic exchanges formally
connect to one another the purpose of
exchanging information
• e-government: e-commerce model in which a
government entity buys or provides goods,
services, or information to businesses or
individual citizens
 The Interdisciplinary
Nature of EC
• Major EC disciplines
– Computer science
– Marketing
– Consumer behavior
– Finance
– Economics
– Management information systems
 A Brief History of EC
• 1970s: innovations like electronic funds transfer
(EFT)—funds routed electronically from one
organization to another (limited to large
corporations)
• electronic data interchange (EDI)— electronically
transfer routine documents (application enlarged
pool of participating companies to include
manufacturers, retailers, services)
• interorganizational system (IOS)—travel reservation
systems and stock trading
 A Brief History of EC (cont.)
• 1969 U.S. government experiment—the Internet
came into being initially used by technical
audience of government agencies, academic
researchers, and scientists
• 1990s the Internet commercialized and users
flocked to participate in the form of dot-coms, or
Internet start-ups
• Innovative applications ranging from online
direct sales to e-learning experiences
 A Brief History of EC (cont.)

• Most medium- and large-sized organizations have

a Web site
• Most large U.S. corporations have comprehensive
portals
• 1999 the emphasis of EC shifted from B2C to B2B
• 2001 the emphasis shifted from B2B to B2E,
c-commerce, e-government, e-learning, and
m-commerce
• EC will undoubtedly continue to shift and change
 A Brief History of EC (cont.)

• EC successes • EC failures
– Virtual EC companies – 1999, a large number of EC-
dedicated companies began
• eBay to fail
• VeriSign – EC’s days are not numbered!
• AOL • dot-com failure rate is
• Checkpoint declining sharply
– Click-and-mortar • EC field is experiencing
consolidation
• Cisco • most pure EC companies,
• General Electric are expanding operations
• IBM and generating increasing
sales (Amazon.com)
• Intel
• Schwab
 The Success Story of
Campusfood.Com
• Provide interactive menus to college students,
using the power of the Internet to replace and/or
facilitate the traditional telephone ordering of
meals
• Built the company’s customer base
– expanding to other universities
– attracting students
– generating a list of restaurants from which students
could order food for delivery
 The Success Story of
Campusfood.Com (cont.)
• Now some of these activities are outsourced
to a marketing firm, enabling the addition of
dozens of schools nationwide
• Financed through private investors, friends,
and family members, the site was built on an
investment of less than $1 million
• Campusfood.com’s revenue is generated
through transaction fees—the site takes a 5
% commission on each order from the
sellers
 The Success Story of
Campusfood.Com (cont.)
• At campusfood.com you can:
– Navigate through a list of local restaurants,
their hours of operation, addresses, phone
numbers, etc.
– Browse an interactive menu
– Bypass “busy” telephone signals to place an
order online
– Access special foods, promotions, and
restaurant giveaways
– Arrange electronic payment of your order
 The Future of EC

• 2004—total online shopping and B2B transactions

in the US between $3 to $7 trillion by 2008:
– number of Internet users worldwide should reach 750
million
– 50 percent of Internet users will shop
– EC growth will come from:
• B2C
• B2B
• e-government
• e-learning
• B2E
• c-commerce
 E-commerce
Business Models
• Business models—a method of doing
business by which a company can
generate revenue to sustain itself
• Examples:
– Name your price
– Find the best price
– Dynamic brokering
– Affiliate marketing
 E-commerce
Business Plans and Cases
• Business plan: a written document that
identifies the business goals and outlines the
plan of how to achieve them
• Business case: a written document that is used
by managers to garner funding for specific
applications or projects; its major emphasis is
the justification for a specific investment
Structure of Business Models
• Business model: A method of doing
business by which a company can
generate revenue to sustain itself
 Structure of Business Models
(cont.)
• Revenue model: description of how the
company or an EC project will earn
revenue
– Sales
– Transaction fees
– Subscription fees
– Advertising
– Affiliate fees
– Other revenue sources
 Structure of
Business Models (cont.)
• Value proposition: The benefits a company
can derive from using EC
– search and transaction cost efficiency
– complementarities
– lock-in
– novelty
– aggregation and interfirm collaboration
Exhibit 1.4: Common Revenue
Models
Typical Business Models
in EC
1. Online direct marketing
2. Electronic tendering systems
tendering (reverse auction): model in which
a buyer requests would-be sellers to submit
bids, and the lowest bidder wins
3. Name your own price: a model in which a
buyer sets the price he or she is willing to
pay and invites sellers to supply the good or
service at that price
 Typical Business
Models in EC (cont.)
4. Affiliate marketing: an arrangement whereby a
marketing partner (a business, an organization,
or even an individual) refers consumers to the
selling company’s Web site
5. Viral marketing: word-of-mouth marketing in
which customers promote a product or service
to friends or other people
 Typical Business
Models in EC (cont.)
6. Group purchasing: quantity purchasing
that enables groups of purchasers to
obtain a discount price on the products
purchased
7. SMEs: small to medium enterprises
8. Online auctions
 Typical Business
Models in EC (cont.)
8. Product and service customization
customization: creation of a product or
service according to the buyer’s
specifications
8. Electronic marketplaces and exchanges
9. Value-chain integrators
10. Value-chain service providers
 Typical Business
Models in EC (cont.)
12. Information brokers
13. Bartering
14. Deep discounting
15. Membership
16. Supply chain improvers
Business models can be independent or they
can be combined amongst themselves or with
traditional business models
 Example of
Supply Chain Improver
• Orbis Group changes a linear physical
supply chain to an electronic hub
– Traditional process in the B2B advertising
field
 Example of
Supply Chain Improver (cont.)

– ProductBank
simplifies this
lengthy process
changing the
linear flow of
products and
information to a
digitized hub
 Benefits of EC

Benefits to organizations
• Global reach • Rapid time-to-market
• Cost reduction • Lower communication
costs
• Supply chain
improvements • Efficient procurement
• Extended hours: 24/7/365 • Improved customer
relations
• Customization
• Up-to-date company
• New business models
material
• Vendors’ specialization
• No city business permits
and fees
• Other benefits
 Benefits of EC (cont.)

Benefits to consumers
• Ubiquity • Participation in
• More products and auctions
services • Electronic
• Cheaper products communities
and services • “Get it your way”
• Instant delivery • No sales tax
• Information
availability
 Benefits of EC (cont.)

• Benefits to society
– Telecommuting
– Higher standard of
living
– Hope for the poor
– Availability of public
services
Limitations of EC
 Barriers of EC
• Security • User authentication
• Trust and risk and lack of public key
• Lack of qualified infrastructure
personnel • Organization
• Lack of business • Fraud
models • Slow navigation on
• Culture the Internet
• Legal issues
 The Digital Revolution
• Digital economy: An economy that is
based on digital technologies, including
digital communication networks,
computers, software, and other related
information technologies; also called the
Internet economy, the new economy, or
the Web economy
 The Digital Revolution (cont.)
• A global platform over which people and
organizations interact, communicate,
collaborate, and search for information
• Includes the following characteristics:
– A vast array of digitizable products
– Consumers and firms conducting financial
transactions digitally
– Microprocessors and networking capabilities
embedded in physical goods
 New Business Environment
• Customers are becoming more powerful
• Created due to advances in science
occurring at an accelerated rate
• Results in more and more technology
• Rapid growth in technology results in a
large variety of more complex systems
 New Business
Environment (cont.)
• Characteristics in the business environment
– A more turbulent environment with more business
problems and opportunities
– Stronger competition
– Need for organizations to make decisions more
frequently
– A larger scope for decisions because more factors
– More information and/or knowledge needed for
making decisions
Environment-Response-Support
Model
• Critical response activities
– traditional actions such as lowering cost and
closing unprofitable facilities
– introduce innovative actions such as
customizing or creating new products or
providing superb customer service
 Exhibit 1.6: Major Business
Pressures and the Role of EC
Major Business Pressures
 Strong competition
 Global economy
 Regional trade
agreements (e.g. NAFTA)
 Extremely low labor cost
Market and in some countries
economic  Frequent and significant
changes in markets
pressures  Increased power of
consumers
 Major
Business Pressures (cont.)
 Changing nature of
workforce
 Government deregulation of
banking and other services
 Shrinking government
Societal and subsidies
environmental  Increased importance of
ethical and legal issues
pressures  Increased social
responsibility of
organizations
 Rapid political changes
 Major
Business Pressures (cont.)
 Rapid technological
obsolescence
 Increase innovations
and new technologies
Technological  Information overload
 Rapid decline in
pressures
technology cost vs.
performance ratio
 Organizational Responses
• Strategic systems
• Continuous improvement efforts and business
process reengineering—including business
process reengineering (BPR)
• Customer relationship management (CRM)—
divided into the following areas
– Operational CRM
– Analytical CRM
– Collaborative CRM
 Organizational Responses (cont.)
• Business alliances
• Electronic markets
• Reductions in cycle time and time-to-
market
Cycle time reduction: Shortening the time it
takes for a business to complete a productive
activity from its beginning to end
 Organizational Responses (cont.)
• Empowerment of employees
• Supply chain improvements
• Mass customization: make-to-order in
large quantities in an efficient manner
Mass customization: Production of large
quantities of customized items
 Organizational Responses (cont.)
• Intrabusiness: from sales force automation
to inventory
• Knowledge management
Knowledge management (KM): The process
of creating or capturing knowledge, storing
and protecting it, updating and maintaining it,
and using it
 Putting It All Together
• Task facing each organization is how to put
together the components that will enable the
organization to transform itself to the digital
economy and gain competitive advantage by
using EC
• Many employ corporate portals
A major gateway through which employees, business
partners, and the public can enter a corporate Web
site
 Exhibit 1.8:
The Networked Organization
 Managerial Issues
1. Is it real?
2. How should we evaluate the magnitude of
the business pressures?
3. Why is B2B e-commerce so attractive?
4. There are so many EC failures—how can
one avoid them?
 Managerial Issues (cont.)
5. What should be my company’s strategy
toward EC?
6. How do we transform our organization
into a digital one?
7. What are the top challenges of EC?
 Summary
1. Definition of EC and description of its
various categories.
2. The content and framework of EC.
3. The major types of EC transactions.
4. The major business models.
 Summary (cont.)
5. Benefits to organizations, consumers,
and society.
6. Limitations of EC.
7. The role of the digital revolution.
8. The role of EC in combating pressures in
the business environment.