ELECTRONIC COMMERCE

Session 1: An Introduction to Electronic Commerce

SESSION OBJECTIVES

To provide an introduction to electronic commerce (e-commerce) by answering the following questions:What is e-commerce?What are the advantages and

disadvantages of e-commerceWhat were the 1st and 2nd waves of

e-commerce characterised by?What are the categories of e-

commerce?

SESSION OBJECTIVES CONT’D

To discuss concepts such as:MarketsValue chainsTransaction cost

To evaluate international electronic commerce issues

WHAT IS COMMERCE?

Traditional commerce may be defined as:From Webster's Revised Unabridged

Dictionary Commerce : \Com"merce\, noun.

The exchange or buying and selling of commodities; esp. the exchange of merchandise, on a large scale, between different places or communities; extended trade or traffic.

WHAT IS E-COMMERCE?

Electronic commerce (e-commerce) is a general term for any type of business, or commercial transaction that involves the transfer of information across the Internet. This covers a range of different types of businesses from consumer-based retail sites, like Amazon.com, through auction and music sites like eBay or MP3.com, to business exchanges trading goods or services between corporations.

WHAT IS E-COMMERCE CONT’D?

Electronic commerce is the use of electronic communication to do business. E-commerce is not about technology. It is not a new business. E-commerce is a method for companies to create and operate their business in new and efficient ways. [1]

WHAT IS E-COMMERCE CONT’D?

Most fundamentally, e-commerce represents the realization of digital, as opposed to paper-based, commercial transactions between businesses, between a business and its consumers, or between a government and its citizens or constituent business. [2]

WHAT IS E-COMMERCE CONT’D?

In summary, e-commerce is theuse of electronic communication to do

business Specifically, the transfer of information

(transactions), over the Internet

Some people use the term e-business to refer to all the categories of e-commerceE.g. IBM defines e-business as:

The transformation of key business processes through the use of Internet technologies

FROM TRADITIONAL COMMERCE TO E-COMMERCE

Sailing ships

Printing press

Steam engine

Telephone

Opened avenues for trade between buyers and sellers. Ancient times (thousands of

years ago)

FROM TRADITIONAL COMMERCE TO E-COMMERCE CONT’D

Electronic Funds Transfer (EFTs)

Electronic Data Interchange (EDI)

Internet

Wire transfers - used by banks

Businesses transfer electronic data- data not re-keyed- high implementation cost, thus excluded small businesses

On-line shopping

BUSINESS PROCESSES SUITED TO CERTAIN TYPE OF COMMERCE

E-commerce Sale/purchase of books & CDs, travel services,

investments and insurance services Online delivery of software Online shipment tracking

BUSINESS PROCESSES SUITED TO CERTAIN TYPE OF COMMERCE CONT’D

E-commerce & Traditional Sale/purchase of automobiles and residential

real estate (e.g. do research online then buy from a dealer or real estate agent)

Online banking Roommate matching service

BUSINESS PROCESSES SUITED TO CERTAIN TYPE OF COMMERCE CONT’D

Traditional Sale/purchase of impulse items for immediate

use, high fashion jewelry and antiques (personal inspection required; prefer to touch, smell or examine closely)

Small denomination purchases and sales (since there is not yet a standard for transferring small amounts of money)

WHAT ARE THE ADVANTAGES OF E-COMMERCE? Increases sales, decreases cost

Allows small businesses to have global customer base

Reduced cost through electronic sales enquires, price quotes and order taking

Provides purchasing opportunities for buyers (businesses can identify new suppliers and partners)

Increase speed and accuracy for exchanged information, thus reducing cost

WHAT ARE THE ADVANTAGES OF E-COMMERCE CONT’D? Business can be transacted 24hrs a

day The level of detail of purchase

information is selected by user Digital products can be delivered

instantly Tax refunds, public retirement and

welfare support costs less when distributed over the Internet

Allows products and services to be available in remote areas, e.g. remote learning

WHAT ARE THE DISADVANTAGES OF E-COMMERCE? Inability to sell some products (e.g.

high cost jewelry and perishable foods, although supermarkets like www.Tesco.com delivers to your home)

The newness and evolution of the current technology

Many products require a large number of people to purchase to be viable

High capital investment

WHAT ARE THE DISADVANTAGES OF E-COMMERCE CONT’D? Difficulty in integrating current

databases and transaction processing systems into e-commerce solutions

Cultural and legal obstaclesTransmission of credit card detailsSome consumers resistant to changeLaws are unclear

Shipping profile: Products with a low value-to-weight ratio that can not be efficiently packed and shipped are unsuitable (use traditional commerce)

THE 1ST WAVE OF E-COMMERCE The 1st wave was from

the mid 1990s to 2003 Dot-com boom (over

$100 billion in investment): Rapid growth from mid-1990s to 2000

Dot-com bust: in 2000 Gloom years: 2000 –

2003 (over $200 billion in investment)

CHARACTERISTICS OF THE 1ST WAVE3

It was primarily a U.S. phenomenon Web pages were in English Internet technologies were slow and

inexpensive (e.g. dial-up lines) Bar codes and scanners used to track

parts (B2B and Business processes) Email, tool for unstructured

communication On-line advertising main revenue

source

THE 2ND WAVE OF E-COMMERCE Beginning in 2003 e-

commerce has shown signs of new life

Companies like Amazon.com (books), and eBay.com (auctions) who survived the downturn were beginning to show profits

Continuous growth of B2C sales: 20-30% each year since 2000

CHARACTERISTICS OF THE 2ND WAVE

International scope where sellers do business in many countries and languages

Faster, cheaper connections (x20 faster), broadband at home (although more expensive)

Radio frequency ID devices and smart cards

Fingerprint readers and retina scanners (biometric technologies) used for tracking

Email, integral part of marketing

CHARACTERISTICS OF THE 2ND WAVE CONT’D

E-commerce integral part of marketing and customer contact strategy

Some categories of on-line advertising, e.g. employment services (job want ads) have replaced traditional advertising outlets

ProblemsLanguage conversionsCurrency conversions

E-COMMERCE CATEGORIES3

There are five general e-commerce categories: Business to Consumer (or B2C) e-

commerce Business to Business (or B2B) e-commerce

(sometimes called e-procurement) Business processes that support buying

and selling activities Consumer-to-consumer (or C2C) e-

commerce Business-to-government (or B2G) e-

commerce

B2C E-COMMERCE Description

Businesses sell products or services to individual customers (consumers)

Example Walmart.com sells merchandise to consumers

through its Web site Web site

www.walmart.com

B2B E-COMMERCE Description

Businesses sell products or services to other businesses

Example Grainger.com sells industrial supplies to large

and small businesses through its Web site Web site

www.grainger.com

BUSINESS PROCESSES THAT SUPPORT BUY/SELL ACTIVITIES Description

Businesses and other organisations maintain and use information to identify and evaluate customers, suppliers and employees (and to support buying, selling hiring, planning and other activities). More and more this information is being shared

ExampleDell Computer uses secure internet

connections to share current sales and forecasts with suppliers who use it to plan their production, therefore they deliver the right quantities of components at the right time

C2C E-COMMERCE

DescriptionParticipants in an online marketplace can

buy and sell goods with each other Example

Consumers and businesses trade with each other on eBay.com

Web sitewww.ebay.com

B2G E-COMMERCE Description

Business sell goods or services to governments and government agencies

Example Cal-Buy portal for businesses that want to sell

online to the State of California Web site

www.pd.dgs.ca.gov/calbuy/default.htm

E-COMMERCE CATEGORIES EXAMPLE You are a computer manufacturing

company who performs the following activities on the Internet:Sells computers to individuals (B2C)Purchases parts (e.g. hard drives, power

supplies etc.) from a supplier (B2B)Hires staff, manage customer accounts,

advertise, etc. (Business processes)Sells computers to the Government to be

used in schools (B2G)On eBay.com individuals buy and sell this

brand of computers (C2C)

Business processes

RELATIVE SIZES OF E-COMMERCE CATEGORIES

B2C

B2B

RELATIVE SIZES OF E-COMMERCE CATEGORIES CONT’D

Year B2C Sales ($ Billions)

B2B Sales ($ Billions)

2005 150 4100

2004 130 2800

2003 100 1600

2000 50 60

ECONOMIC FORCES Economics is the

study of how people allocate scare resources

Resources are allocated through:Commerce

(markets)Government

actions (e.g. taxes)

MARKETS A market is a place where sellers can

come into contact with buyers and a medium of exchange (e.g. currency) is available (e.g.the stock market)

Some hierarchal organisations (companies) however, due to high transaction cost, choose to replace supplier markets with its own hierarchal structure for creating the product. This is called vertical integrationE.g. Thomson Financial, a financial

software provider, purchased the data supplier Datastream

HIERARCHICAL ORGANISATIONS (FIRMS)

Firms participate in markets to purchase rawmaterials and sell finish products.

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W o rke rE

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W o rke rF

M a n ag e rF

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W o rke rJ

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C h ie f O p e ra tin g O ffice r

TRANSACTION COSTS

Transaction costs are the total costs that a buyer and seller incur as they gather information and negotiate a purchase/sale transaction

Transaction costs are the main reason for vertical integration (Ronald Coase)

Businesses can use e-commerce to reduce transaction costs (e.g. telecommuting rather than physical commuting to allow global employment opportunities)

TRANSACTION COSTS EXAMPLE

Transaction costs incurred by a sweater dealer when purchasing from independent sweater knitters: Cost of identifying independent knitters Cost of site visit to negotiate purchase price,

arrange delivery and inspection of sweaters Costs incurred by knitters:

Knitting tools and yarn purchase

NETWORK ECONOMIC STRUCTURES Many businesses operate in an

economic structure that is neither market or hierarchical

These businesses form, long-term, strategic alliances with other companies who share common goals and strategies

These alliances may occur over the Internet – which are called virtual companiesTeams complete a project or activity then

dissolveNew teams are creating as required

VALUE CHAINS A value chain is a way to organise the

activities that a business undertakes to design, produce, promote, market, deliver and support the products or services it sells

There are several types of value chains including: Business unit value chains Industry value chains

STRATEGIC BUSINESS UNIT VALUE CHAINS A strategic business unit is a

particular combination of product, distribution channel and customer type (large firms often break down their business into these units)

The value chain for a strategic business unit include:Primary activities (the activities that the

strategic business unit undertakesSupport activities (such as human

resource management and purchasing)

MANUFACTURER VALUE CHAIN

Finance& admin HR Technology

development

Support activities

Design

Identify customers

Manufacture product or create

service

deliverAfter sales

service & support

Market & sellPurchase materials

and supplies

Primary activities

PRIMARY ACTIVITIES

Identify new customers, and sell new services to existing customers (research & surveys)

Design – from concept to manufacturing Purchase materials and supplies –

includes contracts, vendor selection, monitoring quality and delivery timeliness

Manufacture product or create service –transform materials and labour into finished products

PRIMARY ACTIVITIES CONT’D

Market and sell – advertising, promoting, managing sales staff, pricing and monitoring sales

Deliver – store, deliver distribute and ship final product – warehousing, consolidating freight, selecting shippers and monitoring delivery timeliness

Provide after-sale service and support – promote relationship with customer, e.g. installing, maintaining, testing, repairing, and warranties

PRIMARY ACTIVITIES CONT’D

If a strategic business unit provides a service then the value chain will include a “Provide service” activity instead of “Manufacture activity”

SUPPORT ACTIVITIES Each business unit must also undertake

support activities that provide the infrastructure for the primary activities:Finance and administration – accounting,

paying bills, borrowing, compliance with laws

Human resources – recruiting, hiring, training, compensation and benefits

Technology development – improves the product or service, including basic and applied research and development, process improvement and field tests of maintenance procedures

INDUSTRY VALUE CHAINS

Industry value chains describes the larger stream of activities into which a particular business unit’s value chain is embedded

When a business unit delivers a product to a customer the customer might use the product as purchased materials in its value chain

By examining how other business units in the industry value chain conduct their business cost reduction and product improvement may result

INDUSTRY VALUE CHAIN EXAMPLE A value chain for a wooden chair

Logger cuts down tree Sawmill converts logs to lumber Lumberyard provides selection of lumber Chair manufacture assembles chair Furniture retailer markets and sells chair Consumer purchases and uses chair Landfill or recycler disposes of chair

INTERNATIONAL ISSUES Trust issues Language issues Culture issues Infrastructure

issues

TRUST ISSUES Anyone can create a site on the Web These individuals or businesses can

easily remain anonymous Without an established brand

consumers find it difficult to trusts on-line businesses:especially with personal information and

credit card numbers The key is developing methods which

allow legitimate businesses to establish trusts relationships quickly with consumers

LANGUAGE ISSUES (LOCALISATION) Global impact requires local language Web sites

customers prefer to buy from sites in native language

60% of web content today is in English; but more than 50% of the current users do not read English

Multiple translations may be required for different dialects, e.g. Spanish- Mexico and Spain

Translating entire Web sites is expensive25-90 cents per word for human translators (400-600

words per hour)Automated software translation (machine

translation) is cheaper (400,000 word per hour) - less accurate

CULTURE ISSUES

Culture is the combination of language and customs

Culture varies across national boundaries and in many cases regions within nations

Example: General Motors Chevrolet Nova automobile

amused people in Latin America since no va means “it will not go”

CULTURE ISSUES CONT’D Choice of icons on Web pages becomes

problematic on international Web sites: In the US a shopping cart is useful, in the UK a

shopping basket is more appropriate, Australians call shopping carts, shopping trolleys

In many places other than Brazil the thumbs up gesture means okay, in Brazil it is an obscene gesture

INFRASTRUCTURE ISSUES

Limited telecommunication infra-structure may lead to unreliable Internet access

Internet connection cost might be high Reduces time businesses might spend surfing

for new suppliers or products Flat-rate access to the Internet required

DEFINITIONS A commodity item is a product or service

that is hard to distinguish from the same products or services provided by other sellers (e.g. gasoline, office suppliers, soap and computers)

A transaction is an exchange of value, such as a purchase or sale, or the conversion of raw materials into finished products (a transaction has one or more associated activity)

A business process is the set of logically related and sequential activities and transactions in which businesses engage

DEFINITIONS CONT’D

Merchandising is a combination of store design, layout and product display knowledge

A shipping profile is the collection of attributes that affect how easily that product can be packaged and delivered (e.g. airline tickets have a high value-to-weight ratio)

DEFINITIONS CONT’D

The definition of a market satisfies two conditions: Potential seller of a good (product) comes into

contact with buyers A medium of exchange is available (e.g.

currency or barter (to exchange goods or services directly without the useof money))

DEFINITIONS CONT’D

Transaction costs are the total costs that a buyer and seller incur as they gather information and negotiate a purchase/sale transaction. This includes: Brokerage fees and sales commissions Cost of information search and acquisition Seller’s investment in equipment or hire of

skilled employees

REFERENCES[1] NSW Department of State and Regional Development, “Brief on Electronic

Commerce”, http://www.smallbiz.nsw.gov.au/textonly/issues/technology/brief/index.html

[2] Ford, Warwick, “Secure Electronic Commerce: Building the Infrastructure for Digital Signatures and Encryption (2nd Edition), pp. 1, 2000

[3] Schneider, Gary, P., “Electronic Commerce: The second wave”, Thomson Course Technology, Fifth Annual Edition, 2004