1

Chapter 1Foundations of Electronic

Commerce

2

Learning Objectives

� Define electronic commerce and describe its various categories

� Distinguish between electronic markets and inter-organizational systems

� Describe the benefits of electronic commerce to organizations, consumers, and society

� Describe the limitations of electronic commerce� Understand the forces that drive the widespread use

of electronic commerce� Describe and discuss the changes that will be

caused by electronic commerce� Discuss some major managerial issues regarding

electronic commerce

3

Opening Vignettes:Intel Corp. and Happy Puppy

� Intel Corporation� Business-to-business (B2B) products selling� Customer service� Purchasing from and dealing with suppliers

� Happy Puppy� Retailing company’s games� Marketing others’ games� Business-to-consumers (B2C)

4

Definitions

� Electronic Commerce (EC) is where business transactions take place via telecommunications networks, especially the Internet.� Electronic commerce describes the buying and selling

of products, services, and information via computer networks including the Internet.

� The infrastructure for EC is a networked computing environment in business, home, and government.

� E-Business describes the broadest definition of EC. It includes customer service and intrabusiness tasks. It is frequently used interchangeably with EC.

5

� A global networked environment is known as the Internet

� A counterpart within organizations, is called an intranet

� An extranet extends intranets so that they can be accessed by business partners.

Definitions

6

Pure Vs. Partial Electronic Commerce

� Three dimensions� the product (service) sold [physical / digital];� the process [physical / digital] � the delivery agent (or intermediary) [physical / digital]

� Traditional commerce� all dimensions are physical

� Pure EC� all dimensions are digital

� Partial EC� all other possibilities include a mix of digital and

physical dimensions

7

� Figure 1.2 shows that the EC applications are supported by infrastructures, and their implementation is dependent on four major areas (shown as supporting pillars) people, public policy, technical standards and protocols, and other organizations.

� The EC management coordinates the applications, infrastructures, and pillars. It also includes Internet marketing and advertisement.

The Electronic Commerce Field

A Framework for Electronic Commerce 9

Electronic Commerce Applications

• Stocks Jobs • On-line banking

• Procurement and purchasing• Malls • On-line marketing and advertising

• Home shopping • Auctions • Travel • On-line publishing

People:

Buyers, sellers,

intermediaries,

services, IS people,

and management

Public

policy,

legal, and

privacy

issues

Technical standards

for documents,

security, and

network protocols

payment

Organizations:

Partners,

competitors,

associations,

government services

Infrastructure

(1)

Common business

services infrastructure

(security smart

cards/authentication

electronic payment,

directories/catalogs)

(2)

Messaging and

information distribution

infrastructure

(EDI, e-mail, Hyper Text

Transfer Protocol)

(3)

Multimedia content

and network

publishing infrastructure

(HTML, JAVA, World

Wide Web, VRML)

(4)

Network infrastructure

(Telecom, cable TV

wireless, Internet)

(VAN, WAN, LAN,

Intranet, Extranet)

(5)

Interfacing

infrastructure

(The databases,

customers, and

applications)

Management

9

� A market is a network of interactions and relationships where information, products, services, and payments are exchanged.

� The market handles all the necessary transactions.

� An electronic market is a place where shoppers and sellers meet electronically.

� In electronic markets, sellers and buyers negotiate, submit bids, agree on an order, and finish the execution on- or off-line.

Electronic Markets

11

Shopper/Purchaser Seller/Supplier

Electronic Market

(Transaction Hander)

Electronic commerce

network

(Infrastructure)

Product/service information request

Purchase request

Payment or payment advicePurchase fulfillment request

Purchase change request

Response to fulfillment request

Shipping notice

Payment approval

Electronic transfer of funds Electronic transfer of funds

Shopper/Purchaser’s Bank

Payment remittance notice

Electronic transfer of funds

Transaction Handler’s Bank

(Automated Clearing House)

Seller/Supplier’s Bank

Electronic Markets

Response to information request

Purchase acknowledgment

Shipping notice

Purchase/service delivery (if online)

Payment acknowledgment

11

� An interorganizational information system (IOS) involves information flow among two or more organizations.

� Its major objective is efficient routine transaction processing, such as transmitting orders, bills, and payments using EDI or extranets.

� Scope: An IOS is a unified system encompassing two or several business partners.

� A typical IOS includes a company and its suppliers and and/or customers.

Interorganization Information Systems

12

� Electronic data interchange (EDI)� Extranets� Electronic funds transfer (EFT)� Integrated messaging systems� Shared databases� Electronically-supported supply chain

management

Types of Interorganizational Systems

13

� Business-to-business� Business-to-customer

Classification of EC by the Nature of the Transactions

14

� Marketing� Computer sciences� Consumer behavior

and psychology� Finance� Economic� Production/Logistic

� Management information systems

� Accounting and auditing

� Management� Business law and

ethics

Electronic Commerce is Interdisciplinary

15

The Benefits ofElectronic Commerce

� Expands the marketplace to national and international markets

� Decreases the cost of creating, processing, distributing, storing and retrieving paper-based information

� Allows reduced inventories and overhead by facilitating “pull” type supply chain management

� The pull type processing allows for customization of products and services which provides competitive advantage to its implementers

� Benefits to Organizations

16

Benefits to Organizations (cont.)

� Reduces the time between the outlay of capital and the receipt of products and services

� Supports business processes reengineering (BPR) efforts

� Lowers telecommunications cost - the Internet is much cheaper than value added networks (VANs)

17

Benefits to Customers

� Enables customers to shop or do other transactions 24 hours a day, all year round from almost any location

� Provides customers with more choices� Provides customers with less expensive products

and services by allowing them to shop in many places and conduct quick comparisons

� Allows quick delivery of products and services in some cases, especially with digitized products

18

Benefits to Customers (cont.)

� Customers can receive relevant and detailed information in seconds, rather than in days or weeks

� Makes it possible to participate in virtual auctions� Allows customers to interact with other

customers in electronic communities and exchange ideas as well as compare experiences

� Electronic commerce facilitates competition, which results in substantial discounts.

19

Benefits to Society

� Enables more individuals to work at home, and to do less traveling for shopping, resulting in less traffic on the roads, and lower air pollution

� Allows some merchandise to be sold at lower prices benefiting the poor ones

� Enables people in Third World countries and rural areas to enjoy products and services which otherwise are not available to them

� Facilitates delivery of public services at a reduced cost,increases effectiveness, and/or improves quality

20

The Limitations ofElectronic Commerce

� Lack of sufficient system’s security, reliability, standards, and communication protocols

� Insufficient telecommunication bandwidth� The software development tools are still evolving

and changing rapidly� Difficulties in integrating the Internet and electronic

commerce software with some existing applications and databases

� Technical Limitations of Electronic Commerce

21

Technical Limitations of Electronic Commerce (cont.)

� The need for special Web servers and other infrastructures, in addition to the network servers (additional cost)

� Possible problems of interoperability, meaning that some EC software does not fit with some hardware, or is incompatible with some operating systems or other components

22

Non-Technical Limitations

� Cost and justification� The cost of developing an EC in house can be

very high, and mistakes due to lack of experience, may result in delays. There are many opportunities for outsourcing, but where and how to do it is not a simple issue. Furthermore, to justify the system one needs to deal with some intangible benefits which are difficult to quantify.

23

� Security and Privacy � These issues are especially important in the B2C area,

and security concerns are not truly so serious from a technical standpoint. Privacy measures are constantly improving too. Yet, the customers perceive these issues as very important and therefore the EC industry has a very long and difficult task of convincing customers that online transactions and privacy are, in fact, fairly secure.

� Lack of trust and user resistance � Customers do not trust an unknown faceless seller,

paperless transactions, and electronic money. So switching from a physical to a virtual store may be difficult.

Non-Technical Limitations (cont.)

24

� Other limiting factors are:� Lack of touch and feel online� Many unresolved legal issues� Rapidly evolving and changing EC� Lack of support services� Insufficiently large enough number of sellers

and buyers� Breakdown of human relationships� Expensive and/or inconvenient accessibility to

the Internet

Non-Technical Limitations (cont.)

25

The Driving Forces of Electronic Commerce

� Business pressures� Organizational responses� The role of Information

Technology (including electronic commerce)

� The New World of Business

26

Major Business Pressures

Market and

economic pressures

Strong competition

Extremely low labor cost in some countries

Frequent and significant changes in markets

Increased power of consumers

Societal and

environmental pressures

Changing nature of workforce

Government deregulation of banking and other services

Shrinking government budgets subsides

Increased importance of ethical and legal issues

Increased social responsibility of organizations

Rapid political changes

Technological pressures Rapid technological obsolescence

Increase innovations and new technologies

Information overload

Rapid decline in technology cost Vs. performance ratio

27

Everything Will Be Changed

� Product promotion

� New sales channels

� Direct savings

� Time-to-market (reduced cycle time)

� Customer service

� Brand or corporate image

� Improving Direct Marketing

28

� Transforming Organizations� Work will change

� Technology learning� Organizational learning

� Redefining Organization� New product capabilities� New business models

Other Changes in the Workplace

29

� Impacts on Manufacturing� Pull processing, mass customization, shorter

cycle time, integration (ERP), electronic bidding and procurement

� Impacts on Finance and Accounting� Electronic payment systems, electronic cash,

automating back office, home banking, electronic stock trading

� Human Resource Management� Electronic recruiting, training, distance learning

Other Changes in the Workplace (cont.)

30

� Is it real?� How to evaluate the magnitude of the

business pressures?� What should be my company’s strategy

towards EC?� What is the best way to learn about EC?

Management Issues