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ecommerce power point chapter 1-7
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Copyright 2011 Pearson Education, Inc.
E-commerce
Kenneth C. Laudon
Carol Guercio Traver
business. technology. society.
seventh edition
E-commerce: business. technology. society.
Copyright 2011 Pearson Education, Inc.
Chapter 1: The Revolution Is Just Beginning
Copyright 2007 Pearson Education, Inc. Slide 1-2
Chapter 1
The Revolution Is Just Beginning
Copyright 2011 Pearson Education, Inc.
Facebook: The New Face of E-Commerce?
Class Discussion
Do you use Facebook, and if so, how often? What has the experience been like?
Have you purchased anything based on an advertisement on Facebook or by using a link provided by a friend?
Are you concerned about the privacy of the information you have posted on Facebook?
Slide 1-3
Copyright 2011 Pearson Education, Inc.
E-commerce Trends 2010-2011
Social networking continues to grow
Social e-commerce platform emerges
Online consumer sales return to growth
Mobile computing begins to rival PC
Explosive growth in online video viewing
Continued privacy and security concerns
Slide 1-4
Copyright 2011 Pearson Education, Inc.
The First 30 Seconds
First 16 years of e-commerce
Just the beginning
Rapid growth and change
Technologies continue to evolve at exponential rates
Disruptive business change
New opportunities
Slide 1-5
Copyright 2011 Pearson Education, Inc.
What is E-commerce?
Use of Internet and Web to transact business
More formally:
Digitally enabled commercial transactions between and among organizations and individuals
Slide 1-6
Copyright 2011 Pearson Education, Inc.
E-commerce vs. E-business
E-business:
Digital enablement of transactions and processes within a firm, involving information systems under firms control
Does not include commercial transactions involving an exchange of value across organizational boundaries
Slide 1-7
Copyright 2011 Pearson Education, Inc.
Why Study E-commerce?
E-commerce technology is different, more powerful than previous technologies
E-commerce bringing fundamental changes to commerce
Traditional commerce: Passive consumer
Sales-force driven
Fixed prices
Information asymmetry
Slide 1-8
Copyright 2011 Pearson Education, Inc.
Unique Features of E-commerce Technology
1. Ubiquity
2. Global reach
3. Universal standards
4. Information richness
5. Interactivity
6. Information density
7. Personalization/customization
8. Social technology
Slide 1-9
Copyright 2011 Pearson Education, Inc.
Web 2.0
Technologies that allow users to:
Create and share content, preferences, bookmarks, and online personas
Participate in virtual lives
Build online communities
E.g. Twitter, YouTube, Facebook, Second Life, Wikipedia, Digg
Slide 1-10
Copyright 2011 Pearson Education, Inc.
Types of E-commerce
Classified by market relationship
Business-to-Consumer (B2C)
Business-to-Business (B2B)
Consumer-to-Consumer (C2C)
Classified by technology used
Peer-to-Peer (P2P)
Mobile commerce (M-commerce)
Slide 1-11
Copyright 2011 Pearson Education, Inc.
The Internet
Worldwide network of computer networks built on common standards
Created in late 1960s
Services include the Web, e-mail, file transfers, etc.
Can measure growth by looking at number of
Internet hosts with domain names
Slide 1-12
Copyright 2011 Pearson Education, Inc.
The Growth of the Internet, Measured by Number of Internet Hosts with Domain Names Figure 1.3, Page 23
Slide 1-13
SOURCE: Internet Systems Consortium,
Inc. , 2010.
Copyright 2011 Pearson Education, Inc.
The Web
Most popular Internet service
Developed in early 1990s
Provides access to Web pages
HTML documents that may include text, graphics, animations, music, videos
Web content has grown exponentially
Google indexes between 75 100 billion pages
Slide 1-14
Copyright 2011 Pearson Education, Inc.
Insight on Technology:
Spider Webs, Bow Ties, Scale-Free Networks, and the Deep Web
Class Discussion
What is the small world theory of the Web?
What is the significance of the bow-tie form of the Web?
Why does Barabasi call the Web a scale-free network with very connected super nodes?
Slide 1-15
Copyright 2011 Pearson Education, Inc.
Origins & Growth of E-commerce
Precursors: Baxter Healthcare
Electronic Data Interchange (EDI)
French Minitel (1980s videotex system)
None had functionality of Internet
1995: Beginning of e-commerce First sales of banner advertisements
E-commerce fastest growing form of commerce in United States
Slide 1-16
Copyright 2011 Pearson Education, Inc.
The Growth of B2C E-commerce Figure 1.4, Page 25
Slide 1-17
SOURCES: Based on data from eMarketer, Inc., 2010; authors estimates.
Copyright 2011 Pearson Education, Inc.
The Growth of B2B E-commerce Figure 1.5, Page 28
Slide 1-18
SOURCES: Based on data from U.S. Census Bureau, 2010; authors estimates.
Copyright 2011 Pearson Education, Inc.
Technology and E-commerce in Perspective
The Internet and Web: Just two of a long list of technologies that have greatly changed commerce
Automobiles
Radio
E-commerce growth will eventually cap as it confronts its own fundamental limitations.
Slide 1-19
Copyright 2011 Pearson Education, Inc.
Potential Limitations on the Growth of B2C E-commerce
Expensive technology
Sophisticated skill set
Persistent cultural attraction of physical markets and traditional shopping experiences
Persistent global inequality limiting access to telephones and computers
Saturation and ceiling effects Slide 1-20
Copyright 2011 Pearson Education, Inc.
E-commerce: A Brief History
1995-2000: Innovation Key concepts developed
Dot-coms; heavy venture capital investment
2001-2006: Consolidation Emphasis on business-driven approach
2006-Present: Reinvention Extension of technologies
New models based on user-generated content, social networks, services
Slide 1-21
Copyright 2011 Pearson Education, Inc.
Early Visions of E-commerce
Computer scientists: Inexpensive, universal communications and computing
environment accessible by all
Economists: Nearly perfect competitive market and friction-free
commerce
Lowered search costs, disintermediation, price transparency, elimination of unfair competitive advantage
Entrepreneurs: Extraordinary opportunity to earn far above normal
returns on investment first mover advantage Slide 1-22
Copyright 2011 Pearson Education, Inc.
Insight on Business
Noodlenomics Guides Internet Investment in 2010
Class Discussion
What explains the rapid growth in private investment in e-commerce firms in the period 19982000? Was this investment irrational?
What was the effect of the big bust of March 2000 on e-commerce investment?
What is the value to investors of a company such as YouTube which has yet to show profitability?
Why do you think investors today would be interested in investing in or purchasing e-commerce companies? Would you invest in an e-commerce company today?
Slide 1-23
Copyright 2011 Pearson Education, Inc.
Assessing E-commerce
Many early visions not fulfilled
Friction-free commerce
Consumers less price sensitive
Considerable price dispersion
Perfect competition
Information asymmetries persist
Disintermediation
First mover advantage
Fast-followers often overtake first movers
Slide 1-24
Copyright 2011 Pearson Education, Inc.
Predictions for the Future
Technology will propagate through all commercial activity.
Prices will rise to cover the real cost of doing business.
E-commerce margins and profits will rise to levels more typical of all retailers.
Cast of players will change. Traditional Fortune 500 companies will play dominant role.
New startup ventures will emerge with new products, services.
Number of successful pure online stores will remain smaller than integrated offline/online stores.
Regulatory activity worldwide will grow.
Cost of energy will have an influence.
Slide 1-25
Copyright 2011 Pearson Education, Inc.
Understanding E-commerce: Organizing Themes
Technology: Development and mastery of digital computing and
communications technology
Business: New technologies present businesses with new ways of
organizing production and transacting business
Society: Intellectual property, individual privacy, public welfare
policy
Slide 1-26
Copyright 2011 Pearson Education, Inc.
The Internet and the Evolution of Corporate Computing Figure 1.9, Page 44
Slide 1-27
Copyright 2011 Pearson Education, Inc.
Insight on Society
Who Really Cares About Online Privacy? Class Discussion
What techniques of privacy invasion are described in the case?
Which of these techniques is the most privacy-invading? Why?
Is e-commerce any different than traditional markets with respect to privacy? Dont merchants always want to know their customer?
How do you protect your privacy on the Web?
Slide 1-28
Copyright 2011 Pearson Education, Inc.
Academic Disciplines Concerned with E-commerce
Technical approach Computer science
Management science
Information systems
Behavioral approach Information systems
Economics
Marketing
Management
Finance/accounting
Sociology
Slide 1-29
Copyright 2011 Pearson Education, Inc.
2. Revenue Model
How will the firm earn revenue, generate profits, and produce a superior return on
invested capital?
Major types:
Advertising revenue model
Subscription revenue model
Transaction fee revenue model
Sales revenue model
Affiliate revenue model
Slide 2-30
Copyright 2011 Pearson Education, Inc.
3. Market Opportunity
What marketspace do you intend to serve and what is its size?
Marketspace: Area of actual or potential commercial value in which company intends to operate
Realistic market opportunity: Defined by revenue potential in each market niche in which company hopes to compete
Market opportunity typically divided into smaller niches
Slide 2-31
Copyright 2011 Pearson Education, Inc.
4. Competitive Environment
Who else occupies your intended marketspace? Other companies selling similar products in the same
marketspace
Includes both direct and indirect competitors
Influenced by: Number and size of active competitors
Each competitors market share
Competitors profitability
Competitors pricing
Slide 2-32
Copyright 2011 Pearson Education, Inc.
5. Competitive Advantage
Achieved when firm:
Produces superior product or
Can bring product to market at lower price than competitors
Important concepts:
Asymmetries
First-mover advantage
Unfair competitive advantage
Leverage Slide 2-33
Copyright 2011 Pearson Education, Inc.
6. Market Strategy
How do you plan to promote your products or services to attract your target audience?
Details how a company intends to enter market and attract customers
Best business concepts will fail if not properly marketed to potential customers
Slide 2-34
Copyright 2011 Pearson Education, Inc.
7. Organizational Development
What types of organizational structures within the firm are necessary to carry out the business plan?
Describes how firm will organize work
Typically divided into functional departments
As company grows, hiring moves from generalists to specialists
Slide 2-35
Copyright 2011 Pearson Education, Inc.
8. Management Team
What kinds of experiences and background are important for the companys leaders to have? Employees are responsible for making the business model
work
Strong management team gives instant credibility to outside investors
Strong management team may not be able to salvage a weak business model, but should be able to change the model and redefine the business as it becomes necessary
Slide 2-36
Copyright 2011 Pearson Education, Inc.
Why do you think Webvan failed?
Why are more traditional grocery chains succeeding online today?
Why would an online customer pay the same price as in the store plus a delivery charge? Whats the benefit to the customer?
What are the important success factors for FreshDirect?
Do you think FreshDirect would work in your town?
Slide 2-37
Insight on Business
Online Grocers: Finding and Executing the Right Model
Class Discussion
Copyright 2011 Pearson Education, Inc.
Categorizing E-commerce Business Models
No one correct way
We categorize business models according to: E-commerce sector (B2C, B2B, C2C)
Type of e-commerce technology; i.e. m-commerce
Similar business models appear in more than one sector
Some companies use multiple business models; e.g. eBay
Slide 2-38
Copyright 2011 Pearson Education, Inc.
B2C Business Models: Portal
Search plus an integrated package of content and services
Revenue models:
Advertising, referral fees, transaction fees, subscriptions
Variations:
Horizontal / General
Vertical / Specialized (Vortal)
Pure Search
Slide 2-39
Copyright 2011 Pearson Education, Inc.
How many of you use Google versus Yahoo or Bing? Does the class differ from the overall Web population?
Why do you use a particular search engine?
Why is Google moving beyond search and advertising into applications?
How does Bing try to distinguish itself from Google? Do you think this strategy works?
Slide 2-40
Insight on Technology
Can Bing Bong Google? Class Discussion
Copyright 2011 Pearson Education, Inc.
B2C Models: E-tailer
Online version of traditional retailer
Revenue model: Sales
Variations: Virtual merchant
Bricks-and-clicks
Catalog merchant
Manufacturer-direct
Low barriers to entry
Slide 2-41
Copyright 2011 Pearson Education, Inc.
B2C Models: Content Provider
Digital content on the Web News, music, video
Revenue models: Subscription; pay per download (micropayment);
advertising; affiliate referral fees
Variations: Content owners
Syndication
Web aggregators
Slide 2-42
Copyright 2011 Pearson Education, Inc.
B2C Models: Transaction Broker
Process online transactions for consumers
Primary value propositionsaving time and money
Revenue model:
Transaction fees
Industries using this model:
Financial services
Travel services
Job placement services
Slide 2-43
Copyright 2011 Pearson Education, Inc.
B2C Models: Market Creator
Create digital environment where buyers and sellers can meet and transact
Examples:
Priceline
eBay
Revenue model: Transaction fees
Slide 2-44
Copyright 2011 Pearson Education, Inc.
B2C Models: Service Provider
Online services e.g. Google: Google Maps, Gmail, etc.
Value proposition Valuable, convenient, time-saving, low-cost alternatives to
traditional service providers
Revenue models: Sales of services, subscription fees, advertising, sales of
marketing data
Slide 2-45
Copyright 2011 Pearson Education, Inc.
B2C Models: Community Provider
Provide online environment (social network) where people with similar interests can transact, share content, and communicate
E.g. Facebook, MySpace, LinkedIn, Twitter
Revenue models: Typically hybrid, combining advertising,
subscriptions, sales, transaction fees, affiliate fees
Slide 2-46
Copyright 2011 Pearson Education, Inc.
B2B Business Models
Net marketplaces E-distributor E-procurement Exchange Industry consortium
Private industrial network Single firm Industry-wide
Slide 2-47
Copyright 2011 Pearson Education, Inc.
B2B Models: E-distributor
Version of retail and wholesale store, MRO goods and indirect goods
Owned by one company seeking to serve many customers
Revenue model: Sales of goods
Example: Grainger.com
Slide 2-48
Copyright 2011 Pearson Education, Inc.
B2B Models: E-procurement
Creates digital markets where participants transact for indirect goods B2B service providers, application service providers (ASPs)
Revenue model: Service fees, supply-chain management, fulfillment
services
Example: Ariba
Slide 2-49
Copyright 2011 Pearson Education, Inc.
B2B Models: Exchanges
Independently owned vertical digital marketplace for direct inputs
Revenue model: Transaction, commission fees
Create powerful competition between suppliers
Tend to force suppliers into powerful price competition; number of exchanges has dropped dramatically
Slide 2-50
Copyright 2011 Pearson Education, Inc.
B2B Models: Industry Consortia
Industry-owned vertical digital marketplace open to select suppliers
More successful than exchanges
Sponsored by powerful industry players
Strengthen traditional purchasing behavior
Revenue model: Transaction, commission fees
Example: Exostar
Slide 2-51
Copyright 2011 Pearson Education, Inc.
Private Industrial Networks
Designed to coordinate flow of communication among firms engaged in business together Electronic data interchange (EDI)
Single firm networks Most common form
Example: Wal-Marts network for suppliers
Industry-wide networks Often evolve out of industry associations
Example: Agentrics
Slide 2-52
Copyright 2011 Pearson Education, Inc.
Other E-commerce Business Models
Consumer-to-consumer (C2C) eBay, Craigslist
Peer-to-peer (P2P) The Pirate Bay, Cloudmark
M-commerce: Technology platform continues to evolve
iPhone, smartphones energizing interest in m-commerce apps
Slide 2-53
Copyright 2011 Pearson Education, Inc.
Insight on Society
Where R U? Not Here! Class Discussion
Why should you care if companies track your location via cell phone?
What is the opt-in principle and how does it protect privacy?
Should business firms be allowed to call cell phones with advertising messages based on location?
Slide 2-54
Copyright 2011 Pearson Education, Inc.
E-commerce Enablers: The Gold Rush Model
E-commerce infrastructure companies have profited the most:
Hardware, software, networking, security
E-commerce software systems, payment systems
Media solutions, performance enhancement
CRM software
Databases
Hosting services, etc.
Slide 2-55
Copyright 2011 Pearson Education, Inc.
How the Internet and the Web Change Business
E-commerce changes industry structure by changing:
Basis of competition among rivals
Barriers to entry
Threat of new substitute products
Strength of suppliers
Bargaining power of buyers
Slide 2-56
Copyright 2011 Pearson Education, Inc.
Industry Value Chains
Set of activities performed by suppliers, manufacturers, transporters, distributors, and retailers that transform raw inputs into final products and services
Internet reduces cost of information and other transactional costs
Leads to greater operational efficiencies, lowering cost, prices, adding value for customers
Slide 2-57
Copyright 2011 Pearson Education, Inc.
E-commerce and Industry Value Chains Figure 2.5, Page 105
Slide 2-58
Copyright 2011 Pearson Education, Inc.
Firm Value Chains
Activities that a firm engages in to create final products from raw inputs
Each step adds value
Effect of Internet: Increases operational efficiency
Enables product differentiation
Enables precise coordination of steps in chain
Slide 2-59
Copyright 2011 Pearson Education, Inc.
E-commerce and Firm Value Chains Figure 2.6, Page 106
Slide 2-60
Copyright 2011 Pearson Education, Inc.
Firm Value Webs
Networked business ecosystem
Uses Internet technology to coordinate the value chains of business partners
Coordinates a firms suppliers with its own production needs using an Internet-based
supply chain management system
Slide 2-61
Copyright 2011 Pearson Education, Inc.
Internet-Enabled Value Web Figure 2.7, Page 107
Slide 2-62
Copyright 2011 Pearson Education, Inc.
Business Strategy
Plan for achieving superior long-term returns on the capital invested in a business firm
Four generic strategies 1. Differentiation
2. Cost
3. Scope
4. Focus
Slide 2-63
Copyright 2011 Pearson Education, Inc.
Wikitude.me Class Discussion
Have you used Wikitude.me? If so, has it been useful; if not, is it a service that seems interesting? Why or why not?
Are there any privacy issues raised by geo-tagging?
What are the potential benefits to consumers and firms of mobile services? Are there any disadvantages?
What revenue models could work for providers of mobile services such as Layar?
Slide 3-64
Copyright 2011 Pearson Education, Inc.
The Internet: Technology Background
Internet
Interconnected network of thousands of networks and millions of computers
Links businesses, educational institutions, government agencies, and individuals
World Wide Web (Web)
One of the Internets most popular services
Provides access to billions, possibly trillions, of Web pages
Slide 3-65
Copyright 2011 Pearson Education, Inc.
The Evolution of the Internet 1961The Present
Innovation Phase, 1964 1974
Creation of fundamental building blocks
Institutionalization Phase, 1975 1995
Large institutions provide funding and legitimization
Commercialization Phase, 1995 present
Private corporations take over, expand Internet backbone and local service
Slide 3-66
Copyright 2011 Pearson Education, Inc.
The Internet: Key Technology Concepts
Defined by Federal Networking Commission as network that: Uses IP addressing
Supports TCP/IP
Provides services to users, in manner similar to telephone system
Three important concepts: Packet switching
TCP/IP communications protocol
Client/server computing
Slide 3-67
Copyright 2011 Pearson Education, Inc.
Packet Switching
Slices digital messages into packets
Sends packets along different communication paths as they become available
Reassembles packets once they arrive at destination
Uses routers Special purpose computers that interconnect the computer networks that
make up the Internet and route packets
Routing algorithms ensure packets take the best available path toward their destination
Less expensive, wasteful than circuit-switching
Slide 3-68
Copyright 2011 Pearson Education, Inc.
Packet Switching Figure 3.3, Page 132
Slide 3-69
Copyright 2011 Pearson Education, Inc.
TCP/IP
Transmission Control Protocol (TCP): Establishes connections among sending and receiving Web computers
Handles assembly of packets at point of transmission, and reassembly at receiving end
Internet Protocol (IP): Provides the Internets addressing scheme
Four TCP/IP layers Network Interface Layer
Internet Layer
Transport Layer
Application Layer
Slide 3-70
Copyright 2011 Pearson Education, Inc.
The TCP/IP Architecture and Protocol Suite
Figure 3.4,
Page 134
Slide 3-71
Copyright 2011 Pearson Education, Inc.
Internet (IP) Addresses
IPv4:
32-bit number
Expressed as series of four sets of separate numbers marked off by periods
201.61.186.227
Class C address: Network identified by first three sets, computer identified by last set
New version: IPv6 has 128-bit addresses, able to handle up
to 1 quadrillion addresses (IPv4 can only handle 4 billion)
Slide 3-72
Copyright 2011 Pearson Education, Inc.
Routing Internet Messages: TCP/IP and Packet Switching
Figure 3.5, Page 133
Slide 3-73
Copyright 2011 Pearson Education, Inc.
Domain Names, DNS, and URLs
Domain name IP address expressed in natural language
Domain name system (DNS) Allows numeric IP addresses to be expressed in natural
language
Uniform resource locator (URL) Address used by Web browser to identify location of
content on the Web
E.g. http://www.azimuth-interactive.com/flash_test
Slide 3-74
Copyright 2011 Pearson Education, Inc.
Client/Server Computing
Powerful personal computers (clients) connected in network with one or more servers
Servers perform common functions for the clients
Storing files, software applications, etc.
Slide 3-75
Copyright 2011 Pearson Education, Inc.
The New Client: The Emerging Mobile Platform
Within a few years, primary Internet access will be through:
Netbooks Designed to connect to wireless Internet
Under 2 lb, solid state memory, 8 displays
$200-400
Smartphones Disruptive technology: Processors, operating systems
Slide 3-76
Copyright 2011 Pearson Education, Inc.
Cloud Computing
Firms and individuals obtain computing power and software over Internet e.g., Google Apps
Fastest growing form of computing
Radically reduces costs of: Building and operating Web sites
Infrastructure, IT support
Hardware, software
Slide 3-77
Copyright 2011 Pearson Education, Inc.
Other Internet Protocols and Utility Programs
Internet protocols HTTP
E-mail: SMTP, POP3, IMAP
FTP, Telnet, SSL
Utility programs Ping
Tracert
Pathping
Slide 3-78
Copyright 2011 Pearson Education, Inc.
The Internet Today
Internet growth has boomed without disruption because of:
Client/server computing model
Hourglass, layered architecture Network Technology Substrate
Transport Services and Representation Standards
Middleware Services
Applications
Slide 3-79
Copyright 2011 Pearson Education, Inc.
The Hourglass Model of the Internet
Figure 3.11, Page 144
Slide 3-80
SOURCE: Adapted from Computer
Science and Telecommunications
Board (CSTB), 2000.
Copyright 2011 Pearson Education, Inc.
Internet Network Architecture
Backbone: High-bandwidth fiber-optic cable networks
Private networks owned by a variety of NSPs
Bandwidth: 155 Mbps 2.5 Gbps
Built-in redundancy
IXPs: Hubs where backbones intersect with regional and local networks, and backbone owners connect with one another
CANs: LANs operating within a single organization that leases Internet access directly from regional or national carrier
Slide 3-81
Copyright 2011 Pearson Education, Inc.
Internet Network Architecture Figure 3.12, Page 145
Slide 3-82
Copyright 2011 Pearson Education, Inc.
Internet Service Providers (ISPs)
Provide lowest level of service to individuals, small businesses, some institutions
Types of service
Narrowband (dial-up)
Broadband
Digital Subscriber Line (DSL)
Cable modem
T1 and T3
Satellite
Slide 3-83
Copyright 2011 Pearson Education, Inc.
Intranets and Extranets
Intranet
TCP/IP network located within a single organization for communications and processing
Extranet
Formed when firms permit outsiders to access their internal TCP/IP networks
Slide 3-84
Copyright 2011 Pearson Education, Inc.
Who Governs the Internet?
Organizations that influence the Internet and monitor its operations include: Internet Architecture Board (IAB)
Internet Corporation for Assigned Names and Numbers (ICANN)
Internet Engineering Steering Group (IESG)
Internet Engineering Task Force (IETF)
Internet Society (ISOC)
World Wide Web Consortium (W3C)
International Telecommunications Union (ITU)
Slide 3-85
Copyright 2011 Pearson Education, Inc.
Insight on Society
Government Regulation and Surveillance of the Internet
Class Discussion
How is it possible for any government to control or censor the Web?
Does the Chinese government, or the U.S. government, have the right to censor content on the Web?
How should U.S. companies deal with governments that want to censor content?
What would happen to e-commerce if the existing Web split into a different Web for each country?
Slide 3-86
Copyright 2011 Pearson Education, Inc.
Internet II: The Future Infrastructure
Limitations of current Internet
Bandwidth limitations
Quality of service limitations Latency
Best effort QOS
Network architecture limitations
Language development limitations HTML
Wired Internet limitations
Slide 3-87
Copyright 2011 Pearson Education, Inc.
The Internet2 Project
Consortium of 200+ universities, government agencies, and private businesses collaborating to find ways to make the Internet more efficient, faster
Primary goals: Create leading edge very-high speed network for national
research community
Enable revolutionary Internet applications
Ensure rapid transfer of new network services and applications to broader Internet community
Slide 3-88
Copyright 2011 Pearson Education, Inc.
The Larger Internet II Technology Environment:
The First Mile and the Last Mile
GENI Initiative Proposed by NSF to develop new core
functionality for Internet
Most significant private initiatives Fiber optics
Mobile wireless Internet services
Slide 3-89
Copyright 2011 Pearson Education, Inc.
Fiber Optics and the Bandwidth Explosion in the First Mile
First mile: Backbone Internet services that carry bulk traffic over long distances
Older transmission lines being replaced with fiber-optic cable
Much of fiber-optic cable laid in United States is dark, but represents a vast digital highway that can be utilized in the future
Technology improvement has expanded capacity of existing fiber lines
Slide 3-90
Copyright 2011 Pearson Education, Inc.
The Last Mile: Mobile Wireless Internet Access
Last mile: From Internet backbone to users computer, cell phone, PDA, etc.
Two different basic types of wireless Internet access:
1. Telephone-based (mobile phones, smartphones)
2. Computer network-based
Slide 3-91
Copyright 2011 Pearson Education, Inc.
Telephone-based Wireless Internet Access
Competing 3G standards GSM: Used world-wide, AT&T, T-Mobile
CDMA: Used primarily in U.S.
Evolution: 2G cellular networks: relatively slow, circuit-switched
2.5G cellular networks: interim networks
3G cellular networks: next generation, packet-switched
3.5G (3G+)
4G (WiMax, LTE)
Slide 3-92
Copyright 2011 Pearson Education, Inc.
Wireless Local Area Networks (WLANs)
Wi-Fi High-speed, fixed broadband wireless LAN. Different versions for
home and business market. Limited range.
WiMax High-speed, medium range broadband wireless metropolitan area
network
Bluetooth Low-speed, short range connection
Ultra-Wideband (UWB) Low power, short-range high bandwidth network
Zigbee Short-range, low-power wireless network technology for remotely
controlling digital devices
Slide 3-93
Copyright 2011 Pearson Education, Inc.
Wi-Fi Networks Figure 3.16, Page 163
Slide 3-94
Copyright 2011 Pearson Education, Inc.
Benefits of Internet II Technologies
IP multicasting: Enables efficient delivery of data to many locations on a network
Latency solutions: diffserv (differentiated quality of service)
Assigns different levels of priority to packets depending on type of data being transmitted
Guaranteed service levels and lower error rates Ability to purchase the right to move data through network at
guaranteed speed in return for higher fee
Declining costs
Slide 3-95
Copyright 2011 Pearson Education, Inc.
Development of the Web
19891991: Web invented Tim Berners-Lee at CERN
HTML, HTTP, Web server, Web browser
1993: Mosaic Web browser w/ GUI Andreesen and others at NCSA
Runs on Windows, Macintosh, or Unix
1994: Netscape Navigator, first commercial Web browser Andreessen, Jim Clark
1995: Microsoft Internet Explorer
Slide 3-96
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Hypertext
Text formatted with embedded links
Links connect documents to one another, and to other objects such as sound, video, or animation files
Uses Hypertext Transfer Protocol (HTTP) and URLs to locate resources on the Web
Example URL
http://megacorp.com/content/features/082602.html
Slide 3-97
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Markup Languages
Generalized Markup Language (GML) 1960s
Standard Generalized Markup Language (SGML) GML variation, 1986
Hypertext Markup Language (HTML) Fixed set of pre-defined markup tags used to format text
Controls look and feel of Web pages
eXtensible Markup Language (XML) New markup language specification developed by W3C
Designed to describe data and information
Tags used are defined by user
Slide 3-98
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Web Servers and Web Clients
Web server software: Enables a computer to deliver Web pages to clients on a network that
request this service by sending an HTTP request
Apache and Microsoft IIS
Basic capabilities: Security services, FTP, search engine, data capture
Web server Can refer to Web server software or physical server
Specialized servers: Database servers, ad servers, etc.
Web client: Any computing device attached to the Internet that is capable of
making HTTP requests and displaying HTML pages
Slide 3-99
Copyright 2011 Pearson Education, Inc.
Web Browsers
Primary purpose to display Web pages
Internet Explorer and Firefox dominate the market
Other browsers include: Netscape
Opera
Safari (for Apple)
Google Chrome
Slide 3-100
Copyright 2011 Pearson Education, Inc.
The Internet and Web: Features
Internet and Web features on which the foundations of e-commerce are built include: E-mail
Instant messaging
Search engines
Intelligent agents (bots)
Online forums and chat
Streaming media
Cookies
Slide 3-101
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Most used application of the Internet
Uses series of protocols for transferring messages with text and attachments (images, sound, video clips, etc.,) from one Internet user to another
Instant Messaging
Displays words typed on a computer almost instantly, and recipients can then respond immediately in the same way
Slide 3-102
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Search Engines
Identify Web pages that match queries based on one or more techniques
Keyword indexes, page ranking
Also serve as: Shopping tools
Advertising vehicles (search engine marketing)
Tool within e-commerce sites
Outside of e-mail, most commonly used Internet activity
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How Google Works
Slide 3-104
Figure 3.22, Page 179
Copyright 2011 Pearson Education, Inc.
Intelligent Agents (Bots)
Software programs that gather and/or filter information on a specific topic and then provide a list of results Search bot
Shopping bot
Web monitoring bot
News bot
Chatter bot
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Online Forums and Chat
Online forum: AKA message board, bulletin board, discussion board,
discussion group, board or forum
Web application that enables Internet users to communicate with each other, although not in real time
Members visit online forum to check for new posts
Online chat: Similar to IM, but for multiple users
Typically, users log into chat room
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Streaming Media
Enables music, video and other large files to be sent to users in chunks so that when received and played, file comes through uninterrupted
Allows users to begin playing media files before file is fully downloaded
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Cookies
Small text files deposited by Web site on users computer to store information about user, accessed when user next visits Web site
Can help personalize Web site experience
Can pose privacy threat
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Web 2.0 Features and Services
Online Social Networks Services that support communication among
networks of friends, peers
Blogs
Personal Web page of chronological entries
Really Simple Syndication (RSS)
Program that allows users to have digital content automatically sent to their computers over the Internet
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Web 2.0 Features and Services
Podcasting
Audio presentation stored as an audio file and available for download from Web
Wikis
Allows user to easily add and edit content on Web page
Music and video services
Online video viewing
Digital video on demand Slide 3-110
Copyright 2011 Pearson Education, Inc.
Internet telephony (VOIP)
Uses Voice Over Internet Protocol (VOIP) and Internets packet-switched network to transmit voice and other forms of audio communication over the Internet
Internet television (IPTV)
Telepresence and video conferencing
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Web 2.0 Features and Services
Copyright 2011 Pearson Education, Inc.
Web 2.0 Features and Services
Online software and Web services
Web apps, widgets and gadgets
Digital software libraries, ASPs, distributed storage
M-commerce applications
Beginning to take off
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Copyright 2011 Pearson Education, Inc.
Insight on Technology
Apps for Everything: The App Ecosystem Class Discussion
What are apps and why are they so popular?
Do you use any apps regularly? Which ones, and what are their functions?
What are the benefits of apps? The weaknesses?
Are there any benefits/disadvantages to the proprietary nature of the Apple platform?
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Tommy Hilfiger Right-Sizes Its Web Store Class Discussion
What are the factors you should take into account when sizing a Web sites infrastructure?
Why are peak times an important factor to consider?
What reasons were behind Hilfigers choice of ATG for its Web site solution?
How can operators of smaller sites deal with the right-sizing issue?
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Building an E-commerce Site: A Systematic Approach
Most important management challenges:
1. Developing a clear understanding of business objectives
2. Knowing how to choose the right technology to achieve those objectives
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Pieces of the Site-Building Puzzle
Main areas where you will need to make decisions:
Human resources and organizational capabilities
Creating team with skill set needed to build and manage a successful site
Hardware
Software
Telecommunications
Site design
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The Systems Development Life Cycle
Methodology for understanding business objectives of a system and designing an appropriate solution
Five major steps:
1. Systems analysis/planning
2. Systems design
3. Building the system
4. Testing
5. Implementation
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Web Site Systems Development Life Cycle
Figure 4.2, Page 209
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System Analysis/Planning
Business objectives:
List of capabilities you want your site to have
System functionalities:
List of information system capabilities needed to achieve business objectives
Information requirements:
Information elements that system must produce in order to achieve business objectives
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Table 4.1, Page 210
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Systems Design: Hardware and Software Platforms
System design specification:
Description of main components of a system and their relationship to one another
Two components of system design:
Logical design Data flow diagrams, processing functions, databases
Physical design Specifies actual physical, software components, models, etc.
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Logical Design for a Simple Web Site
Figure 4.3 (a), Page 212
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Physical Design for a Simple Web Site
Figure 4.3 (b), Page 212
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Build/Host Your Own versus Outsourcing
Outsourcing: Hiring vendors to provide services involved in building site
Build own vs. outsourcing: Build your own requires team with diverse skill set; choice of software
tools; both risks and possible benefits
Host own vs. outsourcing Hosting: Hosting company responsible for ensuring site is accessible
24/7, for monthly fee
Co-location: Firm purchases or leases Web server (with control over its operation), but server is located at vendors facility
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Choices in Building and Hosting
Figure 4.4 Page 213
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Insight on Business
Curly Hair and MotorMouths: Getting Started on the Cheap
Class Discussion
How does a small, niche Web site become profitable?
What is the primary source of income for these kinds of sites?
What benefits are there to starting a business in a recession?
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Testing, Implementation, and Maintenance
Testing
Unit testing
System testing
Acceptance testing
Implementation and maintenance:
Maintenance is ongoing
Maintenance costs: Parallel to development costs
Benchmarking
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Factors in Web Site Optimization
Figure 4.7, Page 220
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Web Site Budgets
From $5,000 to millions of dollars/year
Components of budget:
System maintenance
System development
Content design & development
Hardware
Telecommunications
Software
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Simple versus Multi-tiered Web Site Architecture
System architecture Arrangement of software, machinery, and tasks in an
information system needed to achieve a specific functionality
Two-tier Web server and database server
Multi-tier Web application servers
Backend, legacy databases
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Two-Tier E-commerce Architecture
Figure 4.9(a), Page 222
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Multi-tier E-commerce Architecture
Figure 4.9(b), Page 222
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Web Server Software
Apache
Leading Web server software (54% of market)
Works only with UNIX, Linux OSs
Microsofts Internet Information Server (IIS)
Second major Web server software (25% of market)
Windows-based
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Table 4.3, Page 224
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Site Management Tools
Basic tools
Included in all Web servers
Verify that links on pages are still valid
Identify orphan files
Third-party software and services for advanced site management
Monitor customer purchases, marketing campaign effectiveness, etc.
e.g. WebTrends Analytics 9, Google Analytics Slide 4-135
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Dynamic Page Generation Tools
Dynamic page generation: Contents of Web page stored as objects in database and
fetched when needed
Common tools: CGI, ASP, JSP
Advantages Lowers menu costs
Permits easy online market segmentation
Enables cost-free price discrimination
Enables Web content management system (WCMS)
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Application Servers
Web application servers:
Provide specific business functionality required for a Web site
Type of middleware
Isolate business applications from Web servers and databases
Single-function applications increasingly being replaced by integrated software tools that combine all functionality needed for e-commerce site
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Table 4.4, Page 228
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E-commerce Merchant Server Software
Provides basic functionality for online sales
Online catalog
List of products available on Web site
Shopping cart
Allows shoppers to set aside, review, edit selections and then make purchase
Credit card processing
Typically works in conjunction with shopping cart
Verifies card and puts through credit to companys account at checkout
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Merchant Server Software Packages
Integrated environment with most of functionality needed
Key factors in selecting a package Functionality
Support for different business models
Business process modeling tools
Visual site management and reporting
Performance and scalability
Connectivity to existing business systems
Compliance with standards
Global and multicultural capability
Local sales tax and shipping rules
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Building Your Own E-commerce Site
Options for small firms
Hosted e-commerce sites, e.g. Yahoos Merchant Solutions
Site building tools
E-commerce templates
Open-source merchant server software
Enables you to build truly custom site
Requires programmer with expertise, time
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Choosing the Hardware for an E-commerce Site
Hardware platform:
Underlying computing equipment that system uses to achieve e-commerce functionality
Objective:
Enough platform capacity to meet peak demand without wasting money
Important to understand the different factors that affect speed, capacity, and scalability of a site
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Right-Sizing Your Hardware Platform: The Demand Side
Demand is the most important factor affecting speed of site
Factors in overall demand: Number of simultaneous users in peak periods
Nature of customer requests (user profile)
Type of content (dynamic versus static Web pages)
Required security
Number of items in inventory
Number of page requests
Speed of legacy applications
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Table 4.7, Page 233 Slide 4-144
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Degradation in Performance as Number of Users Increases-Resource Utilization
Figure 4.11 (a), Page 235
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Figure 4.11 (b), Page 235
Degradation in Performance as Number of Users Increases-Number of Connections
Copyright 2011 Pearson Education, Inc.
The Relationship of Bandwidth to Hits
Slide 4-147
SOURCE: IBM, 2003.
Figure 4.13, Page 237
Copyright 2011 Pearson Education, Inc.
Right-Sizing Your Hardware Platform: The Supply Side
Scalability:
Ability of site to increase in size as demand warrants
Ways to scale hardware:
Vertically Increase processing power of individual components
Horizontally Employ multiple computers to share workload
Improve processing architecture
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Table 4.8, Page 237
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Vertically Scaling a System
Figure 4.14, Page 238
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Horizontally Scaling a System
Figure 4.15, Page 239
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Table 4.9, Page 240
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Other E-Commerce Site Tools
Web site design: Basic business considerations
Enabling customers to find and buy what they need
Tools for Web site optimization
Search engine placement
Metatags, titles, content
Identify market niches, localize site
Expertise
Links
Search engine ads
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E-commerce Web Site Features that Annoy Customers
Figure 4.16, Page 241
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SOURCE: Based on data from
Hostway Corporations survey, Consumers Pet Peeves about Commercial Web Sites, Hostway
Corporation, 2007.
Copyright 2011 Pearson Education, Inc.
Table 4.10, Page 242
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Tools for Interactivity and Active Content
Web 2.0 design elements: Widgets, Mashups
CGI (Common Gateway Interface)
ASP (Active Server Pages)
Java, JSP, and JavaScript
ActiveX and VBScript
ColdFusion
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Personalization Tools
Personalization
Ability to treat people based on personal qualities and prior history with site
Customization
Ability to change the product to better fit the needs of the customer
Tools to achieve personalization:
Cookies
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The Information Policy Set
Privacy policy
Set of public statements declaring how site will treat customers personal information that is gathered by site
Accessibility rules
Set of design objectives that ensure disabled users can affectively access site
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Insight on Society
Designing for Accessibility with Web 2.0 Class Discussion
Why might some merchants be reluctant to make their Web sites accessible to disabled Americans?
How can Web sites be made more accessible?
Should all Web sites be required by law to provide equivalent alternatives for visual and sound content?
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Cyberwar: Mutually Assured Destruction 2.0
Class Discussion
What is the difference between hacking and cyberwar?
Why has cyberwar become more potentially devastating in the past decade?
What percentage of computers have been compromised by stealth malware programs?
Will a political solution to MAD 2.0 be effective enough?
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The E-commerce Security Environment
Overall size and losses of cybercrime unclear
Reporting issues
2009 CSI survey: 49% of respondent firms detected security breach in last year
Of those that shared numbers, average loss $288,000
Underground economy marketplace:
Stolen information stored on underground economy servers
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Types of Attacks Against Computer Systems (Cybercrime)
Slide 5-162
Figure 5.1, Page 266
SOURCE: Based on data from
Computer Security Institute,
2009
Copyright 2011 Pearson Education, Inc.
What Is Good E-commerce Security?
To achieve highest degree of security
New technologies
Organizational policies and procedures
Industry standards and government laws
Other factors
Time value of money
Cost of security vs. potential loss
Security often breaks at weakest link
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The E-commerce Security Environment
Figure 5.2, Page 269
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Table 5.2, Page 270
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The Tension Between Security and Other Values
Ease of use:
The more security measures added, the more difficult a site is to use, and the slower it becomes
Public safety and criminal uses of the Internet
Use of technology by criminals to plan crimes or threaten nation-state
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Security Threats in the E-commerce Environment
Three key points of vulnerability:
1. Internet communications channels
2. Server level
3. Client level
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A Typical E-commerce Transaction
Figure 5.3, Page 273
Slide 5-168
SOURCE: Boncella, 2000.
Copyright 2011 Pearson Education, Inc.
Vulnerable Points in an E-commerce Environment
Figure 5.4, Page 274
Slide 5-169
SOURCE: Boncella, 2000.
Copyright 2011 Pearson Education, Inc.
Most Common Security Threats in the E-commerce Environment
Malicious code Viruses
Worms
Trojan horses
Bots, botnets
Unwanted programs Browser parasites
Adware
Spyware
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Most Common Security Threats (cont.)
Phishing Deceptive online attempt to obtain confidential information
Social engineering, e-mail scams, spoofing legitimate Web sites
Use of information to commit fraudulent acts (access checking accounts), steal identity
Hacking and cybervandalism Hackers vs. crackers
Cybervandalism: Intentionally disrupting, defacing, destroying Web site
Types of hackers: White hats, black hats, grey hats
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Most Common Security Threats (cont.)
Credit card fraud/theft Hackers target merchant servers; use data to establish credit under
false identity
Spoofing
Pharming
Spam/junk Web sites
Denial of service (DoS) attack Hackers flood site with useless traffic to overwhelm network
Distributed denial of service (DDoS) attack
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Most Common Security Threats (cont.)
Sniffing
Eavesdropping program that monitors information traveling over a network
Insider jobs
Single largest financial threat
Poorly designed server and client software
Mobile platform threats
Same risks as any Internet device
Malware, botnets, vishing/smishing
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Technology Solutions
Protecting Internet communications (encryption)
Securing channels of communication (SSL, S-HTTP, VPNs)
Protecting networks (firewalls)
Protecting servers and clients
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Tools Available to Achieve Site Security
Figure 5.7, Page 287
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Encryption
Encryption Transforms data into cipher text readable only by
sender and receiver
Secures stored information and information transmission
Provides 4 of 6 key dimensions of e-commerce security:
1. Message integrity
2. Nonrepudiation
3. Authentication
4. Confidentiality
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Symmetric Key Encryption
Sender and receiver use same digital key to encrypt and decrypt message
Requires different set of keys for each transaction
Strength of encryption
Length of binary key used to encrypt data
Advanced Encryption Standard (AES)
Most widely used symmetric key encryption
Uses 128-, 192-, and 256-bit encryption keys
Other standards use keys with up to 2,048 bits Slide 5-177
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Public Key Encryption
Uses two mathematically related digital keys
Public key (widely disseminated)
Private key (kept secret by owner)
Both keys used to encrypt and decrypt message
Once key used to encrypt message, same key cannot be used to decrypt message
Sender uses recipients public key to encrypt message; recipient uses his/her private key to decrypt it
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Public Key Cryptography A Simple Case
Figure 5.8, Page 289
Slide 5-179
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Public Key Encryption using Digital Signatures and Hash Digests
Hash function: Mathematical algorithm that produces fixed-length number called
message or hash digest
Hash digest of message sent to recipient along with message to verify integrity
Hash digest and message encrypted with recipients public key
Entire cipher text then encrypted with recipients private key creating digital signature for authenticity, nonrepudiation
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Public Key Cryptography with Digital Signatures
Figure 5.9, Page 291
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Digital Envelopes
Address weaknesses of:
Public key encryption
Computationally slow, decreased transmission speed, increased processing time
Symmetric key encryption
Insecure transmission lines
Uses symmetric key encryption to encrypt document
Uses public key encryption to encrypt and send symmetric key
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Creating a Digital Envelope
Figure 5.10, Page 292
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Digital Certificates and Public Key Infrastructure (PKI)
Digital certificate includes: Name of subject/company
Subjects public key
Digital certificate serial number
Expiration date, issuance date
Digital signature of CA
Public Key Infrastructure (PKI): CAs and digital certificate procedures
PGP
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Digital Certificates and Certification Authorities
Figure 5.11, Page 294
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Limits to Encryption Solutions
Doesnt protect storage of private key
PKI not effective against insiders, employees
Protection of private keys by individuals may be haphazard
No guarantee that verifying computer of merchant is secure
CAs are unregulated, self-selecting organizations
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Insight on Society
Web Dogs and Anonymity Class Discussion
What are some of the benefits of continuing the anonymity of the Internet?
What are the disadvantages of an identity system?
Are there advantages to an identity system beyond security?
Who should control a central identity system?
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Securing Channels of Communication
Secure Sockets Layer (SSL): Establishes a secure, negotiated client-server session
in which URL of requested document, along with contents, is encrypted
S-HTTP: Provides a secure message-oriented communications
protocol designed for use in conjunction with HTTP
Virtual Private Network (VPN): Allows remote users to securely access internal
network via the Internet, using Point-to-Point Tunneling Protocol (PPTP)
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Secure Negotiated Sessions Using SSL
Figure 5.12, Page 298
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Protecting Networks
Firewall
Hardware or software
Uses security policy to filter packets
Two main methods:
1. Packet filters
2. Application gateways
Proxy servers (proxies)
Software servers that handle all communications originating from or being sent to the Internet
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Firewalls and Proxy Servers
Figure 5.13, Page 301
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Protecting Servers and Clients
Operating system security enhancements
Upgrades, patches
Anti-virus software:
Easiest and least expensive way to prevent threats to system integrity
Requires daily updates
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Management Policies, Business Procedures, and Public Laws
U.S. firms and organizations spend 12% of IT budget on security hardware, software, services ($120 billion in 2009)
Managing risk includes
Technology
Effective management policies
Public laws and active enforcement
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A Security Plan: Management Policies
Risk assessment
Security policy
Implementation plan
Security organization
Access controls
Authentication procedures, inc. biometrics
Authorization policies, authorization management systems
Security audit
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Developing an E-commerce Security Plan
Slide 5-195
Figure 5.14, Page 303
Copyright 2011 Pearson Education, Inc.
The Role of Laws and Public Policy
Laws that give authorities tools for identifying, tracing, prosecuting cybercriminals: National Information Infrastructure Protection Act of 1996
USA Patriot Act
Homeland Security Act
Private and private-public cooperation CERT Coordination Center
US-CERT
Government policies and controls on encryption software
OECD guidelines
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Insight on Technology
Think Your Smartphone Is Secure? Class Discussion
What types of threats do smartphones face?
Are there any particular vulnerabilities to this type of device?
What did Nicolas Seriots Spyphone prove?
Are apps more or less likely to be subject to threats than traditional PC software programs?
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Types of Payment Systems
Cash Most common form of payment in terms of number of
transactions Instantly convertible into other forms of value without
intermediation
Checking Transfer Second most common payment form in U.S. in terms of
number of transactions
Credit Card Credit card associations Issuing banks Processing centers
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Types of Payment Systems (cont.)
Stored Value
Funds deposited into account, from which funds are paid out or withdrawn as needed, e.g. debit cards, gift certificates
Peer-to-peer payment systems
Accumulating Balance
Accounts that accumulate expenditures and to which consumers make period payments
e.g. Utility, phone, American Express accounts
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Table 5.6, Page 312
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E-commerce Payment Systems
Credit cards 55 % of online payments in 2009 (U.S.)
Debit cards 28 % online payments in 2009 (U.S.)
Limitations of online credit card payment Security
Cost
Social equity
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How an Online Credit Transaction Works
Figure 5.16, Page 315
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E-commerce Payment Systems (cont.)
Digital wallets Emulates functionality of wallet by authenticating consumer, storing
and transferring value, and securing payment process from consumer to merchant
Early efforts to popularize failed
Newest effort: Google Checkout
Digital cash Value storage and exchange using tokens
Most early examples have disappeared; protocols and practices too complex
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E-commerce Payment Systems (cont.)
Online stored value systems Based on value stored in a consumers bank, checking, or
credit card account
PayPal, smart cards
Digital accumulated balance payment Users accumulate a debit balance for which they are billed
at the end of the month
Digital checking: Extends functionality of existing checking accounts for use
online
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Mobile Payment Systems
Use of mobile handsets as payment devices well-established in Europe, Japan, South Korea
Japanese mobile payment systems
E-money (stored value)
Mobile debit cards
Mobile credit cards
Not as well established yet in U.S
Majority of purchases are digital content for use on cell phone
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Insight on Business
Mobile Payments Future: Wavepayme, Textpayme
Group Discussion
What technologies make mobile payment more feasible now than in the past?
Describe some new experiments that are helping to develop mobile payment systems.
How has PayPal responded?
Why havent mobile payment systems grown faster? What factors will spur their growth?
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Electronic Billing Presentment and Payment (EBPP)
Online payment systems for monthly bills
65% + of households in 2010 used some EBPP; expected to continue to grow
Two competing EBPP business models: Biller-direct (dominant model)
Consolidator
Both models are supported by EBPP infrastructure providers
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Netflix Strengthens and Defends Its Brand
Class Discussion
What was Netflixs first business model? Why did this model not work and what new model did it develop?
Why is Netflix attractive to customers?
How does Netflix distribute its videos?
What is Netflixs recommender system?
How does Netflix use data mining?
Is video on demand a threat to Netflix?
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Consumers Online: The Internet Audience and Consumer Behavior
Around 70% (82 million) U.S. households have Internet access in 2010
Growth rate has slowed
Intensity and scope of use both increasing
Some demographic groups have much higher percentages of online usage than others Gender, age, ethnicity, community type, income, education
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The Internet Audience and Consumer Behavior (contd)
Broadband audience vs. dial-up audience
Purchasing behavior affected by neighborhood
Lifestyle and sociological impacts Use of Internet by children, teens
Use of Internet as substitute for other social activities
Media choices Traditional media competes with Internet for attention
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Consumer Behavior Models
Study of consumer behavior
Social science
Attempts to explain what consumers purchase and where, when, how much and why they buy
Consumer behavior models
Predict wide range of consumer decisions
Based on background demographic factors and other intervening, more immediate variables
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A General Model of Consumer Behavior
Figure 6.1, Page 352
Slide 6-212
SOURCE: Adapted from Kotler and Armstrong, 2009.
Copyright 2011 Pearson Education, Inc.
Background Demographic Factors
Culture: Broadest impact
Subculture (ethnicity, age, lifestyle, geography)
Social
Reference groups Direct reference groups
Indirect reference groups
Opinion leaders (viral influencers)
Lifestyle groups
Psychological
Psychological profiles
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The Online Purchasing Decision
Psychographic research Combines demographic and psychological data
Divides market into groups based on social class, lifestyle, and/or personality characteristics
Five stages in the consumer decision process: 1. Awareness of need
2. Search for more information
3. Evaluation of alternatives
4. Actual purchase decision
5. Post-purchase contact with firm
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The Consumer Decision Process and Supporting Communications
Figure 6.3, Page 356
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A Model of Online Consumer Behavior
Decision process similar for online and offline behavior
General online behavior model Consumer skills
Product characteristics
Attitudes toward online purchasing
Perceptions about control over Web environment
Web site features
Clickstream behavior: Transaction log for consumer from search engine to purchase
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A Model of Online Consumer Behavior
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Figure 6.4, Page 357
Copyright 2011 Pearson Education, Inc.
A Model of Online Consumer Behavior
Clickstream factors include: Number of days since last visit
Speed of clickstream behavior
Number of products viewed during last visit
Number of pages viewed
Supplying personal information
Number of days since last purchase
Number of past purchases
Clickstream marketing
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Shoppers: Browsers and Buyers
Shoppers: 87% of Internet users
72% buyers
16% browsers (purchase offline)
One-third offline retail purchases influenced by online activities
Online traffic also influenced by offline brands and shopping
E-commerce and traditional commerce are coupled: part of a continuum of consuming behavior
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Online Shoppers and Buyers
Figure 6.5, Page 359
Slide 6-220
SOURCE: Based on data from eMarketer, Inc., 2010b
Copyright 2011 Pearson Education, Inc.
What Consumers Shop for and Buy Online
Big ticket items ($500 plus)
Travel, computer hardware, consumer electronics
Expanding
Consumers more confident in purchasing costlier items
Small ticket items ($100 or less)
Apparel, books, office supplies, software, etc.
Sold by first movers on Web Physically small items
High margin items
Broad selection of products available
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What Consumers Buy Online
Figure 6.6, Page 361
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SOURCES: Based on data from eMarketer, Inc., 2010b; Internet Retailer, 2010.
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Intentional Acts: How Shoppers Find Vendors Online
Search engines (59%)
Coupon Web sites (29%)
Comparison shopping sites (27%)
E-mail newsletters (25%)
Online shoppers are highly intentional, looking for specific products, companies, services
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Table 6.6, Page 362
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SOURCES: Based on data from eMarketer, Inc., 2010c
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Trust, Utility, and Opportunism in Online Markets
Two most important factors shaping decision to purchase online:
Utility:
Better prices, convenience, speed
Trust:
Asymmetry of information can lead to opportunistic behavior by sellers
Sellers can develop trust by building strong reputations for honesty, fairness, delivery
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Basic Marketing Concepts
Marketing Strategies and actions to establish relationship
with consumer and encourage purchases of products and services
Addresses competitive situation of industries and firms
Seeks to create unique, highly differentiated products or services that are produced or supplied by one trusted firm Unmatchable feature set
Avoidance of becoming commodity
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Feature Sets
Three levels of product or service
1. Core product e.g. cell phone
2. Actual product Characteristics that deliver core benefits
e.g. wide screen that connects to Internet
3. Augmented product Additional benefits
Basis for building the products brand
e.g. product warranty
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Feature Set
Figure 6.7, Page 364
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Products, Brands and the Branding Process
Brand: Expectations consumers have when consuming, or
thinking about consuming, a specific product Most important expectations: Quality, reliability,
consistency, trust, affection, loyalty, reputation
Branding: Process of brand creation
Closed loop marketing
Brand strategy
Brand equity
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Marketing Activities: From Products to Brands
Figure 6.8, Page 366
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Segmenting, Targeting, and Positioning
Major ways used to segment, target customers
1. Behavioral
2. Demographic
3. Psychographic
4. Technical
5. Contextual
6. Search
Within segment, product is positioned and branded as a unique, high-value product, especially suited to needs of segment customers
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Are Brands Rational?
For consumers, a qualified yes: Brands introduce market efficiency by reducing search and
decision-making costs
For business firms, a definite yes: A major source of revenue
Lower customer acquisition cost
Increased customer retention
Successful brand constitutes a long-lasting (though not necessarily permanent) unfair competitive advantage
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Can Brands Survive the Internet? Brands and Price Dispersion
Early postulation: Law of One Price; end of brands
Instead:
Consumers still pay premium prices for differentiated products
E-commerce firms rely heavily on brands to attract customers and charge premium prices
Substantial price dispersion
Large differences in price sensitivity for same product
Library effect
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The Revolution in Internet Marketing Technologies
Three broad impacts: Scope of marketing communications broadened
Richness of marketing communications increased
Information intensity of marketplace expanded
Internet marketing technologies: Web transaction logs
Cookies and Web bugs
Databases, data warehouses, data mining
Advertising networks
Customer relationship management systems
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Web Transaction Logs
Built into Web server software
Record user activity at Web site
Webtrends: Leading log analysis tool
Provides much marketing data, especially combined with:
Registration forms
Shopping cart database
Answers questions such as:
What are major patterns of interest and purchase?
After home page, where do users go first? Second?
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Cookies and Web Bugs
Cookies: Small text file Web sites place on visitors PC every time
they visit, as specific pages are accessed
Provide Web marketers with very quick means of identifying customer and understanding prior behavior
Flash cookies
Web bugs: Tiny (1 pixel) graphics embedded in e-mail and Web sites
Used to automatically transmit information about user and page being viewed to monitoring server
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Insight on Society
Every Move You Make, Every Click You Make, Well Be Tracking You
Class Discussion
Are Web bugs innocuous? Or are they an invasion of personal privacy?
Do you think your Web browsing should be known to marketers?
What are the Privacy Foundation guidelines for Web bugs?
Should online shopping be allowed to be a private activity?
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Databases
Database: Stores records and attributes
Database management system (DBMS):
Software used to create, maintain, and access databases
SQL (Structured Query Language):
Industry-standard database query and manipulation language used in a relational database
Relational database:
Represents data as two-dimensional tables with records organized in rows and attributes in columns; data within different tables can be flexibly related as long as the tables share a common data element
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A Relational Database View of E-commerce Customers
Figure 6.12, Page 382
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Data Warehouses and Data Mining
Data warehouse:
Collects firms transactional and customer data in single location for offline analysis by marketers and site managers
Data mining:
Analytical techniques to find patterns in data, model behavior of customers, develop customer profiles
Query-driven data mining
Model-driven data mining
Rule-based data mining
Collaborative filtering
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Data Mining and Personalization
Figure 6.13, Page 383
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SOURCE: Adomavicius and Tuzhilin, 2001b 2001 IEEE.
Copyright 2011 Pearson Education, Inc.
Insight on Technology
The Long Tail: Big Hits and Big Misses Class Discussion
What are recommender systems? Give an example you have used.
What is the Long Tail and how do recommender systems support sales of items in the Long Tail?
How can human editors, including consumers, make recommender systems more helpful?
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Customer Relationship Management (CRM) Systems
Record all contact that customer has with firm
Generates customer profile available to everyone in firm with need to know the customer
Customer profiles can contain: Map of the customers relationship with the firm
Product and usage summary data
Demographic and psychographic data
Profitability measures
Contact history
Marketing and sales information
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A Customer Relationship Management System
Figure 6.14, Page 388
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SOURCE: Compaq, 1998
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Market Entry Strategies
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Figure 6.15, Page 390
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Establishing the Customer Relationship
Advertising Networks
Banner advertisements
Ad server selects appropriate banner ad based on cookies, Web bugs, backend user profile databases
Permission marketing
Affiliate marketing
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How an Advertising Network such as DoubleClick Works
Figure 6.16, Page 393
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Establishing the Customer Relationship (contd)
Viral marketing
Getting customers to pass along companys marketing message to friends, family, and colleagues
Blog marketing
Using blogs to market goods through commentary and advertising
Social network marketing, social shopping
Mobile marketing
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Insight on Business
Social Network Marketing: Lets Buy Together Class Discussion
Why do social networks represent such a promising opportunity for marketers?
What are some of the new types of marketing that social networks have spawned?
What are some of the risks of social network marketing? What makes it dangerous?
Have you ever responded to marketing messages on Facebook or another network?
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Establishing the Customer Relationship (contd)
Wisdom of crowds (Surowiecki, 2004) Large aggregates produce better estimates and judgments
Examples: Prediction markets
Folksonomies