Electronic Commerce COMP3210Session 1: An Introduction to Electronic CommerceDr. Paul Walcott Department of Computer Science, Mathematics and Physics University of the West Indies, Cave Hill Campus Barbados

The Department of Computer Science Mathematics and Physics, University of the West Indies, Cave Hill Campus, Barbados 2007 Dr. Paul Walcott

Session ObjectivesDefine e-commerce?Compare and contrast the advantages and disadvantages of e-commerceCompare and contrast the 1st and 2nd waves of e-commerceComprehend the categories of e-commerce?

Session Objectives ContdDiscuss the following:MarketsValue chainsTransaction costEvaluate 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 Contd?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 Contd?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 Contd? In summary, e-commerce is theuse of electronic communication to do businessSpecifically, the transfer of information (transactions), over the InternetSome 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-commerce3Sailing shipsPrinting pressSteam engineTelephoneOpened avenues for trade between buyers and sellers. Ancient times (thousands of years ago)

From Traditional Commerce to E-commerce ContdElectronic Funds Transfer (EFTs)Electronic Data Interchange (EDI)InternetWire transfers - used by banksBusinesses transfer electronic data - data not re-keyed - high implementation cost, thus excluded small businessesOn-line shopping

Business Processes Suited to Certain Type of Commerce3E-commerceSale/purchase of books & CDs, travel services, investments and insurance servicesOnline delivery of softwareOnline shipment tracking

Business Processes Suited to Certain Type of Commerce ContdA combination of E-commerce and Traditional CommerceSale/purchase of automobiles and residential real estate (e.g. do research online then buy from a dealer or real estate agent)Online bankingRoommate matching service

Business Processes Suited to Certain Type of Commerce ContdTraditional CommerceSale/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?3Increases sales, decreases costAllows small businesses to have global customer baseReduced cost through electronic sales enquires, price quotes and order takingProvides purchasing opportunities for buyers (businesses can identify new suppliers and partners)Increases the speed and accuracy of exchanged information, thus reduces cost

What are the Advantages of E-commerce Contd?Business can be transacted 24 hours a dayThe level of detail of purchase information is selected by userDigital products can be delivered instantlyTax refunds, public retirement and welfare support costs less when distributed over the InternetAllows products and services to be available in remote areas, e.g. remote learning

What are the Disadvantages of E-commerce?3Inability to sell certain products (e.g. high cost jewelry and perishable foods; although supermarkets such as www.Tesco.com deliver perishable food items to your home)The newness and evolution of the current technologyMany products require large sales volumes in order to be viableThis is a challenge for small island economies; in the Caribbean the CARICOM Single Market and Economy (CSME) might provide opportunities since it comprises some 14 million people (if Haiti is included only 6 million if it is not) http://www.ab.gov.ag/gov_v2/government/docs/csme/aboutcsme/background_info.html

What are the Disadvantages of E-commerce Contd?A large capital investment is required to startup and run e-commerce initiativesDifficulty in integrating current databases and transaction processing systems (legacy systems) into e-commerce solutionsCultural and legal obstaclesTransmission of credit card informationSome consumers resistance to changeE-commerce legislation is not well developed and is often unclearShipping profileProducts with a low value-to-weight ratio that can not be efficiently packed and shipped are unsuitable for e-commerce (use traditional commerce)

The 1st Wave of E-commerce3The 1st wave was from the mid 1990s to 2003During the dot-com boom over $100 billion was invested and a rapid growth of e-commerce was seen (mid-1990s 2000)The dot-com bust occurred in 2000This was followed by the gloom years, 2000 2003 (however, during this time over $200 billion was invested in e-commerce)

Characteristics of the 1st WaveIt was primarily a U.S. phenomenonWeb pages were in EnglishInternet 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 communicationOn-line advertising main revenue source

The 2nd Wave of E-commerceBeginning in 2003 e-commerce showed new signs of lifeCompanies like Amazon.com (books), and eBay.com (auctions) who survived the downturn were beginning to show profitsContinuous growth of B2C sales: 20-30% each year since 2000

Characteristics of the 2nd WaveInternational scope - sellers do business in many countries and languagesFaster connections (x20 faster), broadband at home (although more expensive)Radio frequency ID devices (are used to track packages) and smart cardsFingerprint readers and retina scanners (biometric technologies) used for tracking (physical security)Email is now an integral part of marketing

Characteristics of the 2nd Wave ContdE-commerce is an integral part of marketing and customer contact strategySome categories of on-line advertising, e.g. employment services (job want ads) have replaced traditional advertising outletsSome problems however include:Language conversionsCurrency conversions

E-commerce Categories3There are five general e-commerce categories:Business to Consumer (or B2C) e-commerceBusiness to Business (or B2B) e-commerce (sometimes called e-procurement)Business processes that support buying and selling activitiesConsumer-to-consumer (or C2C) e-commerceBusiness-to-government (or B2G) e-commerce

B2C e-commerceDescriptionBusinesses sell products or services to individual customers (consumers)ExampleWalmart.com sells merchandise to consumers through its Web siteWeb sitewww.walmart.com

B2B e-commerceDescriptionBusinesses sell products or services to other businessesExampleGrainger.com sells industrial supplies to large and small businesses through its Web siteWeb sitewww.grainger.com

Business Processes that Support Buy/Sell ActivitiesDescriptionBusinesses 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 of this information is being sharedExampleDell Computer uses secure internet connections to share current sales and forecasts information with suppliers who use it to plan their production.As a result they deliver the right quantities of components at the right time

C2C e-commerceDescriptionParticipants in an online marketplace can buy and sell goods from each otherExampleConsumers and businesses trade with each other on eBay.comWeb sitewww.ebay.com

B2G e-commerceDescriptionBusiness sell goods or services to governments and government agenciesExampleCal-Buy portal for businesses that want to sell online to the State of CaliforniaWeb sitewww.pd.dgs.ca.gov/calbuy/default.htm

E-commerce Categories ExampleYou 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)

Relative Sizes of E-commerce Categories3Business processesthat support buy/sell activitiesB2C e-commerceB2B e-commerce

Relative Sizes of E-commerce Categories Contd

Relative Sizes of E-commerce Categories Contd

At the end of 2006 actual B2C sales revenue in the US was US$219 billion4However, in the same period the B2C sales revenue in Europe was US$133 billion5 E-Commerce in Europe is currently dominated by the UK, Germany and France (72% total online sales)Annual growth of 25% is expected over the next 4 years5

Economic ForcesEconomics is the study of how people allocate scare resourcesResources are allocated through:Commerce (markets)Government actions (e.g. taxes)

MarketsA 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 financial data supplier Datastream ICV

Hierarchical Organisations (Firms)

Transaction CostsTransaction costs are the total costs that a buyer and seller incur as they gather information and negotiate a purchase/sale transactionTransaction 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 ExampleTransaction costs incurred by a sweater dealer when purchasing from independent sweater knitters:Cost of identifying independent knittersCost of site visit to negotiate purchase price, arrange delivery and inspection of sweatersCosts incurred by knitters:Knitting tools and yarn purchase

Network Economic StructuresMany businesses operate in an economic structure that is neither market or hierarchicalThese businesses form, long-term, strategic alliances with other companies who share common goals and strategiesThese alliances may occur over the Internet which are called virtual companiesTeams complete a project or activity then dissolveNew teams are creating as required

Value ChainsA 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 sellsThere are several types of value chains including:Business unit value chainsIndustry value chains

Strategic Business Unit Value ChainsA 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 includes:Primary activities (the activities that the strategic business unit undertakesSupport activities (such as human resource management and purchasing)

Manufacturer Value ChainFinance& adminHRTechnologydevelopmentSupport activitiesDesignIdentify customersManufacture product or createservicedeliverAfter sales service & supportMarket & sellPurchase materials and suppliesPrimary activities

Primary ActivitiesIdentify new customers, and sell new services to existing customers (research & surveys)Design from concept to manufacturingPurchase materials and supplies includes contracts, vendor selection, monitoring quality and delivery timelinessManufacture product or create service transform materials and labour into finished products

Primary Activities ContdMarket and sell advertising, promoting, managing sales staff, pricing and monitoring salesDeliver store, deliver distribute and ship final product warehousing, consolidating freight, selecting shippers and monitoring delivery timelinessProvide after-sale service and support promote relationship with customer, e.g. installing, maintaining, testing, repairing, and warranties

Primary Activities ContdIf a strategic business unit provides a service then the value chain will include a Provide service activity instead of Manufacture activity

Support ActivitiesEach business unit must also undertake support activities that provide the infrastructure for the primary activities:Finance and administration accounting, paying bills, borrowing, compliance with lawsHuman resources recruiting, hiring, training, compensation and benefitsTechnology development improves the product or service, including basic and applied research and development, process improvement and field tests of maintenance procedures

Industry Value ChainsIndustry value chains describes the larger stream of activities into which a particular business units value chain is embeddedWhen a business unit delivers a product to a customer the customer might use the product as purchased materials in its value chainBy examining how other business units in the industry value chain conduct their business, cost reduction and product improvement may result

Industry Value Chain ExampleA value chain for a wooden chair:Logger cuts down treeSawmill converts logs to lumberLumberyard provides selection of lumberChair manufacture assembles chairFurniture retailer markets and sells chairConsumer purchases and uses chairLandfill or recycler disposes of chair

SWOT Analysis3SWOT analysis is used to analyse and evaluate business opportunitiesSWOT is an acronym for:StrengthsWeaknessesOpportunitiesThreats

SWOT Analysis ContdAn analyst examines the business unit to determine strengths and weaknessesThen examines the business environment to identify opportunities and threats

SWOT Analysis ContdQuestions asked during SWOT analysis:StrengthsWhat does the company do well?Is the company strong in its market?Does the company have a strong sense of purpose and the culture to support it?Weaknesses:What does the company do poorly?What problems could be avoided?Does the company have serious financial liabilities?

SWOT Analysis ContdOpportunities:Are industry trends moving upwards?Do new markets exist for the companys products/services?Are there new technologies that the company can exploit?Threats:What are the competitors doing well?What obstacles does the company face?Are there troubling changes in the companys business environment (technologies, law and regulations)?

SWOT Analysis ContdIn the mid-1990s DELL Computer did the following SWOT analysis:Strengths:Sell directly to consumersKeep costs below competitorsWeaknesses:No strong relationships with computer retailers

SWOT Analysis ContdOpportunities:Consumers desire for one-stop shoppingConsumers know what they want to buyInternet could be a powerful marketing toolThreats:Competitors have stronger brand namesCompetitors have strong relationships with computer retailers

International Issues3Trust issuesLanguage issuesCulture issuesInfrastructure issues

Trust IssuesAnyone can create a websiteThese individuals or businesses can easily remain anonymousWithout an established brand, consumers find it difficult to trusts on-line businesses:especially with personal information and credit card numbersThe key is to develop methods which would allow legitimate businesses to establish trust relationships quickly with consumers

Language Issues (localisation)Global impact requires local language Web sitescustomers prefer to buy from sites in native language60% of web content today is in English; but more than 50% of the current users do not read EnglishMultiple translations may be required for different dialects, e.g. Spanish- Mexico and Spain

Language Issues (localisation)Translating entire websites 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) but less accurateThe home page should be translated to all supported languages, as well as marketing and product pages

Culture IssuesCulture is the combination of language and customsCulture varies across national boundaries and in many cases regions within nationsExample:General Motors Chevrolet Nova automobile amused people in Latin America since no va means it will not go

Culture Issues ContdChoice 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 trolleysIn many places the hand gesture where the index finger touches the thumb means okay; while in Brazil it is an obscene gesture

Culture Issues ContdIn some cases unrestricted access to the Internet is not permitted, for example in the Middle East and North AfricaThis limits the growth of e-commerceIn France any advertisement for a product or service must in in French by lawThis means that French companies must provide websites in at least two languages if they want to sell goods outside of France

Infrastructure IssuesLimited telecommunication infrastructure may lead to unreliable Internet accessInternet connection cost might be highReduces time businesses might spend surfing for new suppliers or productsFlat-rate access to the Internet is requiredThese are major issue in developing countries, including Barbados

ConclusionIn this session:It was made clear that e-commerce was not a new business, rather a new way of doing businessThe advantages and disadvantages of e-commerce were discussedThe characteristics of the first and second waves were compared and contrastThe five e-commerce categories were presented

Conclusion ContdThe importance of reducing transaction costs was consideredThe importance of SWOT analysis was demonstrated through a useful exampleIssues involved in international commerce were also considered

DefinitionsA 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 ContdMerchandising is a combination of store design, layout and product display knowledgeA 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 ContdThe definition of a market satisfies two conditions:Potential seller of a good (product) comes into contact with buyersA medium of exchange is available (e.g. currency or barter (to exchange goods or services directly without the use of money))

Definitions ContdTransaction costs are the total costs that a buyer and seller incur as they gather information and negotiate a purchase/sale transaction. These costs include:Brokerage fees and sales commissionsCost of information search and acquisitionSellers 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, Thomson Course Technology, Seventh Annual Edition, 2007[4] Gourmet Retailer, Online Sales of Food/Beverage/Grocery Down, May 2007. Available online at http://www.gourmetretailer.com/gourmetretailer/headlines/article_display.jsp?vnu_content_id=1003585259[5] Cheap Web Hosting Directory, E-Commerce Report, Details $133 Billion Online B2C Sales, August 21, 2007. Available online at http://www.cheaphostingdirectory.com/news-e-commerce-report-details-133-billion-online-b2c-sales-3304.html

There is no single definitionSince EDI was facilitated via expensive private networks its up take was only by larger businesses, those who could afford it. The Internet, on the other hand, which is a cost effective communication medium, has fuelled electronic commerce.Definitions of Procurement:Dealing with the legal problems that arise from large contracts for the supply of goods or services, especially for businesses or government organisations.ExampleIntel sells products to other businesses rather than consumers. Intel accepts > 95% of its orders online ($26 billion in 2003); also Intel purchases billions of dollars worth of raw materials on-line every yearAssume a company sells a product to the consumer (B2C) and receives raw materials from suppliers (B2B). In order to produce the product the business needs to hire and manage people, rent storage space for the product, maintain accounts and create marketing campaigns. These are all internal business processes which more and more can be performed on the web.