Chapter 5 Electronic Commerce 1 Learning Objectives

Chapter 5 Electronic Commerce 1

Learning Objectives § Describe electronic commerce, its dimensions, benefits, limitations, and process. § Describe the major applications of e-commerce in the business-to-customer area, including advertisement. § Discuss the importance and activities of market research and customer service. § Describe B 2 B models and relate them to supply chain management. § Describe e-commerce in service industries. 2

Learning Objectives (cont. ) § Describe other e-commerce applications (auctions, C 2 C, m-commerce, and e-government). § Describe the e-commerce infrastructure, extranets, and EDI. § Compare the various electronic payment systems, describe the role of smart cards, and discuss e-payment security. § Discuss legal and ethical issues related to e-commerce. § Describe failure factors of e-commerce. 3

Case: Intel Embraces the Web Problem: § Intel, the world’s largest producer of micro-processor chips, was experiencing problems with their ordering and distribution systems. Solution: § In 1998, they launched a Web-based e-business program that focuses on online ordering for a range of products. § In 1999, extensive e-procurement was introduced. Results: § Intel has enhanced its competitive advantage by giving its customers better tools for managing transactions. § Intel also experienced substantial tangible savings. 4

Electronic Commerce (EC) § Electronic Commerce involves making business transactions via telecommunications networks, primarily the Internet. ü It is also sometimes referred to as e-business (or e-biz) § Evolution of EC: ü Electronic commerce applications began in the early 1970 s. ü Electronic data interchange (EDI) extended the types of participating companies. ü EC applications expanded rapidly with the commercialization of the Internet in the early 1990 s. 5

Electronic Framework 6

The Field of EC The field of EC can be divided into two segments: § Electronic markets, or e-marketplaces - networks of interactions and relationships where information, products, services, and payments are exchanged. ü B 2 C, company-centric, and B 2 B transactions. § Interorganizational information systems (IOS) information flow among two or more organizations. ü Applies to B 2 B applications only 7

Benefits of EC Some benefits of EC to organizations are: § EC allows vendors to reach a large number of customers, anywhere around the globe, at a very low operating cost. § Companies can procure materials and services from other companies rapidly and less expensively. § Marketing distribution channels can be drastically cut or eliminated. § EC decreases the cost of based information by as much as 90%. § Customer services and relationships are facilitated by interactive, one-to-one communication, at a low cost. 8

Benefits of EC (cont. ) Some benefits of EC to consumers are: § EC often provides customers with less expensive products and services by allowing them to shop in many places. § EC provides customers with more choices. § EC enables customers to shop 24 hours a day, year round, from almost any location. § Customers can receive relevant and detailed information and other services in seconds. § EC enables consumers to get customized products and services. 9

Benefits of EC (cont. ) Some benefits of EC to society are: § EC is a major facilitator of the digital economy. § EC enables more individuals to work at home, resulting in less traffic and lower air pollution. § EC allows some goods to be sold at lower prices, so less affluent people can buy them, increasing their standard of living. § EC enables people in developing countries and rural areas to enjoy products and services previously unavailable. § EC facilitates a superior delivery of public services. 10

Limitations of EC Technical Limitations Non-Technical Limitations § Lack of universally accepted standards § Legal issues § Insufficient bandwidth § National and international government regulations § Still-evolving software development tools § Difficulty of measuring EC benefits § Difficulties in integrating the Internet and EC software § Customer resistance § Lack of a critical mass 11

Models of EC Ø Business-to-Business (B 2 B) Ø Business-to-Consumers (B 2 C) Ø Consumer-to-Organizations (C 2 O) Ø Consumer-to-Consumer (C 2 C) Ø Intrabusiness (Intraorganizational) Commerce Ø Government-to-Citizens (G 2 C) Ø Collaborative commerce (ccommerce) Ø Mobile Commerce (m-commerce) 12

Electronic Retailing § Electronic retailing is the direct sale (B 2 C) through electronic storefronts or in electronic malls, usually designed around an electronic catalog format. § In electronic retailing, there are several selling channels: ü Solo electronic storefronts ü Electronic malls (or cybermalls) ü Shopping portals ü Metamalls 13

B 2 C e-Commerce Business-to-consumer EC can be done in two major ways: § Companies sell direct to the customer. § § Such direct marketing has the advantage of personalization and customization. Companies use an intermediary. § There are two types of online infomediaries: 1. Pure online e-tailers 2. ”Click-and-mortar” retailers 14

Why Internet Advertisement? Ø Ads can be updated any time with a minimal cost. Ø Ads can reach large numbers of buyers all over the world. Ø Online ads are frequently cheaper in comparison with television, radio, newspaper, or billboard ads. Ø Web ads can efficiently use text, audio, graphics, and animation. Ø The audience for Internet advertising is growing rapidly. Ø Web ads can be catered to a specific target. 15

Internet Advertisement § Banner advertisement is the most commonly used form of advertising on the Internet. ü Two types of banners: Keyword banners & Random banners ü A major advantage of using banners is the ability to customize, but banner advertising can be costly. § URL Advertising: Any company can submit its URL to a search engine and be listed. 16

Internet Advertising (cont. ) § E-mail Advertising. Email is a cost-effective marketing channel with a better and quicker response rate than other channels. ü Problem of Spamming § Online Events and Promotions (Sponsorship) § Other Forms of Internet Advertisement. ü Internet communities, chat rooms, newsgroups, and kiosks 17

Advertisement Issues Ø Customizing Ads Ø Segmentation Ø Webcasting Ø Permission Marketing Ø Viral Marketing 18

Measuring the Effectiveness of E-Advertising 1. Ad view, or the number of times users see a banner ad during a specific time period. 2. If a customer clicks on a banner and moves to the advertiser’s Web home page. 3. If a customer clicks on a banner, moves to the advertiser’s site, and while there seeks product leads or fills out questionnaires. 4. The actual purchases made on the Web. ü Affiliate Programs 19

Disintermediation & Reintermediation Disintermediation Reintermediation § The emergence of a new § Using the Internet, breed of electronic manufacturers can sell intermediaries. directly to customers and provide customer support § These include; ü e-malls online. § In this sense, the traditional intermediaries may be eliminated. ü directory and searchengine services ü market makers ü comparison-shopping agents 20

Impact of EC on Distribution Strategy Ø Avoiding channel conflicts Ø Coexistence with the dealers Ø Regionally mixed strategy Ø Restraint of competition by powerful distributors Ø In-company channel conflicts 21

Internet Consumers § There are two types of Internet consumers: individuals and organizations. § The largest group of Internet users are married and highly educated. § Initially the vast majority of Internet users were mostly 15 - to 35 -year-old males. § Most users have a high household income and are working in; ü Now the female / male ration is equal. ü Younger and older surfers have joined the party. § Almost 90% are white. ü educational institutions ü the computer industry, or ü professional jobs. 22

Models of Market Research 23

Organizational Buyers § The number of organizational buyers on the Internet is much smaller than individual buyers. § However, their transaction volumes are far larger and the terms of negotiations/ purchase are more complex. § Variables that are specific to organization buyers include; ü an organization’s purchasing guidelines and constraints ü the relationship among various buyers ü the possibility of group decision making ü the organizational structure ü interpersonal variables of the organizational buyer / 24 seller

Facilitating Customer Service Several tools are available for facilitating online customer service. The major tools, with their functionalities, are: Ø Personalized Web pages Ø A chat room Ø FAQs Ø Tracking capabilities Ø Web-based call centers 25

B 2 B Models Sell-side model One company sells to many electronically. (one-to-many) Buy-side model An organization (usually large) buys from many vendors. (many-to-one) Exchanges Marketplace s in which many buyers and sellers meet. (many-tomany) 26

B 2 B Model Types Buy-side model Sell-side marketplace Forward auctions Reverse auctions Buyer’s Internal Marketplace Group Purchasing Exchanges Vertical Distributors Vertical Exchanges Horizontal Distributors Functional Exchanges 27

Cyberbanking § Cyberbanking (electronic banking) ü The Security First Network Bank (SFNB) was the first virtual bank § International and Multiple-Currency Banking § Bill-Paying Online ü Automatic payment of mortgages ü Paying bills from online banking account, etc. § Personal Finance ü Bill paying and electronic check writing ü Tracking bank accounts, expenditures, and credit cards ü Budget management and organization, etc. 28

Online Stock Trading § In 2001, about 30 million people in the US alone were using computers to trade stocks, bonds, and other financial instruments. § Investment information available online includes; ü Stock screening/ evaluation ü Financial news ü Free advice from investment gurus 29

Other EC Services Ø Job Market Online üParticipants include: (1) Job seekers (2) Job offerers (3) Recruitment firms (4) Newsgroups. Ø Travel and Tourism Ø Real Estate Ø Non-Internet Applications üe. g. Smart cards 30

M-Commerce § M-commerce (mobile commerce) refers to the conduct of e-commerce via wireless devices. § Advantages of M-Commerce ü Mobility ü Reachability ü Ubiquity ü Convenience ü Location of products and services • L-commerce 31

B 2 B Auctions § Corporations use auctions mainly as a B 2 B tool, but an increasing number use them also as a direct marketing channel. § The Major Benefits of such auctions are; ü Generating revenue. As a new sales channel, auctions support existing online sales. ü Increasing page views. Auctions give sites “stickiness. ” ü Acquiring and retaining members. All bidding transactions result in additional registered members, which increases the value of companies. 32

Types of B 2 B Auctions § Independent Auctions. ü Companies use a 3 rd-party auctioneer to create the site and to sell the goods. § Commodity Auctions. ü Many buyers and sellers come together to a thirdparty Web site to buy and sell commodities. § Private Auctions. ü Several companies bypass the intermediaries and auction their products by themselves directly to buyers. § Auctions at the Company Web Site. ü Companies build an auction capability on their own Web site. 33

B 2 C & C 2 C Auctions ØSpecialized auction sites ü e. g. , ebay. com ØAuctioning cars ØArt auctions ØAirlines 34

C 2 C EC Activities Ø Classifieds ü classifieds 2000. com Ø Personal services ü These range from tutoring and astrology to the “oldest profession on earth. ” Ø Peer-to-peer (P 2 P) and bartering ü Electronic bartering = the exchange of goods and/or services without a monetary transaction. 35

Other EC Activities § Intrabusiness and Business to Employees (B 2 E) ü Buying, selling and collaborative EC can be conducted within the company, usually using the Intranet and corporate portal. § E-government ü Government-to-citizens (G 2 C) • Electronic benefits transfer (EBT) - governments transfer Social Security, pensions, and other benefits directly to recipients’ bank accounts or smart cards. ü Government-to-business (G 2 B) ü Government-to-government (G 2 G) 36

EC Failures § The major wave of EC failures started in 2000, as secondary funding that was needed by Internet-based EC began to dry up. § Here are some examples; ü Point. Cast, a pioneer in the personalized Web-casting, folded in 1998 due to an incorrect business model. ü An Internet mall, operated by Open Market, was closed in 1996 due to an insufficient number of buyers. ü E-toys, a virtual toy retailer that impacted the entire toy industry folded in 2001 due to inability to generate profit. ü Advertising company Advertexpress. com, in the U. K. , failed due to lack of second-round funding. 37

EDI Characteristics EDI has the following special characteristics: Ø Business transactions messages Ø Data formatting standards Ø EDI translators Ø Private lines versus the Internet 38

Electronic Payment Systems § Security Requirements ü e. g. Authentification, Privacy, Integrity, Non-repudiation, Safety § Single-Key (Symmetric) Encryption § Public-Key Infrastructure ü Public and Private Keys ü Digital Signatures ü Electronic Certificates § Protocols ü Secure Socket Layer (SSL). ü Secure Electronic Transaction Protocol (SET) 39

Electronic Payment Systems (cont. ) § Electronic Credit Cards § Electronic Checks (e. Checks) § Purchasing Cards § Electronic Payment From Cellular Phones § Electronic funds transfer (EFT) § Electronic cash (e-cash) ü E Cash for Micropayments ü Stored-Value Cards ü Enhanced Smart Cards ü Person-to-Person (P 2 P) Payment. ü Electronic Wallets 40

Fraud on the Internet § Internet Stock Fraud § Fraud in Electronic Auctions § Other Financial Fraud ü e. g. Selling bogus investments § Federal Trade Commission ü provides a list of 12 scams most likely to arrive on the net • e. g. Bulk mail solicitors, Chain letters, Work-athome schemes § Buyer Protection is critical to the success of any commerce, and especially EC, where buyers do not see the sellers. § Seller Protection safeguards vendors against consumers who refuse to pay or who pay with bad checks. 41

EC-related Legal Issues § Domain Name ü Problems arise when several companies compete over a domain name. § Taxes and Other Fees ü Federal, state, and local authorities are scrambling to figure out how to get a piece of the revenue created electronically. § Copyright ü Protecting software and other intangible creations is difficult over the Web. 42

Ethical Issues § Privacy and Web tracking. ü Privacy issues are related to both customers and employees. § The human element. ü The implementation of EC may lead to personnel dissatisfaction and loss of salespeople’s income § Disintermediation. ü The use of EC may result in the elimination of a company’s employees as well as brokers and agents. 43

Managerial Issues § Managing resistance to change. § Integration of e. Commerce into the business environment. § Lack of qualified § Alliances. It is not a bad personnel and outsourcing. idea to join an alliance of § Choosing the company’s strategy toward e. Commerce companies to explore e. Commerce. 44

Managerial Issues (cont. ) § Implementation plan. Because of the complexity and multifaceted nature of EC, it makes sense to prepare an implementation plan. § Responding to e-mail. Some companies are flooded by e-mail queries, requests, or complaints. § Justifying EC by conducting a cost-benefit analysis. § Privacy. In electronic payment systems, it may be necessary to protect the identity of buyers. § Order fulfillment. Taking orders in EC may be easier than fulfilling them. § The impacts of EC may be dramatic. 45