Electronic Commerce, Sixth Edition 1-1
Introduction to Electronic Commerce
Instructor’s Manual Table of Contents
? Chapter Overview
? Chapter Objectives
? Instructor Notes
? Quick Quizzes
? Discussion Questions
? Key Terms
Electronic Commerce, Sixth Edition 1-2
The business phenomenon that we now call electronic commerce has had an interesting history. From humble
beginnings in the mid-1990s, electronic commerce grew rapidly until 2000, when a major downturn occurred. Many
people have seen news stories about the “dot-com boom” followed by the “dot-com bust” or the “dot-bomb.” In the
2000 to 2003 period, many industry observers were writing obituaries for electronic commerce. Just as the
unreasonable expectations for immediate success fueled the high expectations during the boom years, overly gloomy
news reports colored perceptions during this time. Although the rapid expansion and high levels of investment of the
boom years are not likely to be repeated, the second wave of electronic commerce has begun.
In this chapter, you will learn about:
? What electronic commerce is and how it is poised for a second wave of growth and a new focus on profitability
? Why business models have given way to revenue models and the analysis of business processes as key elements
of electronic commerce initiatives
? How economic forces have created a business environment that is fostering a rebirth of electronic commerce
? How businesses use value chains and SWOT analysis to identify electronic commerce opportunities
? Why electronic commerce is international by its very nature and what challenges arise in doing global electronic
Electronic Commerce: The Second Wave
To many people, the term “electronic commerce” means shopping on the part of the Internet called the World Wide
Web (the Web). However, electronic commerce (or e-commerce) also includes many other activities, such as
businesses trading with other businesses and internal processes that companies use to support their buying, selling,
hiring, planning, and other activities. Some people use the term electronic business (or e-business) when they are
talking about electronic commerce in this broader sense.
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Categories of Electronic Commerce
Category Description Example Business-to-consumer (B2C) Businesses sell products or services Walmart.com sells merchandise to
to individual consumers. consumers through its Web site.
Business-to-business (B2B) Businesses sell products or services Grainger.com sells industrial
to other businesses. supplies to large and small
businesses through its Web site.
Business processes that support Businesses and other organizations Dell Computer uses secure Internet buying and selling activities maintain and use information to connections to share current sales
identify and evaluate customers, and sales forecast information with
suppliers, and employees. suppliers. The suppliers can use this
Increasingly, businesses share this information to plan their own
information in carefully managed production and deliver component
ways with their customers, parts to Dell in the right quantities
suppliers, employees, and business at the right time.
Consumer-to-consumer (C2C) Participants in an online Consumers and businesses trade
marketplace can buy and sell goods with each other in the eBay.com
to each other. Because one party is online marketplace.
selling, and thus acting as a
business, this book treats C2C
transactions as part of B2C
Business-to-government (B2G) Businesses sell goods or services to CAL-Buy portal for businesses that
governments and government want to sell online to the State of
agencies. This book treats B2G California.
transactions as part of B2C
The Development and Growth of Electronic Commerce
Although the Web has made online shopping possible for many businesses and individuals, in a broader sense,
electronic commerce has existed for many years. For more than 30 years, banks have been using electronic funds
transfers (EFTs, also called wire transfers), which are electronic transmissions of account exchange information over
private communications networks. Businesses also have been engaging in a type of electronic commerce, known as
electronic data interchange, for many years. Electronic data interchange (EDI) occurs when one business transmits
computer-readable data in a standard format to another business.
Businesses that engage in EDI with each other are called trading partners. The standard formats used in EDI contain
the same information that businesses have always included in their standard paper invoices, purchase orders, and
shipping documents. Firms such as General Electric and Wal-Mart have been pioneers in using EDI to improve their
purchasing processes and their relationships with suppliers.
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One serious problem that potential adopters of EDI faced was the high cost of implementation. Until the late 1990s,
doing EDI meant buying expensive computer hardware and software and then either establishing direct network
connections (using leased telephone lines) to all trading partners or subscribing to a value-added network. A value-
added network (VAN) is an independent firm that offers connection and transaction-forwarding services to buyers
and sellers engaged in EDI. Before the Internet came into existence as we know it today, VANs provided the
connections between most trading partners and were responsible for ensuring the security of the data transmitted.
VANs usually charged a fixed monthly fee plus a per-transaction charge, adding to the already significant expense
of implementing EDI. Many smaller firms were unable to afford to participate in EDI and lost important customers,
who went elsewhere to buy. The companies that operated VANs have gradually moved EDI traffic to the Internet,
but many other companies have developed other ways to do EDI types of transactions on the Internet.
The Second Wave of Electronic Commerce
The first wave of electronic commerce was primarily a U.S. phenomenon. Web pages were primarily in English,
particularly on commerce sites. As the second wave begins, it is clear that the future of electronic commerce will be
international in scope and will allow sellers to do business in many countries and in many languages. The problems
of language translation and handling currency conversion will need to be solved to allow efficient conduct of
business in the second wave.
First Wave Second Wave
Internet technologies were slow and inexpensive. The increase in broadband connections in homes is a key Most consumers connected to the Internet using element. Although these connections are more expensive, dial-up modems. they are up to 20 times faster and can alter the way people
use the Web.
Internet technologies were integrated into B2B Radio-frequency ID devices and smart cards are being transactions and internal business processes by combined with biometric technologies such as fingerprint
using bar codes and scanners to track parts, readers and retina scanners to control more items and assemblies, inventories, and production status. people in a wider variety of situations.
The use of electronic mail (or e-mail) was as a Sellers are using e-mail as an integral part of their tool for relatively unstructured communication. marketing and customer contact strategies.
Online advertising was the main revenue source Some categories of online advertising, such as of many failed dot-com businesses. employment services (job wanted ads) are growing
rapidly and are replacing traditional advertising outlets.
Sale of digital products was fraught with Promise of legal distribution of music, video, and other difficulties. digital products on the Web.
Dominated by large businesses, both existing and Will include a larger proportion of smaller businesses. new businesses that had obtained large amounts Enabling those businesses to use electronic commerce will of capital early on. also be a substantial business.
Business Models, Revenue Models, and Business Processes
A business model is a set of processes that combine to yield a profit. In the first wave of electronic commerce, many
investors sought out start-up companies with appealing business models. A good business model was expected to
lead to rapid sales growth and market dominance. The idea that the key to success was simply to copy the business
model of a successful dot-com business led the way to many business failures, some of them quite dramatic.
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Retail merchants have years of traditional commerce experience in creating store environments that help convince
customers to buy. This combination of store design, layout, and product display knowledge is called merchandising.
In addition, many salespeople have developed skills that allow them to identify customer needs and find products or
services that meet those needs. The arts of merchandising and personal selling can be difficult to practice remotely.
Companies must be able to transfer their merchandising skills to the Web for their Web sites to be successful.
Some products are easier to sell on the Internet than others, because the merchandising skills related to those
products are easier to transfer to the Web.
Well Suited to Suited to a Combination of Well Suited to Electronic Commerce Electronic and Traditional Traditional Commerce
Commerce Strategies Sale/purchase of books Sale/purchase of automobiles Sale/purchase of impulse items for and CDs immediate use
Online delivery of software Online banking Small-denomination purchases and
Sale/purchase of travel services Roommate-matching services
Online shipment tracking Sale/purchase of residential real
Sale/purchase of investment and Sale/purchase of high-value jewelry insurance products and antiques
One business process that is especially well suited to electronic commerce is the selling of commodity items. A
commodity item is a product or service that is hard to distinguish from the same products or services provided by
other sellers; its features have become standardized and well known. Gasoline, office supplies, soap, computers, and
airline transportation are all examples of commodity products or services, as are the books and CDs sold by
Another key factor that can make an item well suited to electronic commerce is the product’s shipping profile. A product’s shipping profile is the collection of attributes that affect how easily that product can be packaged and
delivered. A high value-to-weight ratio can help by making the overall shipping cost a small fraction of the selling
price. An airline ticket is an excellent example of an item that has a high value-to-weight ratio. Products that are
consistent in size, shape, and weight can make warehousing and shipping much simpler and less costly. The
shipping profile is only one factor, however. Expensive jewelry has a high value-to-weight ratio, but many people
are reluctant to buy it without examining it in person unless the jewelry is sold under a well-known brand name and
with a generous return policy.
Advantages of Electronic Commerce
Firms are interested in electronic commerce because, quite simply, it can help increase profits. All the advantages of
electronic commerce for businesses can be summarized in one statement: Electronic commerce can increase sales
and decrease costs. Advertising done well on the Web can get even a small firm’s promotional message out to
potential customers in every country in the world. A firm can use electronic commerce to reach narrow market
segments that are geographically scattered. The Web is particularly useful in creating virtual communities that
become ideal target markets for specific types of products or services. A virtual community is a gathering of people
who share a common interest, but instead of this gathering occurring in the physical world, it takes place on the
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? A business can reduce the costs of handling sales inquiries, providing price quotes,
and determining product availability by using electronic commerce in its sales
support and order-taking processes.
? Electronic commerce provides buyers with a wider range of choices than traditional
? Electronic commerce provides buyers with an easy way to customize the level of
detail in the information they obtain about a prospective purchase. Advantages:
? Electronic payments of tax refunds, public retirement, and welfare support cost less
to issue and arrive securely and quickly when transmitted over the Internet.
? Electronic payments can be easier to audit and monitor than payments made by
check, providing protection against fraud and theft losses.
? Electronic commerce can also make products and services available in remote areas.
Disadvantages of Electronic Commerce
Some business processes may never lend themselves to electronic commerce. For example, perishable foods and
high-cost, unique items, such as custom-designed jewelry and antiques, may be impossible to inspect adequately
from a remote location, regardless of any technologies that might be devised in the future. Most of the disadvantages
of electronic commerce today, however, stem from the newness and rapidly developing pace of the underlying
technologies. These disadvantages will disappear as electronic commerce matures and becomes more available to
and accepted by the general population.
? Return-on-investment is difficult to calculate.
? Many firms have had trouble recruiting and retaining employees with the
technological, design, and business process skills needed to create an effective
electronic commerce presence.
? Difficulty of integrating existing databases and transaction-processing software Disadvantages: designed for traditional commerce into the software that enables electronic
? Many businesses face cultural and legal obstacles to conducting electronic
1. The group of logical, related, and sequential activities and transactions in which businesses engage are often
collectively referred to as _____.
Answer: business processes
2. _____ occurs when one business transmits computer-readable data in a standard format to another business.
Answer: Electronic data interchange (EDI)
3. Businesses that engage in EDI with each other are called _____.
Answer: trading partners
4. The combination of store design, layout, and product display knowledge is called _____.
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Economic Forces and Electronic Commerce
Economists use a formal definition of market that includes two conditions: first, that the potential sellers of a good
come into contact with potential buyers, and second, that a medium of exchange is available. This medium of
exchange can be currency or barter. Most economists agree that markets are strong and effective mechanisms for
allocating scarce resources. Thus, one would expect most business transactions to occur within markets. However,
much business activity today occurs within large hierarchical business organizations, which economists generally
refer to as firms, or companies.
? Transaction costs: The total of all costs that a buyer and seller incur as they gather
information and negotiate a purchase-sale transaction.
? Markets and hierarchies: Coase reasoned that when transaction costs were high,
businesspeople would form organizations to replace market-negotiated transactions.
These organizations would be hierarchical and would include strong supervision
and worker-monitoring elements. The practice of an existing firm replacing one or
more of its supplier markets with its own hierarchical structure for creating the
supplied product is called vertical integration.
? Using Electronic Commerce to Reduce Transaction Costs: Businesses and
individuals can use electronic commerce to reduce transaction costs by improving
Economic Forces the flow of information and increasing the coordination of actions.
and Electronic ? Network economic structures: Companies coordinate their strategies, resources, Commerce: and skill sets by forming long-term, stable relationships with other companies and
individuals based on shared purposes. These relationships are often called strategic
alliances or strategic partnerships, and when they occur between or among
companies operating on the Internet, these relationships are also called virtual
? Network effects: Law of diminishing returns states that most activities yield less
value as the amount of consumption increases. In networks, an interesting exception
to the law of diminishing returns occurs. As more people or organizations
participate in a network, the value of the network to each participant increases. This
increase in value is called the network effect.
Identifying Electronic Commerce Opportunities
In his 1985 book, Competitive Advantage, Michael Porter introduced the idea of value chains. A value chain is a
way of organizing the activities that each strategic business unit undertakes to design, produce, promote, market,
deliver, and support the products or services it sells. In addition to these primary activities, Porter also includes
supporting activities, such as human resource management and purchasing, in the value chain model.
? Identify customers
? Purchase materials and supplies Primary ? Manufacture product or create service Activities: ? Market and sell
? Provide after-sale service and support
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? Finance and administration
Support ? Human resources
Activities: ? Technology development
Industry Value Chains
Porter’s book also identifies the importance of examining where the strategic business unit fits within its industry.
Porter uses the term value system to describe the larger stream of activities into which a particular business unit’s
value chain is embedded. However, many subsequent researchers and business consultants have used the term
industry value chain when referring to value systems.
SWOT Analysis: Evaluating Business Unit Opportunities
In SWOT analysis (the acronym is short for strengths, weaknesses, opportunities, and threats), the analyst first looks
into the business unit to identify its strengths and weaknesses. The analyst then reviews the environment in which
the business unit operates and identifies opportunities presented by that environment and the threats posed by that
Issues Box: SWOT Analysis
(Fictional animal greeting card site, CrawlyCards.com, specializing in pictures of ground-
clinging creatures such as slugs, snails, and puppydog tails)
? Unique idea, no one else is even close
? Strong artistic team includes some of the finest slug and insect illustrators in the country
? Excellent animation abilities
? Source of inspirational card inscriptions for all occasions
? Experienced and innovative company officers.
? Small opt-in customer list, most site users seek to remain anonymous
? Few advertisers interested in this strangely targeted market
? Perl script that runs the site is slow and needs to be rewritten in a compiled language
? Lack of interest from venture capitalists.
? Single stream of revenue is advertising, and that is slim pickin's.
? No real competitors in our precise space.
? Much traffic from students at UC Santa Cruz (Banana Slug is their mascot) sending cards to each other.
Possible joint venture with alumni association and the Official Pacific Northwest Slug Page
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? Seek advertising from French restaurants and their suppliers.
? Possible books sales such as: Slugs and Snails (Minipets), Field Guide to the Slug, and Creepy Crawly
Cuisine: The Gourmet Guide to Edible Insects.
? Possible sales of Turbo Snails to browse algae in fishtanks
? Partnership with CyberSlug Adoption Center
? E-commerce venture selling scarab jewelry Threats
? Chemical companies are producing more effective snail bait that may destroy gastropod populations in our
? Large card sites such as Blue Mountain (http://www.bluemountain.com) might want to take over the slug
and mollusk traffic and edge us out.
1. Using SWOT analysis, evaluate a business opportunity of your choice.
1. _____ are the total of all costs that a buyer and seller incur as they gather information and negotiate a purchase-
Answer: Transaction costs
2. Economists have found that most activities yield less value as the amount of consumption increases. This
characteristic of economic activity is called the _____.
Answer: law of diminishing returns
3. True or false: Network organizations are particularly well suited to technology industries that are information
4. The practice of an existing firm replacing one or more of its supplier markets with its own hierarchical structure
for creating the supplied product is called _____.
Answer: vertical integration
International Nature of Electronic Commerce
It is important for all businesses to establish trusting relationships with their customers. Companies with established
reputations in the physical world often create trust by ensuring that customers know who they are. These businesses
can rely on their established brand names to create trust on the Web. New companies that want to establish online
businesses face a more difficult challenge because a kind of anonymity exists for companies trying to establish a
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Most companies realize that the only way to do business effectively in other cultures is to adapt to those cultures. The phrase “think globally, act locally” is often used to describe this approach. The first step that a Web business usually takes to reach potential customers in other countries, and thus in other cultures, is to provide local language versions of its Web site. This may mean translating the Web site into another language or regional dialect. Researchers have found that customers are far more likely to buy products and services from Web sites in their own language, even if they can read English well. Only 370 million of the world’s 6 billion people learned English as their native language.
Culture and Government
An important element of business trust is anticipating how the other party to a transaction will act in specific circumstances. That is one reason why companies with established brands can build online businesses more quickly and easily than a new company without a reputation. The brand conveys some expectations about how the company will behave. For example, a potential buyer might like to know how the seller would react to a claim by the buyer that the seller misrepresented the quality of the goods sold. Part of this knowledge derives from the buyer and seller sharing a common language and common customs. Business partners ideally have a common legal structure for resolving disputes. The combination of language and customs is often called culture. Most researchers agree that culture varies across national boundaries and, in many cases, varies across regions within nations. All companies must be aware of the differences in language and customs that make up the culture of any region in which they intend to do business.
Businesses that successfully meet the challenges posed by trust, language, and culture issues still face the challenges posed by variations and inadequacies in the infrastructure that supports the Internet throughout the world. Internet infrastructure includes the computers and software connected to the Internet and the communications networks over which the message packets travel. In many countries other than the United States, the telecommunications industry is either government owned or heavily regulated by the government. In many cases, regulations in these countries have inhibited the development of the telecommunications infrastructure or limited the expansion of that infrastructure to a size that cannot reliably support Internet data packet traffic.
More than half of all businesses on the Web turn away international orders because they do not have the processes in place to handle such orders. Some of these companies are losing millions of dollars worth of international business each year. This problem is global; not only are U.S. businesses having difficulty reaching their international markets, but businesses in other countries are having similar difficulties reaching the U.S. market.
? How does the international nature of e-commerce affect its infrastructure? ? What steps should be taken to overcome the cultural issues of electronic commerce? ? What is the main motivation behind the second wave to electronic commerce?