Introduction To Electronic Commerce

Introduction to Electronic
Commerce
Objectives
• In this chapter, you will learn about:
• What electronic commerce is and how it is

poised for a second wave of growth and
profitability
• Why business models have given way to

revenue models and the analysis of business
processes as key elements of electronic
commerce initiatives
E-Commerce: The Second Wave, Fifth Annual Edition 2

Objectives
• How economic forces have created a

business environment that is fostering a
rebirth of electronic commerce How
businesses use value chains to identify
electronic commerce opportunities
• How businesses use SWOT analysis to

analyze and evaluate business opportunities

Objectives
• Why electronic commerce is international by

its very nature and what challenges arise in
doing global electronic commerce

Electronic Commerce
• Electronic commerce (e-commerce)
– Businesses trading with other businesses and

internal processes
• Electronic business (e-business)
– Term used interchangeably with e-commerce
– The transformation of key business processes

through the use of Internet technologies
Categories of Electronic Commerce
• Five general e-commerce categories

– Business-to-consumer
– Business-to-business
– Business processes
– Consumer-to-consumer
– Business-to-government
• Supply management or procurement
– Departments devoted to negotiating purchase
transactions with suppliers

Elements of Electronic Commerce

Categories of Electronic Commerce
(Continued)
• Transaction
– An exchange of value
• Business processes
– The group of logical, related, and sequential
activities and transactions in which businesses
engage
• Telecommuting or telework
– Employee logs in to company computer
through Internet instead of traveling to office

Electronic Commerce Categories

The Development and Growth of
Electronic Commerce
• Electronic funds transfers (EFTs)
– Also called wire transfers
– Electronic transmissions of account exchange
information over private communications
networks
• Electronic data interchange (EDI)
– Transmitting computer-readable data in a
standard format to another business

The Development and Growth of
Electronic Commerce (Continued)
• Trading partners
– Businesses that engage in EDI with each

other
• Value-added network (VAN)
– Independent firm
– Offers connection and transaction-forwarding

services to buyers and sellers engaged in EDI

Actual and Estimated Online Sales in
B2C and B2B Categories

The Second Wave of Electronic
Commerce
• Defining characteristics of first wave
– Dominant influence of U.S. businesses
– Extensive use of the English language
– Low bandwidth data transmission technologies
– Unstructured use of e-mail
– Overreliance on advertising as a revenue
source

The Second Wave of Electronic
Commerce (Continued)
• As second wave begins
– Future of electronic commerce will be

international in scope
– Language translation and handling currency

conversion problem will need to be solved
– E-mail will be used as an integral part of

marketing and customer contact strategies

Business Models, Revenue Models,
and Business Processes
• Business model
– A set of processes that combine to yield a
profit
• Revenue model
– Used to
• Identify customers
• Market to those customers
• Generate sales to those customers

Focus on Specific Business Processes
• Merchandising
– Combination of store design, layout, and
product display knowledge
• Commodity item
– Hard to distinguish from the same products or
services provided by other sellers
– Features have become standardized and well
known

Focus on Specific Business Processes
(Continued)
• Shipping profile
– Collection of attributes that affect how easily a

product can be packaged and delivered
• High value-to-weight ratio
– Can make overall shipping cost a small

fraction of the selling price

Advantages of Electronic Commerce
• Can increase sales and decrease costs
• If advertising done well on the Web
– Can get a firm’s promotional message out to
potential customers in every country
• Using e-commerce sales support and order-
taking processes, a business can
– Reduce costs of handling sales inquiries
– Provide price quotes
Advantages of Electronic Commerce
(Continued)
• Increases purchasing opportunities for buyer

• Negotiating price and delivery terms is easier
• The following cost less to issue and arrive
securely and quickly
– Electronic payments of tax refunds
– Public retirement
– Welfare support

Disadvantages of Electronic
Commerce
• Perishable grocery products are much harder
to sell online
• Difficult to
– Calculate return-on-investment
– Integrate existing databases and transaction-
processing software into software that enables
e-commerce
• Cultural and legal obstacles also exist

Economic Forces and Electronic
Commerce
• Economics
– Study of how people allocate scarce resources
• Two conditions of a market
– Potential sellers of a good come into contact

with potential buyers
– A medium of exchange is available

Transaction Costs
• Total costs that a buyer and seller incur
• Significant components of transaction costs
– Cost of information search and acquisition
– Investment of seller in equipment or in the

hiring of skilled employees to supply product
or service to buyer

The Role of Electronic Commerce
• Businesses and individuals
– Can use electronic commerce to reduce

transaction costs by
• Improving flow of information
• Increasing coordination of actions

Network Economic Structures
• Network economic structure
– Companies coordinate their strategies,

resources, and skill sets
• Strategic alliances (strategic partnerships)
– Relationships created within the network

economic structure

Network Economic Structures
(Continued)
• Virtual companies
– Strategic alliances that occur between or

among companies operating on the Internet
• Strategic partners
– Come together as a team for a specific project

or activity

Network Effects
• Law of diminishing returns
– Most activities yield less value as the amount

of consumption increases
• Network effect
– As more people or organizations participate in

a network
• Value of network to each participant increases

Value Chains in Electronic Commerce
• Strategic business unit
– One particular combination of product,
distribution channel, and customer type
• Firm
– Multiple business units owned by a common
set of shareholders
• Industry
– Multiple firms that sell similar products to
similar customers

Strategic Business Unit Value Chains
• Value chain
– A way of organizing the activities that each
strategic business unit undertakes
• Primary activities
– Design, produce, promote, market, deliver,
and support the products or services it sells
• Supporting activities
– Human resource management and purchasing

Value Chain for a Strategic Business
Unit

Industry Value Chains
• Value system
– Larger stream of activities into which a

particular business unit’s value chain is
embedded
– Also referred to as industry value chain

SWOT Analysis: Evaluating Business
Unit Opportunities
• SWOT analysis
– Analyst first looks into the business unit to

identify its strengths and weaknesses
– Analyst then reviews operating environment

and identifies opportunities and threats

SWOT Analysis Questions

Results of Dell’s SWOT Analysis

Language Issues
• To do business effectively in other cultures
– Must adapt to culture
• Researchers have found that
– Customers are more likely to buy products and
services from Web sites in their own language
• Localization
– Translation that considers multiple elements of
local environment

Culture Issues
• Important element of business trust
– Anticipate how the other party to a transaction
will act in specific circumstances
• Culture
– Combination of language and customs
– Varies across national boundaries
– Varies across regions within nations

Infrastructure Issues
• Internet infrastructure includes

– Computers and software connected to Internet
– Communications networks over which
message packets travel
• Organization for Economic Cooperation and
Development’s (OECD)
– Statements on Information and
Communications Policy
• Deal with telecommunications infrastructure
development issues
Infrastructure Issues (Continued)
• Flat-rate access system
– Consumer or business pays one monthly fee
for unlimited telephone line usage
– Contributed to rapid rise of U.S. electronic
commerce
• Targets for technological solutions

– Paperwork and processes that accompany
international transactions

Parties Involved in a Typical
International Trade Transaction

Summary
• Commerce
– Negotiated exchange of goods or services
• Electronic commerce
– Application of new technologies to conduct
business more effectively
• First wave of electronic commerce
– Ended in 2000
• Second wave of electronic commerce
– New approaches to integrating Internet
technologies into business processes

Summary
• Using electronic commerce, businesses have

– Created new products and services
– Improved promotion, marketing, and delivery of
existing offerings
• Global nature of electronic commerce
– Leads to many opportunities and few
challenges
• To conduct electronic commerce across
international borders
– You must understand the trust, cultural, and
language legal issues

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Introduction to Electronic

• In this chapter, you will learn about:

• What electronic commerce is and how it is

• Why business models have given way to

E-Commerce: The Second Wave, Fifth Annual Edition 2

• How economic forces have created a

• How businesses use SWOT analysis to

E-Commerce: The Second Wave, Fifth Annual Edition 3

• Why electronic commerce is international by

E-Commerce: The Second Wave, Fifth Annual Edition 4

• Electronic commerce (e-commerce)

– Businesses trading with other businesses and

• Electronic business (e-business)

– Term used interchangeably with e-commerce

– The transformation of key business processes

• Five general e-commerce categories

E-Commerce: The Second Wave, Fifth Annual Edition 6

E-Commerce: The Second Wave, Fifth Annual Edition 7

E-Commerce: The Second Wave, Fifth Annual Edition 8

E-Commerce: The Second Wave, Fifth Annual Edition 9

E-Commerce: The Second Wave, Fifth Annual Edition 10

– Businesses that engage in EDI with each

• Value-added network (VAN)

– Offers connection and transaction-forwarding

E-Commerce: The Second Wave, Fifth Annual Edition 11

E-Commerce: The Second Wave, Fifth Annual Edition 12

E-Commerce: The Second Wave, Fifth Annual Edition 13

• As second wave begins

– Future of electronic commerce will be

– Language translation and handling currency

– E-mail will be used as an integral part of

E-Commerce: The Second Wave, Fifth Annual Edition 14

E-Commerce: The Second Wave, Fifth Annual Edition 15

E-Commerce: The Second Wave, Fifth Annual Edition 16

– Collection of attributes that affect how easily a

• High value-to-weight ratio

– Can make overall shipping cost a small

E-Commerce: The Second Wave, Fifth Annual Edition 17

• Increases purchasing opportunities for buyer

E-Commerce: The Second Wave, Fifth Annual Edition 19

E-Commerce: The Second Wave, Fifth Annual Edition 20

– Study of how people allocate scarce resources

• Two conditions of a market

– Potential sellers of a good come into contact

– A medium of exchange is available

E-Commerce: The Second Wave, Fifth Annual Edition 21

• Total costs that a buyer and seller incur

• Significant components of transaction costs

– Cost of information search and acquisition

– Investment of seller in equipment or in the

E-Commerce: The Second Wave, Fifth Annual Edition 22

• Businesses and individuals

– Can use electronic commerce to reduce

• Improving flow of information

• Increasing coordination of actions

E-Commerce: The Second Wave, Fifth Annual Edition 23

• Network economic structure

– Companies coordinate their strategies,