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5Chapter

Enabling Commerce Using the Internet

“There is no physical analog for what Amazon.com is becoming.”

Jeff BezosCofounder and long-time CEO of Amazon.com

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Learning Objectives

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Learning Objectives

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Electronic Commerce• Online exchange of goods, services and money

• Second quarter of 2006o 2.7% of total retail revenueo $24.8 billion in revenue

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Most Common Types of E-Commerce• Business-to-consumer (B2C)

o A person buys a book from Amazon.com

• Business-to-business (B2B)o Retailer like Wal-Mart ordering from distributors

• Business-to-employee (B2E)o Employee uses the Web to change employee

benefits

• Consumer-to-consumer (C2C)o One person purchases from another on eBay

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Other Types of E-Commerce

• Government-to-citizen (G2C)o A person filing income taxes online

• Government-to-business (G2B)o Government purchases supplies using

Internet-enabled procurement system

• Government-to-government (G2G)o Foreign government accessing U.S. federal

regulations

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Key Capabilities of the Web

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Information Dissemination

• Firms across the world have access to customers

• Economical medium for marketing products and services

• Increased geographical reach

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Integration

• Integration of information via Web sites

• Real-time access to personalized information

• No time lag between company decisions and customers’ ability to access these

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Example: Integration

• Alaska Airlines customers can access their mileage program any timeo Real-time link

between company database and customer

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Mass Customization• Meeting particular

customers’ needs on a large scale

• Timbuk2.como Custom Messenger

Bag Builder

• Customers create a virtual bag

• Preference-tracking helps Timbuk2 in marketing efforts

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Interactive Communication

• Immediate feedback between company and customerso E-mail notificationso Customer service

online chat

• Best Buyo Geek Squado 24-hour computer

support

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Collaboration

• Virgin Entertainment Groupo Microsoft SharePointo Managers: spend

more time selling products

o Head office: more time for strategic planning

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Transaction Support• Internet and the

Web:o Reduced transaction

costs o Enhanced

operational efficiency

• Dell – automated transaction supporto Cost savings per

sale

• Disintermediation

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E-Commerce Business Strategies

• Differentiated based on levels of physical/virtual presence

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Brick-and-Mortar Business Strategy• Physical locations only

• Traditional stores

• Cons: Limited geographical reach

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Click-Only Business Strategy• Business conducted in cyberspace - no physical location

• Virtual companies

• Cons: Customers uncomfortable with online transactions No face-to-face interaction with customers

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Click-and-Mortar Business Strategy• Bricks-and-clicks business strategy

• Hybrid strategy

• Cons: Added complexity combining 2 different environments

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Example: Click-and-Mortar Company

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Ingredients of a Business Model

• A plan of how to achieve EC success

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Common Revenue Models for EC

• Most important ingredient of business model

• How will the firm earn revenue?

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Learning Objectives

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Business-to-Business E-Commerce

• Extraneto Enables firms to do business together (B2B)

o One of best ways for organizations to gain return on technology-based investments

o Boeing

•1,000 authorized business partners

o Nearly all Fortune 1,000 companies deploy some type of B2B applications

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Electronic Data Interchange (EDI)• Used prior to the introduction of the Internet

• EDI used for B2B systems

• Digital or electronic transmission of business documents between organizationso Value-added networks

(VAN)o Dedicated circuit

between companies

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Advantages and Disadvantages of EDI• Advantages

o Streamlining business processes

o Reduction of error rates

• Disadvantageso Costly

o Mid-size and small companies disadvantaged

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Extranets

• New, more affordable alternative to EDI

• Advantageso Improved timelines and accuracy of

information

o Central management of documents

o Cross-platform nature

o Low cost of adoption

o No specific user training required

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Extranet System Architecture

• Internet-based application

• Virtual private network (VPN) used to secure information transmission

• Used to manage supply chains

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Intranets• Business-to-employee (B2E) electronic

commerce

• Internet based private network using Web technologies

• Boeingo More than 1 million pageso 200,000 employees

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Intranet System Architecture• Internet-based

application

• Firewalls used for securityo Software placed

between LAN and the Internet

• VPN used to access intranet from remote locations

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Intranet: Training

• Boeing Companyo 200,000 employees

get trainedo Quality eTraining

program• Catalogue of courses• Online course content• Standardized courses

o Business improvements

o Cost reduction• Eliminated travel cost

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Intranet: Application Integration

• Information from separate applications can be consolidated and presented to the user

Netegrity

SiteMinder

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Intranet: Online Entry of Information• Use of Web browsers to enter information online

• E.g., Microsoft MSExpenseo Prior to MSExpense

• 136 different report templates

• Outdated versions

o With MSExpense• Online submission of expense records

• Easy and centralized updates to templates

• Savings of $4.3 million a year

• Shortened period for reimbursement from 3 weeks to 3 days

• Etc.

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Intranet: Real-Time Access to Information• Manage, update, distribute, and access

corporate informationo Boeing

• News releases uploaded to the Intranet

• Previously sent to all corporate offices as video tapes

• Reduced distribution costs

• Efficient information sharing

• Company-wide access

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Intranet: Collaboration

• Boeingo Information shared between employees

across the world

o Reduced product development cycles

o Ability to stay current on projects

o Ability to stay current with the changing market conditions

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Learning Objectives

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Use of Internet Technologies• Characteristics of the Internet, intranet and extranet

• B2B, B2E rely on extranet and intranet• Internet provides an opportunity for B2C commerce

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Stages of B2C E-Commerce

• Websites range from passive to active

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E-Tailing• Selling goods and services online

• Click-and-mortaro Walmart.com

• Click only o Amazon.com

• Virtual companyo Priceline.com

•Reverse pricing vs. menu-driven pricing

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E-Tailing Benefits• Product benefits

o Unlimited number and variety of productso Easier comparison shopping

• E.g., AllBookstores, BizRate, or SideStep

• Place benefitso Anywhere, anytimeo Purchasing on global scale

• Price benefitso Higher inventory turnover rateo No expenditures for physical retail space

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The Long Tail

• Traditional storeso Focus on

mainstream needso Target the average

customero E.g., Blockbuster

• E-Tailerso Can focus on niche

marketso E.g., Netflix

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E-Tailing Drawbacks

• Product delivery drawbackso Delay between product order and delivery

•Except for products that can be downloaded

• Direct product experience drawbackso Lack of sensory information

•Smell, taste, feel

o Lack of the social element

•Cannot replace going to the mall with friends

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Attracting and Retaining Online Customers• Basic rule of commerce

o Offer valuable products/services at fair prices

• Additional e-commerce rules1. The Web site should offer something unique2. The Web site must be aesthetically pleasing3. The Web site must be easy to use and fast4. The Web site must motivate people to visit, stay

and return5. You must advertise your presence on the Web6. You should learn from your Web site

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Web Site Rules: Rule 1

• Offer something uniqueo Offer hard-to-

find goods

• Global audience

• Reasonable prices

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Web Site Rules: Rule 2

• Website must be aesthetically pleasingo Use of color schemes, backgrounds, high

quality images

o Clear, concise and consistent layout

• Increases chances of return

•Can separate a Web site from the competition

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Web Site Rules: Rule 3

• Website must be easy to use and fasto Easy navigation

o Fast download speed

•Average user will wait only a couple of seconds for a website to download

o Present brief summary information with hyperlinks

•Allows users to “drill down”

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Web Site Rules: Rule 4

• Web site must motivate people to visit stay and returno Create a community

•GardenWebo Users share tipso Buy from each other

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Web Site Rules: Rule 5

• Advertise your presence on the Webo Pull marketing

•A passive method of attracting to a specific site

• Include the Web site address on all promotional materials

•Advertise your Web site on other sites

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Web Site Rules: Rule 5

• Advertise your presence on the Web (II)o Pay-per-click

•Only pay for advertising when user clicks on it

•Affiliate marketing – Web site owners post ads on their site

•Problem: click fraud – artificially clicking on ads to create revenue

o Network click fraudo Competitive click fraud

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Web Site Rules: Rule 6• Learn from your Web site

o Who are your customers?o What are they doing?

• Web analyticso Analyze behavior of visitors

•Path the visitors take

•Length of the visit

•Number of pages viewed

•Page from which they exit

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Search Engine Marketing

• Paid inclusiono Fee paid to the search engine to appear in

the results

o Cannot influence order, thus companies may use:

•Search engine advertising

•Search engine optimization

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Search Engine Advertising

• Sponsored searcho Pay to ensure a

spot on top of search results page

o Company in control of ad positioning

o Pay-per-click

o Can get costly

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Search Engine Optimization

• Position within search results based on complex formula

• Site owner has no control over the position of the ad

• Optimization based ono Web site updateso Use of key termso Unethical “tricks”

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Securing Payments in the Digital World• 90 % of users have changed online

behavior because of fear of identity theft

• 1/3 of online purchasers cut back on the volume of purchasing

• More than 1/2 of shopping carts are abandoned

• Need for secure forms of online payment

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Credit and Debit Cards• Customer Verification Value (CVV)

o Three-digit code on the back of a card

o Added to combat fraud in online purchases

o Not included in the

magnetic strip

information

o Code used for

authorization by bank

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Conducting Safe Transactions Online1. Use a secure browser with the latest encryption

capabilities

2. Check the site’s privacy policy

3. Read and understand refund and shipping policies

4. Keep personal information private

5. Give payment information only to those you know and trust

6. Keep records of online transaction

7. Review your monthly credit card and bank statements

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Payment Services• Online transactions without sharing

private information with actual sellero PayPal (owned by eBay)

•Can send and receive money if you have an e-mail account

o Google Checkout•Linked with Google search

•Users can see if merchants offer this option

o E-Gold•Service backed by real gold

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Example: Payment Services

• e-Gold

• Backed by real gold

• Person-to-person transfer

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Managing Financial Transactions in the Digital World

• Financial institutions now offer:o Online banking

•Management of credit card, checking and savings accounts

o Electronic bill pay

•Bill payment online

o Online investing

•Growing in popularity

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Learning Objectives

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Types of C2C E-Commerce

• C2C commerce has always been present

• 17% of American adults have sold online

• C2C relationships characterized byo Number of buyers

o Number of sellers

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Opportunities and Threats of C2C E-Commerce

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E-Auctions• Forward auction

o Sellers post goods or services for sale

o Buyers bid on these items

o Highest bid wins

• Reverse auctiono Buyers post a request for quote (RFQ)

o Seller proposes a bid

o Lowest seller bid wins

o Used frequently in B2B e-commerce

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E-Auctions (II)• eBay

o Transaction fee-based revenue system

o 2006 revenue - $6 billion

o Mostly forward auctions

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E-Auction Fraud• E-auctions marred with more fraud than any

other Internet activityo 42% of all Internet-fraud related complaintso Average loss: $1,155

• Types of e-Auction fraudo Bid luringo Reproductionso Bid shieldingo Shipping fraudo Payment failureo Nonshipment

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Social Online Communities• MySpace.com

o 4.5% of all Internet site visits in mid 2006

o Over 100 million users

o About 230,000 new users a day

o Original purpose – social network based on music interests

o 2005 – purchased by NewsCorp for $580 million

o Income from targeted ads

• $2.17 per user per year

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Cyworld

• Successful social online community

• Asian market

• South Korea – Cyworld’s per capita penetration greater than MySpace in the US

• Sale of virtual itemso $7 per user per year

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Self-Publishing

• Consumers can voice their opinions with no editorial review

• Original material by the author

• Traditional B2B becoming C2C

• Publishing from homeo Print-On-Demand

o Blogging

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Printing-On-Demand

• Customized printing

• Small batches

• Attractive for first time authors

• Select providerso Luluo Blurbo BookSurge

• Amazon

• End-to-end service

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Blogging

• Webloggingo Online text diaryo Chronological

entrieso Power of

bloggers• “Rathergate”

• Vloggingo Video blogging

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M-Commerce• Electronic transactions using wireless

mobile devices

• Mobile networkso Wirelesso Switched public network

• Smart phoneso High-speed data transfero “Always-on” connectivity

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Popular Technologies for M-Commerce

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M-Commerce Applications

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Location-Based M-Commerce• Highly personalized mobile services

• Based on locationo GPS functionality

o Bluetooth

• Pull-based – consumers seeking information

• Push-based – companies sending (unrequested) information to the consumer

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Enhanced 911 and Phone Locator

• e911o Federal mandateo Correct routing of

emergency callso GPS specifies location

within 50 meters

• Phone locatoro Location of family

members’ cell phoneso Alerting system when child

leaves a certain area

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Location-Based Services

• Next thing: cell phone social networking

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Key Drivers of M-Commerce

• General interest in adoption of the Internet and e-commerce

• Real-time transfer of data over 3G and 4G cellular networkso “Always-on” connectivity

• Growth in mobile telephony

• 2007 M-commerce market: $250 billion

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Crowdsourcing• Use of everyday people as cheap labor force

• iStockphoto.como Amateurs take pictureso Cost of picture $1 - $5o Revenue shared with the photo creator

• Eli Lilly – InnoCentiveo Companies post scientific problemso Anyone can try to solve themo Reward paid to a successful solvero Decreased R&D costs

• E-lancing

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Online Entertainment Industry

• Digital rights management (DRM)o Technological solution for control of digital

media

•Restrictionso Devices which will play ito How many times it can play

o Prevention of illegal copying and distribution

•Watermark – illegal copy can be traced to original purchaser

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Slingbox• Acts as a personal media server

• “Placeshifts” television content to any Internet-enabled deviceo Television signal received at the user’s house

o Relayed over the Internet to be accessed from anywhere

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Learning Objectives

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E-Government

• Providing information about public serviceso To citizenso To organizationso To other

governmental agencies

• 1998 – Government Paperwork Elimination Act

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Government-to-Citizens

• Interactions between the government and its constituentso IRS – e-filing

o Grants.gov

o e-voting initiatives

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Government-to-Business

• Relationships between businesses and the governmento E-procuremento Forward auctions

• Businesses buy surplus government equipment

• Auctionrp.com

o Online application for export licenses

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Government-to-Government

• Interactions between countrieso Regulations.gov

o Export.gov

• Interactions between different levels of government

Threats to E-Commerce

• The USA PATRIOT Act

• Taxation

• Net Neutrality

• Censorship

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Threats to E-Commerce• The USA PATRIOT Act

o Introduced after 9/11 terrorist attacks in 2001

o More power given to governmental agencies to protect Americans

o Critics – Civil Liberties Union•Reduced checks and balances on surveillance

•Lack of focus on terrorism

•Surveillance on Americans

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Examples of Provisions Allowed by the USA PATRIOT Act

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Internet Taxation

• The Internet Tax Freedom Act – 1998o Created as an incentive for EC businesseso Internet sales treated as mail-order sales

• No sales taxes paid in states where the company has no presence

• Problem• Loss of tax incomes• Unfair advantage for e-tailers

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Internet Taxation (II)

• Solutions:• Use tax

oConsumers required to pay their state’s sales taxoPart of some income tax returns

• Streamlined Sales Tax ProjectoSimplification of tax codes oCollection of taxes by out-of-state sellers

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Arguments For and Against Internet Taxation

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Net Neutrality• Data sent over the Internet is handled in

a neutral manner

• All traffic treated the same way

• ISPs and telephone companies argue for prioritizationo Traditional Internet traffic suffers (e-mail)

due to high bandwidth applicationso Example: YouTube.com not paying their fair

share, should be deprioritized

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Approaches to Net Neutrality

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Censorship• Governmental attempts to control

Internet traffico Limiting citizens from viewing contento E.g., China, North Korea

•Strict guidelines on what can be viewed

•Key words and topics blocked

o United States•Child Online Protection Act (COPA)

o Age verification for certain content

End of Chapter Content

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Opening Case: Managing in the Digital World: eBay Under Attack

• Phishing o Scam artists pretending to

be eBay

o Ask for credit card information and passwords

o eBay would never send such an email

o 2006 – London

• £200,000 stolen

• eBay feedback scores

• eBay buyer insurance

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Monitoring Productive Employees

• “You have zero privacy, get over it” (Scott McNeely)

• Use of company provided Internet connection can be legally monitored

• American Management Association survey (2005)o 75% of employers monitor employee’s Internet use

o 65% use software to block access to certain Web sites

o 30% monitor key strokes

o 50% review and retain employee e-mails

o 8% of the companies disclose the practices to the employees

o 26% fired employees for Internet misuse

o 25% fired employees for e-mail abuse

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Employees Using Company Networks Can Affect Liability

• Illegal downloading of music and movies using company’s computer and Internet access

• Star Wars Episode III: Revenge of the Sitho September 2005

o “Screener” version stolen and distributed

• Forensic marker revealed the identity of the thief

• 3 years in prison

o 7 employees copied the movie

• 1 year in prison and $100,000 in fines

• Company not held liable

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IM at Work• Disadvantages of using public IM

o Security cannot be assumedo Data resides on the provider’s servero Access to the network cannot be blocked

• IM protocols for organization’s own IM networko Secure message transfero Ability to handle thousands of employee accountso Platform compatibilityo Access from outside of the WANo Proper access rights

• IM hosting service – third alternativeo Data still resides on provider’s server – privacy concerns

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E-Business is BIG Business

• Growing numbers of online consumerso 2005 revenues - $176.4 billion

o 2006 expected revenue – $211.4 billion

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Photonic Crystal Fibers

• New type of fiber-optic cableo Based on characteristics of photonic crystals

•Larger data carrying capacity

•Photonic crystals allow the fiber to contain light in a hollow core

•No need for cladding

•Higher-powered lasers can be used

•Data speeds greater than 1,000 times the current fiber capacity

•Can be connected to any fiber-optic equipment

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Meg Whitman, President and Chief Executive Officer, eBay, Inc.

• Princeton – Undergrad

• Harvard – MBA

• Worked foro Hasboro Inc. o FTDo Stride Rite Corporationo Walt Disney Companyo Procter & Gamble • eBay

o 53 country specific siteso Purchase of Skype

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Online Travel

• Online travel agencieso Expedia, Travelocity, Orbitzo 75% of surveyed travelers visit online travel sites

before booking travel

• Direct customer relationshipso JetBlue, InterContinental Hotelso Customers purchase services directly

• Travel search engineso Kayak, SideStep, Mobissimo, Yahoo!’s FareChase

• Link to suppliers’ Web sites