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ELECTRONIC COMMERCE
Session 1: An Introduction to Electronic Commerce
SESSION OBJECTIVES
To provide an introduction to electronic commerce (e-commerce) by answering the following questions:What is e-commerce?What are the advantages and
disadvantages of e-commerceWhat were the 1st and 2nd waves of
e-commerce characterised by?What are the categories of e-
commerce?
SESSION OBJECTIVES CONT’D
To discuss concepts such as:MarketsValue chainsTransaction cost
To evaluate 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 CONT’D?
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 CONT’D?
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 CONT’D?
In summary, e-commerce is theuse of electronic communication to do
business Specifically, the transfer of information
(transactions), over the Internet
Some 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-COMMERCE
Sailing ships
Printing press
Steam engine
Telephone
Opened avenues for trade between buyers and sellers. Ancient times (thousands of
years ago)
FROM TRADITIONAL COMMERCE TO E-COMMERCE CONT’D
Electronic Funds Transfer (EFTs)
Electronic Data Interchange (EDI)
Internet
Wire transfers - used by banks
Businesses transfer electronic data- data not re-keyed- high implementation cost, thus excluded small businesses
On-line shopping
BUSINESS PROCESSES SUITED TO CERTAIN TYPE OF COMMERCE
E-commerce Sale/purchase of books & CDs, travel services,
investments and insurance services Online delivery of software Online shipment tracking
BUSINESS PROCESSES SUITED TO CERTAIN TYPE OF COMMERCE CONT’D
E-commerce & Traditional Sale/purchase of automobiles and residential
real estate (e.g. do research online then buy from a dealer or real estate agent)
Online banking Roommate matching service
BUSINESS PROCESSES SUITED TO CERTAIN TYPE OF COMMERCE CONT’D
Traditional Sale/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? Increases sales, decreases cost
Allows small businesses to have global customer base
Reduced cost through electronic sales enquires, price quotes and order taking
Provides purchasing opportunities for buyers (businesses can identify new suppliers and partners)
Increase speed and accuracy for exchanged information, thus reducing cost
WHAT ARE THE ADVANTAGES OF E-COMMERCE CONT’D? Business can be transacted 24hrs a
day The level of detail of purchase
information is selected by user Digital products can be delivered
instantly Tax refunds, public retirement and
welfare support costs less when distributed over the Internet
Allows products and services to be available in remote areas, e.g. remote learning
WHAT ARE THE DISADVANTAGES OF E-COMMERCE? Inability to sell some products (e.g.
high cost jewelry and perishable foods, although supermarkets like www.Tesco.com delivers to your home)
The newness and evolution of the current technology
Many products require a large number of people to purchase to be viable
High capital investment
WHAT ARE THE DISADVANTAGES OF E-COMMERCE CONT’D? Difficulty in integrating current
databases and transaction processing systems into e-commerce solutions
Cultural and legal obstaclesTransmission of credit card detailsSome consumers resistant to changeLaws are unclear
Shipping profile: Products with a low value-to-weight ratio that can not be efficiently packed and shipped are unsuitable (use traditional commerce)
THE 1ST WAVE OF E-COMMERCE The 1st wave was from
the mid 1990s to 2003 Dot-com boom (over
$100 billion in investment): Rapid growth from mid-1990s to 2000
Dot-com bust: in 2000 Gloom years: 2000 –
2003 (over $200 billion in investment)
CHARACTERISTICS OF THE 1ST WAVE3
It was primarily a U.S. phenomenon Web pages were in English Internet 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
communication On-line advertising main revenue
source
THE 2ND WAVE OF E-COMMERCE Beginning in 2003 e-
commerce has shown signs of new life
Companies like Amazon.com (books), and eBay.com (auctions) who survived the downturn were beginning to show profits
Continuous growth of B2C sales: 20-30% each year since 2000
CHARACTERISTICS OF THE 2ND WAVE
International scope where sellers do business in many countries and languages
Faster, cheaper connections (x20 faster), broadband at home (although more expensive)
Radio frequency ID devices and smart cards
Fingerprint readers and retina scanners (biometric technologies) used for tracking
Email, integral part of marketing
CHARACTERISTICS OF THE 2ND WAVE CONT’D
E-commerce integral part of marketing and customer contact strategy
Some categories of on-line advertising, e.g. employment services (job want ads) have replaced traditional advertising outlets
ProblemsLanguage conversionsCurrency conversions
E-COMMERCE CATEGORIES3
There are five general e-commerce categories: Business to Consumer (or B2C) e-
commerce Business to Business (or B2B) e-commerce
(sometimes called e-procurement) Business processes that support buying
and selling activities Consumer-to-consumer (or C2C) e-
commerce Business-to-government (or B2G) e-
commerce
B2C E-COMMERCE Description
Businesses sell products or services to individual customers (consumers)
Example Walmart.com sells merchandise to consumers
through its Web site Web site
www.walmart.com
B2B E-COMMERCE Description
Businesses sell products or services to other businesses
Example Grainger.com sells industrial supplies to large
and small businesses through its Web site Web site
www.grainger.com
BUSINESS PROCESSES THAT SUPPORT BUY/SELL ACTIVITIES Description
Businesses 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 this information is being shared
ExampleDell Computer uses secure internet
connections to share current sales and forecasts with suppliers who use it to plan their production, therefore they deliver the right quantities of components at the right time
C2C E-COMMERCE
DescriptionParticipants in an online marketplace can
buy and sell goods with each other Example
Consumers and businesses trade with each other on eBay.com
Web sitewww.ebay.com
B2G E-COMMERCE Description
Business sell goods or services to governments and government agencies
Example Cal-Buy portal for businesses that want to sell
online to the State of California Web site
www.pd.dgs.ca.gov/calbuy/default.htm
E-COMMERCE CATEGORIES EXAMPLE You 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)
Business processes
RELATIVE SIZES OF E-COMMERCE CATEGORIES
B2C
B2B
RELATIVE SIZES OF E-COMMERCE CATEGORIES CONT’D
Year B2C Sales ($ Billions)
B2B Sales ($ Billions)
2005 150 4100
2004 130 2800
2003 100 1600
2000 50 60
ECONOMIC FORCES Economics is the
study of how people allocate scare resources
Resources are allocated through:Commerce
(markets)Government
actions (e.g. taxes)
MARKETS A 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 data supplier Datastream
HIERARCHICAL ORGANISATIONS (FIRMS)
Firms participate in markets to purchase rawmaterials and sell finish products.
W o rke rA
M a n ag e rA
W o rke rB
M a n ag e rB
E xecu tive1
W o rke rE
M a n ag e rE
W o rke rF
M a n ag e rF
E xecu tive2
W o rke rJ
M a n ag e rJ
W o rke rK
M a n ag e rK
E xecu tive3
C h ie f O p e ra tin g O ffice r
TRANSACTION COSTS
Transaction costs are the total costs that a buyer and seller incur as they gather information and negotiate a purchase/sale transaction
Transaction 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 EXAMPLE
Transaction costs incurred by a sweater dealer when purchasing from independent sweater knitters: Cost of identifying independent knitters Cost of site visit to negotiate purchase price,
arrange delivery and inspection of sweaters Costs incurred by knitters:
Knitting tools and yarn purchase
NETWORK ECONOMIC STRUCTURES Many businesses operate in an
economic structure that is neither market or hierarchical
These businesses form, long-term, strategic alliances with other companies who share common goals and strategies
These alliances may occur over the Internet – which are called virtual companiesTeams complete a project or activity then
dissolveNew teams are creating as required
VALUE CHAINS A 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 sells
There are several types of value chains including: Business unit value chains Industry value chains
STRATEGIC BUSINESS UNIT VALUE CHAINS A 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 include:Primary activities (the activities that the
strategic business unit undertakesSupport activities (such as human
resource management and purchasing)
MANUFACTURER VALUE CHAIN
Finance& admin HR Technology
development
Support activities
Design
Identify customers
Manufacture product or create
service
deliverAfter sales
service & support
Market & sellPurchase materials
and supplies
Primary activities
PRIMARY ACTIVITIES
Identify new customers, and sell new services to existing customers (research & surveys)
Design – from concept to manufacturing Purchase materials and supplies –
includes contracts, vendor selection, monitoring quality and delivery timeliness
Manufacture product or create service –transform materials and labour into finished products
PRIMARY ACTIVITIES CONT’D
Market and sell – advertising, promoting, managing sales staff, pricing and monitoring sales
Deliver – store, deliver distribute and ship final product – warehousing, consolidating freight, selecting shippers and monitoring delivery timeliness
Provide after-sale service and support – promote relationship with customer, e.g. installing, maintaining, testing, repairing, and warranties
PRIMARY ACTIVITIES CONT’D
If a strategic business unit provides a service then the value chain will include a “Provide service” activity instead of “Manufacture activity”
SUPPORT ACTIVITIES Each business unit must also undertake
support activities that provide the infrastructure for the primary activities:Finance and administration – accounting,
paying bills, borrowing, compliance with laws
Human resources – recruiting, hiring, training, compensation and benefits
Technology development – improves the product or service, including basic and applied research and development, process improvement and field tests of maintenance procedures
INDUSTRY VALUE CHAINS
Industry value chains describes the larger stream of activities into which a particular business unit’s value chain is embedded
When a business unit delivers a product to a customer the customer might use the product as purchased materials in its value chain
By examining how other business units in the industry value chain conduct their business cost reduction and product improvement may result
INDUSTRY VALUE CHAIN EXAMPLE A value chain for a wooden chair
Logger cuts down tree Sawmill converts logs to lumber Lumberyard provides selection of lumber Chair manufacture assembles chair Furniture retailer markets and sells chair Consumer purchases and uses chair Landfill or recycler disposes of chair
INTERNATIONAL ISSUES Trust issues Language issues Culture issues Infrastructure
issues
TRUST ISSUES Anyone can create a site on the Web These individuals or businesses can
easily remain anonymous Without an established brand
consumers find it difficult to trusts on-line businesses:especially with personal information and
credit card numbers The key is developing methods which
allow legitimate businesses to establish trusts relationships quickly with consumers
LANGUAGE ISSUES (LOCALISATION) Global impact requires local language Web sites
customers prefer to buy from sites in native language
60% of web content today is in English; but more than 50% of the current users do not read English
Multiple translations may be required for different dialects, e.g. Spanish- Mexico and Spain
Translating entire Web sites 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) - less accurate
CULTURE ISSUES
Culture is the combination of language and customs
Culture varies across national boundaries and in many cases regions within nations
Example: General Motors Chevrolet Nova automobile
amused people in Latin America since no va means “it will not go”
CULTURE ISSUES CONT’D Choice 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 trolleys
In many places other than Brazil the thumbs up gesture means okay, in Brazil it is an obscene gesture
INFRASTRUCTURE ISSUES
Limited telecommunication infra-structure may lead to unreliable Internet access
Internet connection cost might be high Reduces time businesses might spend surfing
for new suppliers or products Flat-rate access to the Internet required
DEFINITIONS A 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 CONT’D
Merchandising is a combination of store design, layout and product display knowledge
A 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 CONT’D
The definition of a market satisfies two conditions: Potential seller of a good (product) comes into
contact with buyers A medium of exchange is available (e.g.
currency or barter (to exchange goods or services directly without the useof money))
DEFINITIONS CONT’D
Transaction costs are the total costs that a buyer and seller incur as they gather information and negotiate a purchase/sale transaction. This includes: Brokerage fees and sales commissions Cost of information search and acquisition Seller’s 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: The second wave”, Thomson Course Technology, Fifth Annual Edition, 2004