Introduction to E-Commerce

Topic ObjectivesAt the end of this topic, you should be able to do the following:

Define e-commerce and describe how it defers from e-business

Describe the unique features of e-commerce technology and how they are relevant to business

Describe the major types of e-commerce and explain how they differ from each other

Describe the factors that were thought to be critical success factors in E-Commerce I, and explain why these factors did not contribute to the success of e-commerce

Describe the characteristics of E-Commerce II Describe the three major themes used to help

understand e-commerce

What is E-Commerce Definition of E-Commerce

The use of the Internet and the Web to carry out digitally enabled commercial transactions

Key words“digitally enabled transactions”

• Business transactions carried out digitally• For the most part, transactions occur over the Internet

using World Wide Web“commercial transactions”

• Involve the exchange of value (such as money) across organizational boundaries in return for products and/or services

• Note: without exchange of value, commerce do not occur

Other Definitions of E-Commerce

Kalakota and Whinston say we should look at e-commerce from 4 perspectives: Communications perspective Business process perspective Service perspective Online perspective

Each of these perspectives can provide value (benefits) to business organizations adopting e-commerce as a means of doing business

Definition of E-Commerce

Perspective Definition

Communications Delivery of information, production/services, or payments over electronic meansInternet facilitate exchange between buyers and sellers

Business process Use of ICT to automation of business transactions and work flowHelps reduce transaction cost

Service Use of ICT to cut service cost BUT improving quality of goods and increasing the speed of service delivery

Online Capability of buying and selling products and services on the Internet

Pure verses Partial E-Commerce

E-commerce businesses range from using web sites to display electronic product catalogs to having almost 100% of business operations digitised.

Business profit is NOT related to the degree of “digitalness” The pure-ness or digital-ness of an e-commerce

business is not a measure of how successful a business is or will be

The level of digital-ness is a choice of business strategy (a choice management makes)

Pure plays (fully digital companies) have their own unique sets of problems compared to brick and mortar (traditional, physical stores) companies

Pure verses Partial E-Commerce

Level of digital-ness can be measured by the following business dimensions: ProductProduct / service (is the product sold

digitized?) AgentAgent (does the business have any physical

stores its customers can shop at?) Delivery processDelivery process (is the product sold or

service provided delivered through the Internet?)

Pure verses Partial E-Commerce

Degree of digitizationDimension Digital Physical

Product sold Software, music, electronic Magazine

Books, flowers, toys, cars, clothes

Delivery Process

Product or service can be downloaded from the internetBusiness processes are highly automated

Courier, postal, truckBusiness processes are manually done

Agent Physical presence is not important; Customers do not need to know where the shop is

Brick and mortar, physical retail outlet

Choi, et al., 1997

Dimensions of Electronic Commerce

DigitalProduct

PhysicalProduct

PhysicalAgent

DigitalAgent

PhysicalProcess

DigitalProcess

PureEC

Brick andMortar

Business and Commerce Commerce refers to the exchange of goods and

services (by sellers) and money (by buyers) Commerce activities are a subset of business

activities; Business organizations have to carry out other

activities not directly related to commerce (such as HRM and building maintenance)

Business

Brick and Mortar Business Approach Traditional brick and mortar companies implement the

following business strategies: Mass-marketing strategy

• use of newspapers, TV and radio to advertise to the general public (not to a narrow, targeted market segment)

Sales force driven process• Sales persons have to physically go out and sell

Customers seen as passive targets of advertisement campaigns and branding blitz

• One way communication (businesses send information and customers read information)

Customers are trapped by social and geographical (physical) boundaries

• Businesses have a limited market area to sell their products and services

• Customers have a limited market area to look for products and services they want to purchase

Brick and Mortar Business ApproachInformation Asymmetry

Traditional brick and mortar companies make use of information asymmetry to create profits information asymmetry occurs when the

seller has more relevant market information than the buyer in a transaction

The seller can take advantage of the buyer because she knows more than the buyer about actual costs, actual quality of the product, different categories of a product, profit margins, price offered by other retailers

Brick and Mortar Business ApproachInformation Asymmetry

With the use of Internet, (theoretically) buyers can surf the Internet, do comparison

shopping (compare prices between different sellers)

Buyers can make use of informediaries and transaction brokers to help find the sellers offering the product at the “best” price

Therefore, with the use of the Internet, information asymmetry (theoretically) can be minimized

Unique Features of E-Commerce Businesses can make use of the unique

features (capabilities) of the Internet and the World Wide Web when conducting e-commerce

There are seven unique features of e-commerce technology Ubiquity Global reach Universal standards Richness Interactivity Information density Personalization / customization

Unique Features of E-CommerceUbiquityUbiquity

The Internet makes it possible for commerce to be carried out from anywhere, and at any time Transactions can take place any place where Internet

access is available Buyers and sellers do NOT have to meet at a common

physical place to interact, exchange goods and services and make payments

Wireless devices will allow buyers and sellers to interact “on the move” and not fixed to specific locations (e.g. on the bus, in the car, at a restaurant, sitting in an airplane)

Unique Features of E-CommerceUbiquityUbiquity

Traditionally, a market is associated with a physical place (e.g. supermarket, wholesale market, pasar malam, pasar tani)

With e-commerce, markets have evolved to marketspace (instead of marketplace) since buyers and sellers transact in cyberspace (Internet) Internet reduces the limitations of temporal (time)

• Commercial transactions can take place 24 hours a day and 7 days a week

Internet reduces the limitations of geographical locations (place)

Unique Features of E-CommerceUbiquityUbiquity

E-commerce reduces transaction costs (administrative cost) of doing business Automation through e-commerce will help

reduce transaction costs of making phone calls, faxing business documents, confirming orders, filing sales records and sending bills and sales receipts

Reduction of transaction costs may lead to the following: Increase profit margin (benefit to sellers) Reduced retail price (benefit to buyers)

Unique Features of E-CommerceUbiquityUbiquity

E-commerce also reduces cognitive energy (mental effort) to carry out business transaction Making purchasing decisions are easier

because information is readily available in the Internet

• Comparison shopping (comparing prices, comparing product characteristics of different brand names) can be done by surfing the Net

Buying a product or service is also easier done online (by a click of a button)

Unique Features of E-CommerceGlobal ReachGlobal Reach

The Internet permits commercial transactions to cross cultural and national boundaries far more conveniently and cost effectively than in the past

E-commerce can help increase the reach of a business Reach can be defined as a measure of the

number of users or potential customers an e-business can get

E-commerce can help businesses reach potential customers living anywhere in the world as long as there is Internet access

Unique Features of E-CommerceGlobal ReachGlobal Reach

Brick and mortar companies rely on customers that live or work within a limited physical area surrounding the physical shop

Advertisements Internet offer business the ability to

advertise online to customers around the world

Television, radio and newspapers can reach a specific region, and at best the entire (one) country

Unique Features of E-CommerceUniversal StandardsUniversal Standards

The strength of e-commerce technologies is that it employ technical universal standards (TCP/IP) that are readily and widely adopted by all countries in the world Not true with telephones, radio and television Television signals, for example, are different between

some countries Many electronic products manufactured for Japanese

consumers cannot be used outside Japan Having universally accepted standards helps

businesses to reduce market entry costs because buyers and business partners do not need to buy special equipment or software to use the Internet to carry out business transactions

Unique Features of E-CommerceUniversal StandardsUniversal Standards

By getting access to sellers throughout the world, buyers can enjoy two benefits: Reduced search cost because buyers can search

easily products they want to buy from sellers located all over the world

Simpler and faster price discovery because buyers can search easily products they want to buy at the price they are willing to pay, and terms and conditions they like

Definition Search cost is the costs of searching for suitable

product Price discovery is the price agreed between the

buyer and seller

Unique Features of E-CommerceRichness of InformationRichness of Information

richness of information can be defined as a measure of the information that is transmitted based on multiple information cues (words, posture, facial expressions, gestures, intonations), immediate feedback, and the personal touch

Daft and Lengel (1986) defined information richness as the ability of information to change understanding within a time interval…”can overcome different frames of reference or clarify ambiguous issues to change understanding in a timely manner are considered rich.”

Unique Features of E-CommerceRichness of InformationRichness of Information

Traditional markets provide richness of information by offering physical, personalised, face-to-face services to attract customers

Before the development of e-commerce, there was a trade-off between market reach and richness of information

With e-commerce, the trade-off is significantly reduced because the Internet offer businesses increased market reach without losing richness of information Customers from far away countries can get rich

information (in multiple forms such as text, pictures, graphs, video, audio) from businesses employing e-commerce

Unique Features of E-CommerceRichness of InformationRichness of Information

Reach

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Before e-commerce, we have tosacrifice reach to improve richnessof information

Unique Features of E-CommerceInteractivityInteractivity

Internet technology allows for two-way communication between seller and consumer Chatting, voice over IP, instant messaging, SMS

and e-mail can be used by buyers and sellers to communicate with each other

Television, radio and newspaper do not offer interactivity like the Internet and the Web Television, for example, is a one-way

communication system where viewers cannot “talk back”

Unique Features of E-CommerceInformation DensityInformation Density

Information density can be defined as the total amount and quantity of information available to all market participants

Information technology… reduces the cost of information collection,

storage, processing and communications Increases the currency, accuracy and

timeliness of information

Unique Features of E-CommerceInformation DensityInformation Density

Information density improves price and cost transparency Price transparency refers to the ability of customers to

find out the variety of prices in the market Cost transparency refers to the ability of customers to

find out the cost sellers pay for products Price and cost transparency can help buyers to

identify the best price for the product or service they want to purchase

Unique Features of E-CommerceInformation DensityInformation Density

Information density offers benefits to the sellers. The more sellers know about customers, the better able for them to implement price discrimination Price discrimination takes place when a seller sells

products or services at different prices to different buyers (depending on the buyers’ willingness to pay)

If a seller knows a particular buyer is willing to pay a higher price for her product, she will set the price higher for that one buyer; the same product may be sold at a lower price to another customer who is not willing to pay a higher price

Unique Features of E-CommercePersonalization and CustomizationPersonalization and Customization

Personalization refers to targeting marketing messages to specific individuals by adjusting the message to a person’s name, interests, and past purchases

Customization refers to designing and producing the delivered products or services based on the buyer’s preferences or prior purchase behaviour

To personalise marketing messages and customising products and services requires the business to collect and use information about their customers

Businesses can make use of many software applications that can collect and analyse detailed customer information to be used for personalisation and customisation

Types of E-Commerce

There are a variety of e-commerce and many ways to categorise e-commerce

Below are the major types of e-commerce differentiated by the nature of the market relationship – who is selling to whom B2C (business to consumer) B2B (business to business) C2C (consumer to consumer) P2P (peer to peer) M-commerce (mobile commerce)

Types of E-Commerce

Type Name Description

B-2-C Business to Consumers Online businesses selling to individual consumers

B-2-B Business to Business Online businesses selling to other businesses

C-2-C Consumer-to-consumer Consumers selling to other consumers

P-2-P Peer-to-peer Use of peer to peer technology, which enables Internet users to share files

M-Commerce Mobile commerce Use of wireless digital devices to enable transactions on the Web

Driving Forces of Electronic CommerceMarket and economic pressures

Societal and environmental pressures

Technological pressures

•Strong competition in the marketplace•Global economy•Regional trade agreements•Low labor cost in some countries

• Changing nature of workforce• Government deregulations• Increased importance of ethical and

legal issues

• Rapid technological obsolescence• Information overload• Rapid decline in technology cost

verses performance ration

Growth of the Internet and the Web

Growth of the Internet Measured by

• number of Internet host computers• (growth rate of 45% per year)

Radio took 38 years to achieve 30% share Television took 17 years to achieve 30% share Internet/Web took 7 years to achieve 30%

share World Wide Web made Internet

commercially popular

Growth of the Internet and the Web

World Wide Web allows us to create web pages using a language called HTML (hypertext Markup Language)

Web pages can display information in the form of text, graphics, animation, video, audio There has been an exponential growth of

web content since 1993• Approx 7 million new web pages a day

Origins and Growth of E-Commerce Examples of attempts to employ information systems to

conduct e-commerce before the adoption of the Internet and the Web Electronic data interchange (EDI)

• EDI is an inter-organizational system that allows for efficient transfers of business documents (such as invoice, sales orders, purchase requisition forms) between business organizations

Electronic fund transfer (EFT)• EFT is an inter-organizational system that allows for

efficient transfers of funds electronically between banks Videotext systems

• Videotext systems make use of television screens to display text messages

Limitations on the Growth of B-2-C E-commerce Below are examples of factors slowing down the

adoption of e-commerce There are still many people without computers (with

Internet access) in their homes Computers (with Internet access) are still considered

expensive to many people It takes skill and experience to efficiently surf and look

for information through the Internet There is still a persistent cultural attraction of physical

markets and traditional shopping experiences There is still a persistent global inequality limiting

access to telephones and PCs (especially in the rural areas)

E-Commerce I

E-Commerce I A period of explosive growth in e-commerce,

beginning in 1995 and ending in 2000 It was thought (at that time) commerce will

improve because of e-commerce; improvements will happen due to the following:

• Disintermediation of middlemen• Friction free markets will emerge• Commerce will be fueled by the network effect

E-Commerce I (1995-2000) Forces Shaping this Era

Disintermediation Disintermediation refers to the displacement of

market middlemen who traditionally are intermediaries between producers and consumers

E-commerce offers producers an efficient way to sell their products directly to consumers (through online stores)

By selling directly to consumers, consumers are able to buy products at lower prices while producers can sell at a higher price than what they normally charge wholesalers

E-Commerce I (1995-2000) Forces Shaping this Era

Friction-free commerce Friction-free markets are markets with high efficiencies in

facilitating buyers and sellers to transact Friction in markets are caused by significant cost in

transactions Friction-free markets can be achieved given the following

conditions:• Information on market condition is equally distributed among

sellers and buyers• transaction costs are low because of efficient use of

telecommunication technology and automation• prices can be dramatically adjusted to reflect actual demand

due to improved access to information• intermediaries are few as producers sell directly to buyers• unfair competitive advantages are eliminated due to improved

access to information (by both buyers and sellers)

E-Commerce I (1995-2000)Forces Shaping this Era

First movers A first mover is a firm that is first to market a product

or at a particular area; being the first allows the business to quickly gain market share

Once a business has acquired a sizable share of the market, it is difficult to penetrate the market (for example, it is difficult to sell a new cola soft drink because Coca Cola and Pepsi have a strong hold on the cola market)

During E-commerce Era I, it was believed that becoming a first mover is very important because once a first mover has captured a large portion of the market, it would be very difficult to compete against them

E-Commerce I (1995-2000)Forces Shaping this Era

Network Effect Network effect occurs when the value of a product or

service is dependent on the number of customers already owning and using that product or service

The purchase of a product by one customer will indirectly benefit all other customers who own similar products

For example• When more people buy mobile phones, the more useful

is our mobile phone because now we can phone more people

• The more people who have MMS function in their mobile phones, the more valuable is the MMS function

• The more people who have fax machines the more useful is a fax machine

E-Commerce II E-Commerce II started with the crash in stock

market values of E-Commerce I companies beginning in January 2001 Telecommunications industry

• had built excess capacity in high-speed fiber optic networks

• Price wars leading to inability to pay for debts incurred in building high speed networks

There were less sales growth than anticipated Early adopters of e-commerce began to realize e-

commerce was not easy to implement Dot.com companies were over valued and they could

not live up to the revenues expected

E-Commerce II During Era II, sales growth for B2C increased at 45% to 55% per

year There are significant revenue generated from consumers who

purchase from brick and mortar shops but received valuable product information through web sites (these kinds of sales is called “Internet influenced” commerce)

“Friction free” commerce not fully realized because… Prices are not necessarily less than found in the brick and mortar

stores Information asymmetries are still being created by sellers Information overload (too much information) has not helped to

reduce market friction Although search costs have fallen, logistic, settlement costs are still

high Consumers fail to purchase online due to uncertainties and lack of

trust of online facilities

E-Commerce II Intermediaries have not disappeared

the reverse has happed – introduction of new forms of intermediaries (called re-intermediation)

First movers advantage very small First movers are displaced by “fast followers” Many first movers have closed down because they could not

realise their predicted advantages The overall costs of doing business on the Internet is high

The cost of customer acquisition and retention is very high Acquiring and operating the technology for e-commerce is

expensive Site design and maintenance costs are high Warehouses for fulfillment (are just as high as brick and

mortar companies)

Comparing E-Commerce I and IIPredictions of what will happen

E-Commerce I E-Commerce IITechnology driven Business driven

Revenue growth emphasis Earnings and profits emphasis

Venture capital financing Traditional financing

Ungoverned Stronger regulation and governance

Entrepreneurial Large traditional firms

Disintermediation Strengthening intermediaries

Perfect markets Imperfect markets, brands, network effects

Pure online strategies Mixed “click and bricks” strategies

First movers strategies Strategic follower strength

Understanding E-Commerce Dimensions of e-commerce

Technology• Basic understanding of technologies that make e-

commerce possible• Computer technology• Telecommunications technology• Internet and WWW

Business• Understand new ways of implementing business

transactions• Redefining functions of markets• Nature of producing and selling digitized products

Understanding E-Commerce

Dimensions of e-commerce Society

• Difficulty of protecting digitized intellectual property• Exploiting individual rights to privacy to improve

customer service• E-commerce contributing to digital divide• Evaluate whether e-commerce can improve quality

of life• Government responsibility to regulate rights and

responsibilities of businesses, consumers and society

Approach to Learning E-CommerceTechnical approaches

Below are technical concerns in e-commerce Choosing the right hardware architecture Deciding on the type and combination of software

applications on the Internet to be used Identifying ways of using Internet services to carry out

tactical plans Need to manage network traffic to improve response

time Building secure web site to ensure business reputation

and trust of online customers Designing intranets and extranets to integrate internal

information systems with e-commerce systems

Approach to Learning E-CommerceBehavioral approaches

E-commerce has raised many behavioural concerns when businesses adopted this new channel of doing business The challenge of encouraging shoppers to shop online Businesses need to understand the behavior of online

shoppers and Internet users to identify ways of increasing online purchases

The social impact of the digital divide Businesses, government and society has to deal with

new ethical issues ranging from protecting individual privacy, intellectual property rights and ensuring quality of life of individuals in society

End of Notes

Please read again the objectives of this topic and do a self-check to determine if you have met the objectives outlined