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ONLINE FILE W1.1ZAPPOS CORE VALUES

1. Deliver WOW Through Service: Anything worth doing should be done with WOW.

2. Embrace and Drive Change: Constant change allows for faster evolution than competitors; most change is driven from thebottom up—from those employees directly involved with the processes, customers, and issues.

3. Create Fun and a Little Weirdness: In celebrating the individual differences in each employee, employees are more engagedin the work that they do, and the company as a whole becomes more innovative.

4. Be Adventurous, Creative, and Open-Minded: It’s important for people and the company as a whole to be bold and daring(but not reckless).

5. Pursue Growth and Learning: The best expertise an employee can bring is expertise at learning and adapting and figuringnew things out—helping the company grow, and in the process, they grow.

6. Build Open and Honest Relationships with Communication: Openness and honesty make for the best relationships becausethat leads to trust and faith.

7. Build a Positive Team and Family Spirit: Creating an environment that is friendly, warm, and exciting encourages diversityin ideas, opinions, and points of view.

8. Do More with Less: Continuous innovation and endeavoring to be more efficient, always trying to figure out how to dosomething better, and using mistakes as learning opportunities.

9. Be Passionate and Determined: Passion is the fuel that drives the individual and the company forward.

10. Be Humble: We carry ourselves with a quiet confidence because we believe that, in the long run, our character will speakfor itself.

Source: Zappos.com. Used with permission.

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W1.2 Part 1: Introduction to E-Commerce and E-Marketplaces

ONLINE FILE W1.2 Application Case

MARY KAY’S EC SYSTEMSFounded in 1962, Mary Kay (marykay.com) has about 1.8 million consultants selling its cosmetics and fragrances in34 countries. In 2008, the company had about $2.4 billion inwholesale sales.

As a company that has based its reputation on per-sonal contacts through door-to-door visits and home gath-erings, one might think that Mary Kay would not benefitfrom EC. Actually, the opposite is true. Currently, morethan 95 percent of Mary Kay’s independent salespeopleplace orders via the Internet.

The ProblemThe cosmetics market is very competitive, but it is growingrapidly, especially in developing countries. Mary Kay is try-ing to capitalize on this trend. The Mary Kay businessmodel enables rapid growth into new markets. By the early2000s, consultants found that more and more customerswanted to shop online. With a long and global supplychain and the need to manage almost 2 million consul-tants, it was clear that automation was needed, but MaryKay’s existing computer system was old and lacked Web ore-commerce applications. Therefore, a major overhaul ofthe information systems was needed. Finally, it becameclear that the emergence of social computing might pro-vide a golden opportunity for Internet marketing by thecompany.

The SolutionMary Kay’s IT department is now split into three divisions:e-commerce, supply chain, and back-office support.Because of pressure from the consultants, the restructuringfocused on e-commerce.

The company’s goals and objectives were set based onindustry best practices. Goals and objectives determinewhat, how, and when the company is operated, and thesealso apply to EC initiatives. Mary Kay’s EC solution includedthe creation of an electronic service desk that supportsconsultants in 30 countries in a standardized way. Mary Kayalso introduced a global electronic ordering system, calledAtlas, that allows the consultants to communicate withcompany warehouses. An intelligent data repository thatdynamically maintains a logical model of the EC environ-ment can be accessed by Mary Kay IT staff.

Mary Kay and its consultants are also making extensiveuse of social computing. The following are some represen-tative examples of how Mary Kay uses social computing:

The company posts job opening announcements onseveral sites, including MySpace Jobs (classifieds.myspace.com/job).

Movies and videotapes are available on YouTube(youtube.com) and on movies.go.com.

Several blogs are available, both for and against thecompany (e.g., marykayandrews.com/blog).

Auctions and fixed-price items are available for sale oneBay.

Mary Kay provides a consultant locator on the Internet(marykay.com/customerpreferences/locator.aspx).

All of these developments are supported by an exten-sive hardware and software infrastructure, including a wire-less remote management system at the 760,000 square-footcorporate headquarters, an extensive wide area network(WAN, see Chapter 8), and a large data center. Some of theEC systems are used enterprise wide (e.g., service desk,ticketing system for consultants attending events, and ser-vice requests made by consultants). Others are functional(e.g., accounting, finance, marketing, and inventory con-trol). The company uses an intranet for internal communi-cations as well as dozens of other EC applications.

In addition to providing better support to consul-tants, the EC initiatives produced other benefits, such asgreater efficiency, reduced costs and downtime, andimproved service. In terms of human resources, it enabledthe company to handle its rapid growth without a substan-tial increase in staffing. The changes also have allowed ECpersonnel to focus on strategic tasks. Mary Kay found thatits engineers and technical people now have time to spendon new innovations.

Sources: Compiled from Rubin (2007), Channel Insider (2008),LGC Wireless (2008), Dubie (2006), and marykay.com (accessedJune 2009).

Questions1. List the drivers of EC at Mary Kay.

2. List the business pressures faced by Mary Kay. Howdid Mary Kay respond to them?

3. What new EC models did Mary Kay implement?

4. What types of EC transactions is Mary Kayinvolved in?

5. What social networking activities is Mary Kayinvolved in?

6. What were the benefits of the new EC initiative toMary Kay and its employees and customers?


Chapter One: Overview of Electronic Commerce W1.3

REFERENCES FOR ONLINE FILE W1.2Channel Insider. “Mary Kay Gets IT Makeover.” April

25, 2008. channelinsider.com/c/a/News/Mary-Kay-Gets-IT-Makeover (accessed March 2009).

Dubie, D. “Mary Kay Makes Over Its WAN.” NetworkWorld, June 1, 2006. networkworld.com/newsletters/accel/2006/0529netop2.html (accessed March 2009).

LGC Wireless. “Mary Kay Puts a New Face onWireless.” LGC Wireless case study, 2008. lgcwireless.org/downloads/Case_Study_Mar y_Kay.pdf(accessed March 2009).

Rubin, C. “More Than Skin Deep.” CommunicationNews, March 2007.


DELL—USING E-COMMERCE FOR SUCCESSThe Problem/OpportunityFounded in 1985 by Michael Dell, Dell Computer Corp.(now known as Dell) was the first company to offerpersonal computers (PCs) via mail order. Dell designed itsown PC system (with an Intel 8088 processor running at8 MHz) and allowed customers to configure their owncustomized systems using the build-to-order concept. Thisconcept was, and is still, Dell’s cornerstone businessmodel. By 1993, Dell had become one of the top fivecomputer makers worldwide, threatening Compaq,which started a price war. At that time, Dell was takingorders by fax and snail mail and losing money. Lossesreached over $100 million by 1994. The company was introuble.

The Solution

Direct Marketing OnlineThe commercialization of the Internet in the early 1990sand the introduction of the World Wide Web in 1993 pro-vided Dell with an opportunity to expand rapidly. Dellimplemented aggressive online order taking and openedsubsidiaries in Europe and Asia. Dell also started to offeradditional products on its Web site. This enabled Dell tobatter Compaq, and in 2000 Dell became number one inworldwide PC shipments. At that time, Internet salestopped $50 million per day (about $18 billion per year).Today, Dell (dell.com) sells about $62 billion a year incomputer-related products online, from network switchesto printers, employing over 88,000 people.

Direct online marketing is Dell’s major electronic com-merce (EC) activity. Dell sells to the following groups:

◗ Individuals for their homes and home offices◗ Small businesses (up to 200 employees)◗ Medium and large businesses (over 200 employees)◗ Government, education, and health care organizations

Sales to the first group are classified as business-to-consumer (B2C). Sales to the other three groups are classi-fied as business-to-business (B2B). Consumers shop atdell.com using an electronic catalog. The sales are com-pleted using mechanisms described in Chapters 2 and 3.

In addition, Dell sells refurbished Dell computers andother products at electronic auctions (dellauction.com).Online auctions are an important sales channel. In 2006,Dell opened physical stores, mainly in reaction to customerdemands.

Business-to-Business EC Most of Dell’s sales are tobusinesses. Whereas B2C sales are facilitated by standardshopping aids (e.g., catalogs, shopping carts, credit cardpayments; see Chapter 2), B2B customers obtain addi-tional help from Dell. Dell provides each of its nearly100,000 business customers with Premier Dell service.

For example, British Airways (BA) considers Dell to bea strategic supplier. Dell provides notebooks and desktopsto 25,000 BA users. Dell offers two e-procurement servicesto BA purchasing agents. The more basic service, PremierDell, allows BA (and other businesses) to browse, buy, andtrack orders on a Dell Web site customized for the user’srequirements. The site enables authorized users to selectpreconfigured PCs for their business unit or department. A more advanced version, Premier B2B, supports e-procurement systems such as those from Ariba. This provides automatic requisition and order fulfillment oncean authorized user has chosen to buy a PC from Dell. BAhas placed the e-procurement tools on its E-Workingintranet. This allows authorized staff to purchase PCsthrough a portal that connects directly to Dell’s systems.

In addition to supporting its business customers withe-procurement tools, Dell also is using EC in its own pro-curement. Dell developed an e-procurement model that itshares with its business partners, such as BA. One aspect



ONLINE FILE W1.3 (continued)

of this model is the use of electronic tendering to conductbids (see Chapter 5). Dell uses electronic tendering whenit buys the components for its products.

In 2000, Dell created a B2B exchange at dell.b2b.com.This venture was a failure, like most other exchanges (seeChapter 5).

E-Collaboration Dell has many business partners withwhom it needs to communicate and collaborate. For exam-ple, Dell uses shippers, such as UPS and FedEx, to deliverits computers to individuals. It also uses third-party logis-tics companies to collect, maintain, and deliver compo-nents from its suppliers, and it has many other partners.Dell is using Web Services, an EC technology, to facilitatecommunication and reduce inventories. Web Services facili-tate B2B integration. Integration efforts began in 2000with other technologies when Dell encouraged its cus-tomers to buy online. The B2B integration offer combinesDell PowerEdge servers based on Intel architecture andwebMethods B2B integration software to link customers’existing ERP (enterprise resource planning) or procurementsystems directly with Dell and other trading partners. Inaddition, Dell can provide e-procurement applications andconsulting services. Dell also educates customers in itstechnologies and offers suggestions on how to use them.This is particularly true for emerging technologies such aswireless.

Finally, Dell has a superb communication system withits over 15,000 service providers around the globe.

E-Customer Service Dell uses a number of different toolsto provide superb customer service around the clock. Toleverage customer relationship management (CRM)—a cus-tomer service approach that is customer centered for last-ing relationships—Dell provides a virtual help desk forself-diagnosis and service as well as direct access to tech-nical support data. In addition, a phone-based help deskis open 24/7. Customers can also arrange for a live chatwith a customer care agent. Product support includes trou-bleshooting, user guides, upgrades, downloads, news andpress releases, FAQs, order status information, a “myaccount” page, a community forum (to exchange ideas,information, and experiences), bulletin boards and othercustomer-to-customer interaction features, training books(at a discount), and much more. Dell also offers educa-tional programs at learndell.com.

Dell keeps a large customer database. Using data min-ing tools, it learns a great deal about its customers andattempts to make them happy. The database is used toimprove marketing as well.

Intrabusiness EC To support its build-to-order capabili-ties, significantly improve its demand-planning and factory

execution accuracy, reduce order-to-delivery time, andenhance customer service, Dell partnered with Accentureto create a new, high-performance supply chain planningsolution. Now in place in Dell’s plants around the world,the program, which paid for itself five times over duringthe first 12 months of operation, enables Dell to adaptmore quickly to rapidly changing technologies and thebusiness environment, maintaining its position as a high-performance business. Dell also has automated its factoryscheduling, demand-planning capabilities, and inventorymanagement using information technology and e-supplychain models.

Affiliate Program Dell provides affiliate partners theopportunity to link from their Web sites to Dell.com. Dellpays 2 to 4 percent on any qualified sale made from click-ing on Dell’s link at the partners’ sites (referring buyers).

The ResultsDell has been one of Fortune’s top five “Most Admired”companies since 1999, and it continuously advances in therankings of the Fortune 500 and the Fortune Global 500.Dell has over 100 country-oriented Web sites, and profitsare nearing $3 billion a year. If you had invested $10,000in Dell’s initial public offering (IPO) in 1987, you would bea millionaire just from that investment.

In 2006, Dell opened physical stores to match itscompetitors and customer demands. (Its major competitoris HP. In 2006, HP regained its “top PC maker” position,leaving Dell in second place and stayed in the lead through2008.) Michael Dell returned to the CEO position in 2006,and a restructuring of the company began shortly there-after. All sales to businesses will be managed centrally,rather than from three regional headquarters around theglobe. The company cut its workforce by 8,000 in 2009.

Still, over 95 percent of its business is online andthrough mail orders. It also launched a blog calledDirect2Dell (en.community.dell.com/blogs/direct2dell). Dellalso is expanding its business not only in the computerindustry but also in consumer electronics. It is clearly anexample of EC success.

Sources: Compiled from National Cristina Foundation (2006),Finkle (2008), dell.com and dellauction.com (accessed February2009).

Questions1. List all the types of EC transactions used by Dell.

2. List the business models used by Dell.

3. List the competitive advantage of Dell over brick-and-mortar competitors.



REFERENCES FOR ONLINE FILE W1.3Finkle, J. “Top Dell Execs Leave as PC Maker

Restructures.” Reuters, December 31, 2008.reuters.com/article/businessNews/idUSWNAB624720081231?feedTy pe=RSS&feedName=businessNews (accessed April 2009).

National Cristina Foundation. “Dell Recycling.”Cristina.org. cristina.org/dell.html (accessed January2009).


BOEING CHANGES THE NATURE OF ITS BUSINESSWITH GLOBAL COLLABORATIONBoeing, the world’s largest aerospace company, has been amajor player in the global economy for almost a century.The company undertook a far-reaching transformation as itused cutting-edge materials and electronics and high-leveltechnology for the design and assembly process of its newpassenger plane—the Boeing 787. The new plane is Boeing’sbid for market leadership in competition with Airbus. Thenew midsize passenger jet will have an outer shell and abouthalf of its parts made of carbon-fiber-reinforced plastic,which makes it lighter and gives it better fuel economy. InSeptember 2008, the company had over 700 firm orders forthe new 787, which seats from 250 to 330 passengers invarying configurations. The list price is about $150 millionper plane.

The previous innovation in aviation manufacturingwas to have global partners work from a common blueprintto produce parts—actually, whole sections of the airplane—that were then physically shipped to a Boeing assemblyplant near Seattle to see if they fit together. Prior to the787, wood mock-ups of planes would be constructed to seeif parts built by partners around the world would really fittogether. When there was no fit, cost in terms of time,money, and delays was extreme.

Boeing’s changes go beyond making planes faster andcheaper. The new business model takes Boeing from amanufacturer to a high-end technology systems integrator.In 2004, Boeing’s IT systems people were consolidatedinto the Boeing Technology Group. Now, parts are designedfrom concept to production concurrently by partners(including companies in Japan, Russia, and Italy) and“assembled” in a computer model maintained by Boeingoutside its corporate firewall. Boeing’s role is one of inte-grator and interface to the airlines, while the partners takeresponsibility for the major pieces, including their design.Boeing still takes the hit if there is no fit and the plane’s

delivery is late, but the actual cost of development andmanufacturing is spread across its network of collabora-tors. At the same time, building such global relationshipsmay help the company sell its planes overseas. The biggestsavings are in the time saved through the online collabo-ration process (from 33 to 50 percent), creating a hugecompetitive advantage.

Collaboration is a necessity for Boeing for several rea-sons. Airplanes are huge and enormously complex. Politically,sales of a “global product” are enhanced when people inother countries are building parts of the airplane. Companiesin these countries may then buy from Boeing. Basic collabo-ration is done through information-flow tools such asMicrosoft SharePoint. Boeing and partners are using DassaultSystèmes 3D and Product Lifecycle Management solutions.

Other IT tools used are a product suite from ExostarLLC, with which Boeing can share two-dimensional draw-ings, conduct forward and reverse auctions (Chapter 2),and respond to RFPs (Chapter 5), and an application calledCATIA. The plane is designed at Global CollaborationEnvironment, a special online site maintained by Boeing.

Three levels of collaboration are facilitatedbetween teams and companies. In the first level—designcollaboration—all parties involved log in and make theirchanges electronically in the blueprints, and the teamworks together. Quality is improved because the computerfinds the mistakes. The next level involves suppliersworking with their supply chains. The third level is real-time collaboration that involves a considerable amount ofproduct life-cycle management across multiple countriesenabled by technology that differentiates Boeing’s newmodel from the previous kinds of global relationships.Boeing also uses the new partnership to solicit ideas forhow to improve designs, integration, and so on. Thisresults in cost cutting.




Boeing maintains 10 multimedia rooms at its Everett,Washington, complex for the use of collaboration teams.These are open 365 days a year, 24 hours a day. A visual-ization application developed by Boeing allows the teamsto do real-time design reviews of complex geometry with-out any lag time as the models load. Meetings are con-ducted in English, with sidebar conversations, as needed,in a team member’s native language. Collaborative designalso speeds the design process, helping Boeing to avoidexpensive penalties from its customers if the plane is notdelivered on time, and it gives the company more flexibilityin simultaneously designing multiple versions of the 787that are part of its wide-ranging appeal in the marketplace.

Finished designs are stored in another Dassault prod-uct, Enovia, which is also maintained by Boeing. The stor-age has become an enormous data-management task. Theissue of security has also been a concern; however,

security technology has developed to the point that thesecurity of the information is assured.

All of this has helped Boeing accelerate the designprocess, overcome some unforeseen problems, and deliverthe planes in fall 2008.

Sources: Compiled from Cone (2006), Workforce-Performance (2006),Berstein (2006), and boeing.com (accessed January 2009).

Questions1. Describe online collaboration and its benefits to

Boeing.

2. List the levels of collaboration and the partiesinvolved.

3. How does technology facilitate collaboration?

REFERENCES FOR ONLINE FILE W1.4Berstein, M. “Boeing Shrinks Supply Chain to

Facilitate Risk Sharing.” World Trade, April 1,2006.

Cone, E. “Flying in Formation.” CIO Insight, March2006.

Workforce-Performance. “Boeing 787 Global Design TeamBenefits from Collaboration Solution IncorporatingSimulation,” Tech Horizon, May 22, 2006. techlearnnewsline.com/News/05-22-06a.html (accessed January2009).


CAMPUSFOOD.COM—STUDENT ENTREPRENEURSCampusfood.com’s recipe for success was a simple one:Provide interactive menus to college students, using thepower of the Internet to replace and/or facilitate the tra-ditional telephone ordering of meals. Launched at theUniversity of Pennsylvania (Penn), the company takesthousands of orders each month for local restaurants—bringing pizzas, hoagies, and wings to the Penn commu-nity and to dozens of other universities.

Founder Michael Saunders began developing the site(campusfood.com) in 1997 while he was a junior at Penn.With the help of some classmates, Saunders launched thesite in 1998. After graduation, he began building the

company’s customer base. This involved expanding toother universities, attracting students, and generating alist of restaurants from which students could order food fordelivery. Currently, some of these activities are outsourcedto a marketing firm, which enabled the site to add dozensof schools nationwide. In 2004, the company served 200schools linked to over 1,000 restaurants.

Financed through private investors, friends, and fam-ily members, the site was built on an investment of lessthan $1 million. (For comparison, another company withservices also reaching the college-student market invested$100 million.) Campusfood.com’s revenue is generated


The following are representative characteristics:

◗ User-created content (self publishing).◗ The ability to tap into the collective intelligence of users. The more users contribute, the more popular and valuable a Web

2.0 site becomes.◗ Unique communication and collaborative environment.◗ Making data available in new or never-intended ways. Web 2.0 data can be remixed or “mashed up,” often through Web

Services interfaces, much the way a dance-club DJ mixes music.◗ The presence of lightweight programming techniques and tools lets nearly anyone act as a developer (e.g., wikis, blogs,

RSS, and podcasting).

Online File W1.6 Major Characteristics of Web 2.0



through transaction fees—the site takes a 5 percent com-mission on each order from the sellers (the restaurants).

When you visit Campusfood.com, you can:

◗ Navigate through a list of local restaurants, their hoursof operation, addresses, phone numbers, and otherinformation.

◗ Browse an interactive menu. The company takes a restau-rant’s standard print menu and converts it to an elec-tronic menu that lists every topping, every special, andevery drink offered, along with the latest prices.

◗ Bypass “busy” telephone signals to place an order online,and in so doing, avoid miscommunications.

◗ Get access to special foods, promotions, and restaurantgiveaways. The company is working to set up meal dealsthat are available online exclusively for Campusfood.comcustomers.

◗ Arrange for electronic payment of an order.

University students who signed up at Titan Poker witha special bonus code provided by Campusfood.com wereeligible to play in a series of exclusive online poker tour-naments (in April 2006). Winners received specialCampusfood Cash coupons valued at $20,000, redeemablefor food orders at participating restaurants.

Questions1. Classify this application by EC transaction type.

2. Explain the benefits of Campusfood.com for its stu-dent customers and for the restaurants it represents.

3. Trace the flow of digitized information in this venture.

4. How does the outsourcing of the marketing activi-ties contribute to the business?

5. What is the benefit of the Titan Poker contest to thecompany?

REFERENCES FOR ONLINE FILE W1.5Campusfood.com. campusfood.com (accessed November

2009).eMediaWire. “Titan Poker Teams Up With Campusfood

for Tournaments Aimed at College Students.”

February 16, 2006. emediawire.com/releases/2006/2/emw346598.htm (accessed February 2009).

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◗ The virtual elimination of software-upgrade cycles makes everything a perpetual beta or work in progress, and allows rapidprototyping using the Web as a platform.

◗ Unique sharing of content or all media.◗ Networks as platforms, delivering and allowing users to use applications entirely through a browser.◗ Open source architecture, which makes connectivity to computing resources simple.◗ Users own the data on the site and exercise control over that data.◗ An architecture of participation and digital democracy encourages users to add value to the application as they use it.◗ New business models are created.◗ A major emphasis on social networks.◗ A rich interactive, user-friendly interface based on Ajax or similar frameworks. Ajax (Asynchronous JavaScript and XML) is

a Web development technique for creating interactive Web applications.◗ More productive organization communication due to improved search, links, user authority, etc.◗ Global spread of innovation. As soon as a successful idea is deployed as a Web site in one country, similar sites appear

around the globe.

Online File W1.6 (continued)

Radio frequency identification (RFID) is a technology that uses electronic tags (or transponders), instead of bar codes, toautomatically identify objects or items. The tags can be attached or embedded in objects, animals, or humans. RFID read-ers use radio waves to interact with the tags. The radio waves enable the unique identification and location of the objects,transmission of data, and/or storage of information about the object. Some tags can be read from several meters away andbeyond the line of sight of the reader.

An RFID system consists of (1) an RFID tag that includes an antenna and a chip with information about the item and(2) an RFID reader that contains a radio transmitter and receiver. An RFID tag remains inactive until radio frequencyenergy from the radio transmitter (on the tag) hits its antenna, giving the chip enough power to emit a 96-bit string ofinformation, which is read by the radio receiver. This is three times the amount of information a bar code can hold, andthe tag can be read through cardboard, wood, and plastic at a range of up to 30 feet. The reader then passes the informa-tion, wirelessly or through a docking station, to a computer for processing (see Exhibit W1.7.1).

RFID ApplicationsThe number of applications for RFID is rapidly increasing. RFID technology is already being used for a variety of purposes:

◗ Track moving vehicles. The E-Z Pass (ezpass.com) prepay toll system uses RFID, as does Singapore’s Electronic RoadPricing system, which charges different prices to drive on different roads at different times.

◗ Track people. In some Japanese schools, tags in backpacks or clothes track students’ entry and departure from schoolbuildings. In Denmark, the LEGOLAND amusement park offers parents a child-tracking system that combines RFID and Wi-Fi. As of 2006, all new U.S. passports contain an RFID tag that can be scanned on entry and departure from the UnitedStates.

◗ Track individual items. The Vatican Library is tagging over 2 million items in its collection. Retail giant Marks & Spenceris using antitheft tags on clothes and is tagging employee ID cards to control entrance into secure areas. The

Online File W1.7 What Is a Radio Frequency Identification (RFID) System?

(continued)



Jacksonville, Florida, airport has a pilot test for RFID tracking of luggage. The U.S. army is tracking inventory, includingweapons, with RFID tags. The Star City Casino in Sydney, Australia, is using RFID to keep track of 80,000 costumes anduniforms.

◗ Protect secure areas. FedEx uses RFID-tagged wristbands to give drivers access to their vehicles, reducing theft andspeeding delivery time. The New York Police Department uses RFID tags embedded in ID tags to track visitors.

◗ Record transactions. Exxon Mobil Corp.’s Speedpass cards and key rings allow customers to speed through checkout lines.At the Baja Beach Club in Barcelona, Spain, an RFID chip embedded just under a guest’s skin is used to pay for purchases,including drinks at the pool.

Most RFID tags contain at least two parts. One is an integrated circuit for storing and processing information, modu-lating and demodulating a (RF) signal, and other specialized functions. The second is an antenna for receiving and trans-mitting the signal.

Tags can be active or passive. Active tags have their own internal power supply; passive ones do not have it. Passivetags collect power from the incoming signal. Active tags are more reliable due to having their own power supply, and theyhave a larger memory range (500 feet to 1,500 feet). For details see en.wikipedia.org/wiki/Rfid.

The major capabilities of RFID are:

◗ Quick tracking of where items are (their location) in real time◗ Finding extensive information about the items◗ Enabling quick inventory taking of items


Business Rules

Host Processor Control

RFID Tag(Transponder)

WirelessTransmission RFID ReaderAntenna

EXHIBIT W1.7.1 How Does RFID Work?

Source: Drawn by E. Turban.

(continued)



In contrast with a bar code, the information can be read from a much greater distance (about 30 feet or 10 meters withpassive tags; 500 feet to 1,500 feet with active tags) and no line of sight is required. The technology is in extensive usein transportation, hospitals, libraries, and the like (see en.wikipedia.org/wiki/Rfid). Its most promising use is in enterprisesupply chain management to improve the efficiency of inventory tracking (see Online Appendix A).

These capabilities result in the following benefits:

Benefits for ManufacturersRFID solutions provide the real-time information that’s necessary to improve operating efficiencies in a number of indus-trial applications. By automatically detecting product movements throughout the manufacturing process, RFID providesreal-time inventory visibility while minimizing the need for human intervention.

With RFID, it is possible for manufacturers to:

◗ Increase speed and efficiency, with fewer errors throughout the entire assembly process.◗ Take inventory and perform picking operations to update inventory levels in real time.◗ Improve efficiencies for work-in-process (WIP) reporting.◗ Improve inventory visibility to production employees who use just-in-time (JIT) systems.◗ Reduce stock levels, resulting from improved inventory management.◗ Automate reporting of all material moves both inbound/outbound and within your facility.

Benefits for RetailersRFID technology empowers retailers to increase inventory visibility, reduce labor costs, and improve profitability by deliv-ering the benefits of enterprise mobility to a variety of applications:

◗ Read/write RFID tags automatically at shipping and receiving doors to expedite loading and unloading processes.◗ Improve customer satisfaction by ensuring that products are stocked and available.◗ Reduce shrinkage, fraud, and spoilage.◗ Increase in-stock merchandise for higher sales volumes and increased profits.◗ Reduce human intervention and decrease labor costs.◗ Dramatically improve overall warehousing efficiencies.

Benefits for Transportation CompaniesRFID solutions can provide fast, accurate information to improve operational efficiencies in a variety of transportationapplications. By automatically tracking assets throughout the course of transit, RFID transforms the tracking process andyields unsurpassed asset management and visibility. RFID can:

◗ Enhance passenger and employee safety by virtually eliminating security risks.◗ Improve the efficiency of baggage-handling processes to reduce loss and theft, and increase customer satisfaction.◗ Streamline cargo processes and reduce labor costs.◗ Control cost by improving all facets of inventory tracking and management.

Benefits for Federal Government and Defense AgenciesRFID technology provides the solutions that government agencies need to improve security and inventory visibilitythroughout the world. With RFID, government and defense agencies can:

◗ Locate and track military personnel instantaneously.◗ Increase the speed and accuracy of deliveries by allowing items to be inventoried at the container level.◗ Augment available staff power by automating functions previously executed manually.◗ Access real-time inventory to improve visibility and reduce shrinkage.


(continued)



REFERENCES FOR ONLINE FILE W1.7Heinrich, C. RFID and Beyond. Indianapolis, IN:

Wiley, 2005.O’Connor, M. C. “Philly Cabs Taking RFID Payments

on the Road.” RFID Journal, November 29, 2006.

rfidjournal.com/article/articleprint/2852/-1/1(accessed February 2009).

ExamplesRFID implementation is slow due to privacy and security concerns, especially when it involves consumers. On the otherhand, an increasing number of companies use the technology internally frequently in combination with other IT systems,as is done by Nokia.

RFID at NokiaSecurity guards employed at Nokia carry mobile phone handsets with an attached RFID tag and RFID reader. RFID tags arealso installed at various points around the facility. At the start of a shift, guards use the phones to read their RFID-enabled name badges. Then, security guards do their rounds, opening the handsets to read the various tags as they passby them. Details of the phone number and RFID tag just read are transmitted over the cell phone network. Supervisors arethus given accurate information as to when a particular guard started and finished a shift, whether the guard patrolled allthe required locations, and where the guard was at a particular point in time. In addition, supervisors can use the text andphone function to ask guards to recheck an area, vary their route, and the like.

RFID at Harmon HospitalKeeping track of relatively small, movable assets (such as wheelchairs, pulse oximeters, and other medical devices) in hos-pitals can be time-consuming and difficult. Equipment may be stored in cupboards, moved to other wards and notreturned, or sent home with patients and not returned. Studies also suggest that when hospital staff are unable to find theequipment they need, rather than instigating a full-scale search, they tend to place an order for more equipment. Thus,hospitals incur significant costs in both searching for equipment and in ordering equipment that is not actually necessary.Harmon Hospital in Las Vegas is addressing these concerns by attaching active RFID tags to various medical devices andinstalling RFID readers at various points throughout the hospital. This enables staff to locate any required item of equip-ment, with the system providing a text-based report or a map of the hospital indicating the location of the desired pieceof equipment. Many other organizations in a variety of industries experience similar problems as those at Harmon Hospital.

RFID in Philadelphia CabsTaxicabs in Philadelphia, Pennsylvania, are equipped to accept payments using RFID technologies. Passengers can use RFID-enabled credit cards, such as PayPass from MasterCard or similar cards from Visa or American Express, to pay their cab fares. Aterminal is located behind the front seat, facing the passenger. To activate the system, passengers wave their RFID-enabledcards near the reader. The driver can then complete the transaction using either credit or debit facilities. Payments are processedby sending payment information over wireless networks. Such technologies are reducing the time taken to complete a transac-tion. This system also can be used by the cab driver for routing and navigational information, for work scheduling (signing onand off a shift), for keeping logs of trips, and for tracking items mistakenly left by passengers in the cab (O’Connor 2006).

RFID Use by CHEPThe Asia Pacific Division of CHEP (famous for its pallets and reusable containers, based in Florida) has developed aninnovative use of RFID for the automotive industry in Australia. CHEP manufactures and then rents reusable, custom-made,plastic stacking crates for transporting parts and components along the automotive supply chain. In addition to the tradi-tional text tags and bar-coded labels, CHEP has now added RFID tags to the outside of these crates. CHEP is able to easilydetermine which customer has which crate, while it gives the automotive companies much more precise insights into thelocation of parts both within their manufacturing environment and along their extended supply chains.

Some good sources for information on RFID are aimglobal.org/technologies/RFID, rfidjournal.com, andceng.usc.edu/~anrg/SensorNetBib.html.




Pearson Education, Inc., the publisher of this book, in collaboration with O’Reilly & Associates, offers professors reason-ably priced, customized textbooks for their classes by compiling material from thousands of Pearson’s publications and theinstructors’ own materials. The customized books are either electronic (Chapter 6) or more expensive hard copies.

In Japan, a person can wave a Casio watch over a scanner to purchase products from a vending machine, pay for foodin a cafeteria, or pay for gasoline.

More than 60 percent of all airline tickets sold in the United States are electronic tickets. It costs more to purchase aticket from a local travel agent or by phone directly from the airline. In large airports, travelers can get their boardingpasses from a machine. Most airlines allow travelers to print their boarding passes at home.

In January 2004, NASA’s Web site received more than 6.5 billion hits in a few days—the biggest Internet governmentevent to date—because people were interested in viewing the Mars Exploration Rover’s landing on Mars.

Several banks in Japan issue smart cards that can be used only by their owners. When using the cards, the palm veinof the owner’s hand is compared with a prestored template of the vein stored on the smart card. When the owner insertsthe card into ATM or vendors’ card readers that are equipped with the system, it will dispense the card owner’s money. Thepolice are alerted if anyone other than the card’s owner tries to use it.

Jacobi Medical Center in New York tracks the whereabouts of patients in the hospital. Each patient has an RFID in aplastic band strapped to the wrist. Each time a patient passes an RFID reader, the patient’s location is transmitted in realtime to the responsible staff member. The RFID is linked to the hospital’s computer network, connecting the patient’srecords to labs, billing, and the pharmacy.

Online File W1.8 Examples of Innovative EC Applications

Obama’s campaign team was everywhere on the Internet: MySpace, YouTube, Flickr, Facebook, and Twitter. Atmy.barackobama.com (MyBO) 1.5 million volunteers were registered, who in turn mobilized supporters and organized com-munities. Through the site, the campaign was able to train a large number of volunteers, arm them with up-to-date tar-geted information, and provide field-workers with names, contact coordinates, and voting histories. They started withvoter registration and then turned their efforts to a get-out-the-vote campaign. MyBO redirected the energy of social net-workers to specific, campaign-oriented tasks. The site raised $600 million from just 3 million people.

The campaign also built a consensual database of 3 million mobile numbers by promising (and keeping the promise)to get campaign news to the supporters before the news media. Obama’s e-mail list contained about 13 million addresses.Over the course of the campaign, aides sent more than 7,000 different messages, many of them targeted to specific donation-level participants. On average, supporters received 5 to 20 text messages per month, depending on where they lived andwhat kind of messages they opted to receive.

Because social media is such a direct engagement and communication between friends, contacts, and families, ideas,opinions, and information are shared and become part of a close, trusted network. So, social networking brought Obamainto the homes and hearts of millions who felt they knew him because they spent so much time with him.

Obama’s campaign integrated online marketing methods with a viral campaign using word-of-mouth advertising andmarketing techniques to create a real buzz about him. One instance of the marketing campaign was a viral video onYouTube that raised $300,000 in a week. The word-of-mouth advertising helped him raise enormous amounts of money andbuild his brand.

Online File W1.9 How Obama Used EC to Win

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Obama on MySpaceThe official profile page for Barack Obama included a blog, blurbs, news clips, videos, and comments from his MySpacefriends. In January 2008, MySpace users selected Obama as the presidential winner taking 46 percent of the vote.

Obama on YouTubeBarack Obama speeches, events, and TV ads are still available at the official Obama-Biden Campaign YouTube channel.Obama campaign-related videos got 14.5 million hours of viewing time on YouTube. This time would have cost $47 millionto buy on television. Obama’s 38-minute speech on race had more than 2 million views on YouTube in just two days afterposting. In November of 2008, President Obama chose YouTube as the media stream for his “Saturday Fireside Chats” inboth video and audio forms.

Obama on FlickrOn Flickr, photos of the president were organized by set and tags, including archives, favorites, and his profile. The cam-paign posted intimate photographs from a Chicago hotel room showing the minutes before Obama became president-elect.

Obama on FacebookObama supporters on Facebook found it impossible to be on the site at any given time and not see an Obama ad drivingthem to BarackObama.com. His Facebook friend count was over 3.1 million. Facebook cofounder Chris Hughes quit thecompany in early 2007 to help run the Obama campaign’s Web operations.

Obama on TwitterOn Twitter the campaign used an automated script that let users know that the Obama folks were following them. Thissent the message they wanted to communicate, and they wanted to hear from the user. This built a sense of community.Obama’s posts were filled with words like encourage and friends, and every post was a clear call to action.

In conclusion, the Obama campaign did not invent anything completely new. Instead, by using social networkingapplications, they created a powerful way to raise money, organize locally, fight smear campaigns, and get out the votethat helped them bring down Hillary Clinton first, and then the Republicans in 2008.


REFERENCES FOR ONLINE FILE W1.9Carr, D. “How Obama Tapped into Social Networks’

Power.” New York Times, November 9, 2008.Cone, E. “All Politicking Is Local: How the Obama

Campaign Is Using Technology to Change Electionson the Ground.” CIO Insight, September 29, 2008.blogs.cioinsight.com/knowitall/content001/all_politicking_is_local_how_the_obama_campaign_is_using_technology_to_change_elections_on_the_ground.html (accessed March 2009).

Cone, E. “Connecting the Campaign: How theDemocrats Built Their Network.” CIO Insight,September 29, 2008. blogs.cioinsight.com/k n o w i t a l l / c o n t e n t 0 0 1 / c o n n e c t i n g _ t h e _compaign_how_the_democrats_built_their_network.html (accessed March 2009).

Cone, E. “Local Area Networks: How the ObamaCampaign Works on the Ground.” CIO Insight,September 29, 2008. blogs.cioinsight.com/knowitall/content001/local_area_networks_how_the_obama_campaign_works_on_the_ground.html(accessed March 2009).

The Guardian. “Barack Obama’s Flickr Page ShowsFamily as Their Lives Changed Forever.” November7, 2008. guardian.co.uk/world/deadlineusa/2008/nov/07/barackobama-uselections2008 (accessedMarch 2009).

Kiss, J. “Why Everyone’s a Winner.” The Guardian,November 10, 2008. guardian.co.uk/media/2008/nov/10/obama-online-strategy (accessed March2009).



REFERENCES FOR ONLINE FILE W1.9 (continued)Learmonth, M. “How Barack Obama Won Facebook.”

BusinessInsider.com, July 7, 2008. businessinsider.com/2008/7/how-barack-obama-won-facebook(accessed March 2009).

McCarthy, C. “Surprise! Barack Obama, Ron Paul WinMySpace ‘Primaries.’” CNET.com, January 3, 2008.news.cnet.com/8301-13577_3-9839328-36.html(accessed March 2009).

McKeever, C. “Obama and Hillary Use Twitter for SocialNetworking.” OpenSourceMarketer.com, February 27,2008. opensourcemarketer.com/marketing-tools/

obama-and-hillary-use-twitter-for-social-networking(accessed March 2009).

Needle, D. “Huffington: ‘Obama Not Elected WithoutInternet.’” InternetNews.com, November 7, 2008.internetnews.com/webcontent/article.php/3783741(accessed March 2009).

Tumulty, K. “Obama’s Viral Marketing Campaign.”Time.com, July 5, 2007. time.com/time/magazine/article/0,9171,1640402,00.html (accessed March2009).

Strategic Systems. Strategic systems provide organizations with strategic advantages, enabling them to increase their mar-ket share, better negotiate with their suppliers, or prevent competitors from entering into their territory. There are a vari-ety of EC-supported strategic systems. One example is FedEx’s tracking system, which allows FedEx to identify the status ofevery individual package, anywhere in the system. Most of FedEx’s competitors have already copied the FedEx system. Inresponse, FedEx has been forced to continuously introduce EC innovations, but so are its competitors, especially UPS.

Agile Systems. Agile organizations have the ability to consistently improve productivity—especially during periods ofchange. To create business agility, organizations use IT in general and EC in particular. The solution provided by EC enablescapitalizing on changing industry, government, and business requirements; assimilating required resources and businessprocesses quickly to meet demand; promptly adapting technology to fit new or modified business processes; leveragingexisting resources to do the above; and doing it all economically.

Continuous Improvement Efforts and Business Process Restructuring and Management. Many companies continuouslyconduct programs to improve their productivity, quality, and customer service. Two examples of how EC can help companiesare Dell and Intel. Dell takes its orders electronically and immediately moves them via enterprise resource planning (ERP)software (see Online Tutorial T1) into the just-in-time assembly operation. Using an almost real-time extranet-based moni-toring system, Intel tracks the consumption of its products by a dozen of its largest customers in order to plan productionschedules and deliveries.

However, continuous improvement programs may not be a sufficient solution for some business problems. Strong busi-ness pressures may require a radical structural change. Such an effort is referred to as business process restructuring orreengineering (BPR). E-commerce is frequently interrelated with process restructuring that may be needed for implementa-tion of EC initiatives such as e-procurement.

Customer and Partner Relationship Management. One of the major symptoms of the digital revolution is that the bar-gaining power of customers is stronger than ever, and that power is growing. The availability of information and the abil-ity to make quick comparisons online (e.g., google.com/products) increases this trend. Customers are called “kings” and“queens,” and organizations must make their customers happy in order to keep them. This may be accomplished throughcustomer relationship management (CRM).

EC is not just about buying and selling. Supporting CRM, as we will see throughout the book, is a major function ofEC. Such support is done by multiple technologies, ranging from computerized call centers to intelligent agents. Some ofthe e-CRM topics highlighted in this book are sales force automation, call center tools and operations, personalization,empowerment of customers and frontline employees, support of mobile employees, and partner relationship management.

Online File W1.10 Response Activities by Organizations

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Business Alliances. Many companies realize that alliances with other companies, even competitors, can be beneficial. Forexample, General Motors, Ford, and others in the automotive industry created a huge B2B e-marketplace called Covisint(see Chapter 5). Other types of business alliances include resource-sharing partnerships, permanent supplier–company rela-tionships, and joint design and research efforts.

Electronic Markets. Electronic markets, private or public, can optimize trading efficiency, enabling their members to com-pete globally. Most electronic markets require the collaboration of different companies, sometimes even competitors, asyou will see in Chapters 5 and 6.

Reductions in Cycle Time and Time to Market. Cycle time reduction—shortening the time it takes for a business to com-plete a productive activity from its beginning to end—is extremely important for increasing productivity and competitive-ness. Similarly, reducing the time from the inception of an idea to its implementation (time to market) is important,because those who are first on the market with a product or who can provide customers with a service faster than theircompetitors enjoy a distinct competitive advantage. Extranet-based applications can expedite the various steps in theprocess of product or service development, testing, and implementation.

Empowerment of Employees. Giving employees the authority to act and make decisions on their own is a strategy usedby many organizations as part of productivity improvement programs. Management delegates authority to individuals orteams who can then execute the work faster and with fewer delays. Empowerment of employees may also be part of e-CRM.Empowered salespeople and customer service employees are given the authority to make customers happy and do itquickly, helping to increase customer loyalty. EC allows the decentralization of decision making and authority via empowerment and distributed systems, but simultaneously supports a centralized control. Empowerment can also beachieved by using automated decision systems.

Supply Chain Improvements. EC, as is shown throughout the book, and especially in Chapter 5 and Online Appendix A,can help reduce supply chain delays, reduce inventories, and eliminate other inefficiencies. The use of e-supply chain mod-els to automate factory scheduling, which reduces response time and inventory management, can be seen in companiessuch as Dell and Toyota.

Mass Customization: Made to Order in Large Quantities. Today’s customers demand customized products and services;the business problem is how to provide customization and do it efficiently. This can be done, in part, by changing manu-facturing processes from mass production to mass customization (Anderson 2002). In mass production, a company pro-duces a large quantity of identical items. In mass customization, items are produced in a large quantity but are customizedto fit the desires of each customer. EC is an ideal facilitator of mass customization, for example, by enabling interactivecommunication between buyers and designers so customers can quickly and correctly configure the products they want.Also, orders placed online can reach production facilities in minutes. Note that mass customization is not easy to achieve;however, EC can help. Mass customization requires a build-to-order process (see Online File W1.15).

Intrabusiness: From Sales Force Automation to Inventory Control. One area where EC has made major progress in sup-porting organizational responses is applications inside the business. The support can be provided to field representatives,warehouse employees, designers, researchers, and office workers. The improvements in productivity for these kinds ofemployees were fairly slow until the introduction of EC.

Knowledge Management. Knowledge management (KM) refers to the process of creating or capturing knowledge, storingand protecting it, updating and maintaining it, and using it whenever necessary. Knowledge management programs andsoftware are frequently associated with EC. For example, knowledge is delivered via corporate portals to assist users or toteach employees. Also, EC implementation requires knowledge, and EC activities such as market research create knowledge.For more on the EC–KM connection, see Chapter 6.

Questions1. List the major business pressures faced by organizations today.

2. List the major organizational responses to business pressures.

3. Describe how EC supports organizational responses to business pressures.

4. Describe an agile organization.




REFERENCE FOR ONLINE FILE W1.10Anderson, D. Build-to-Order and Mass Customization:

The Ultimate Supply Chain Management and LeanManufacturing Strategy for Low-Cost On-Demand

Production Without Forecasts or Inventory. LosAngeles: CIM Press, 2004.

1. Name your own price. Pioneered by Priceline.com, the name-your-own-price model allows buyers to set the price theyare willing to pay for a specific product or service. Priceline.com will try to match a customer’s request with a supplierwilling to sell the product or service at that price. This model is also known as a demand-collection model.

2. Find the best price. According to this model, also known as a search engine model, a customer specifies a need andthen an intermediate company, such as Hotwire.com, matches the customer’s need against a database, locates the low-est price, and submits it to the consumer. The potential buyer then has 30 to 60 minutes to accept or reject the offer. Avariation of this model is available for purchasing insurance: A consumer can submit a request for insurance toInsweb.com and receive several quotes. Many companies employ similar models to show price comparisons and find thelowest price. For example, consumers can go to eloan.com to find the best interest rate for auto or home loans. A well-known company in this area is Shopping.com.

3. Affiliate marketing. Affiliate marketing is an arrangement whereby a marketing partner (a business, an organization,or even an individual) refers consumers to a selling company’s Web site. The referral is done by placing a banner ad orthe logo of the selling company on the affiliated company’s Web site. Whenever a customer who was referred to the sell-ing company’s Web site makes a purchase there, the affiliated partner receives a commission (which may range from 3to 15 percent) of the purchase price. In other words, by using affiliate marketing, a selling company creates a virtualcommissioned sales force. Pioneered by CDNow, the concept is now employed by thousands of retailers and manufactur-ers. For example, Amazon.com has over 1 million affiliates, and even tiny Cattoys.com offers individuals and organiza-tions the opportunity to put its logo and link on their Web sites to generate commissions.

4. Group purchasing. In the offline world of commerce, discounts are usually available for purchasing large quantities. So,too, EC has spawned the concept of demand aggregation, wherein a third party finds individuals or small-to-mediumenterprises (SMEs), aggregates their small orders to attain a large quantity, and then negotiates (or solicits a tenderoffer) for the best deal. Thus, using the concept of group purchasing, a small business, or even an individual, can get adiscount. This model is also known as the volume-buying model. One leading aggregator is Letsbuyit.com. Online pur-chasing groups are also called e-co-ops.

5. Online auctions. Almost everyone has heard of eBay, the world’s largest online auction site. Several hundred other com-panies, including Amazon.com and Yahoo!, also conduct online auctions. In the most popular type of auction, onlineshoppers make consecutive bids for various goods and services, and the highest bidders get the items auctioned. E-auctions come in different shapes and use different models. For example, eBay is using about 40,000 “assistants” in amodel where the assistants perform the order fulfillment function.

6. Product and service customization. With customization, a product or service is created according to the buyer’s spec-ifications. Customization is not a new model, but what is new is the ability to quickly configure customized productsonline for consumers at costs not much higher than their noncustomized counterparts. Dell is a good example of a com-pany that customizes PCs for its customers.

7. Information brokers (infomediaries). Information brokers provide privacy, trust, matching, search, content, and otherservices (e.g., Bizrate.com, google.com/products).

8. Bartering. Companies use bartering (see Chapter 2) to exchange surpluses they do not need for things that they doneed. A market maker (e.g., web-barter.com or tradeaway.com) arranges such exchanges.

9. Deep discounting. Companies such as Half.com offer products and services at deep discounts, as much as 50 percent offthe retail price (see Chapter 3).

Online File W1.11 Representative EC Business Models

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10. Membership. A popular offline model, in which only members get a discount, also is being offered online (e.g.,netmarket.com and nytimes.com).

11. Value-chain integrators. This model offers services that aggregate information-rich products into a more complete pack-age for customers, thus adding value. For example, Carpoint.com provides several car buying–related services, such asfinancing and insurance.

12. Value-chain service providers. These providers specialize in a supply chain function such as logistics (ups.com) or pay-ments (PayPal at paypal.com).

13. Supply chain improvers. One of the major contributions of EC is in the creation of new models that change or improvesupply chain management, as shown in Online File W1.3 about Dell. Most interesting is the conversion of a linear sup-ply chain, which can be slow, expensive, and error prone, into a hub.

14. Negotiation. The Internet offers negotiation capabilities between individuals (e.g., ioffer.com) or between companies.Negotiation can also be facilitated by intelligent agents.


The following are representative sources of information on EC:

Vendors, News, EC Statistics, and Morewikipedia.org/wiki/e-commerce

cio.com/topic/5693/E_Business

searchcio.techtarget.com

electronicmarkets.org

ecommercetimes.com

ecommerce-guide.com

forrester.com

whitepapers.com

goecart.com/support/ecommerce-articles.aspx

ConferencesMany conferences are dedicated to e-commerce. Well-known conferences are:

The Annual Bled Conference (bledconference.org)

The Annual Conference of ICEC (seeicec.net)

The Congress on the Management of E-Business (eworldcongress.smu.ca)

Other SourcesMany other sources are provided within the chapters and in the chapters’ Online Files.

Online File W1.12 Basic Resources for E-Commerce

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JournalsInternational Journal of Electronic Commerce (gvsu.edu/ssb/ijec)

Journal of Organizational Computing and Electronic Commerce (informaworld.com/smpp/title&sim;content=t775653688&sim;db=all)

Electronic Markets Journal (electronicmarkets.org)

Journal of Electronic Commerce Research (csulb.edu/journals/jecr)

Journal of Electronic Commerce in Organization (ISSN: 1539-2937)

International Journal of Web Services Research (ISSN: 15398-3062)

International Journal of E-Business Research (ISSN: 1548-1131)

International Journal of Electronic Government Research (ISSN: 1548-3886)

Journal of Cases on Electronic Commerce (ISSN: 1548-0623)


Online File W1.13 Competition in the Digital Economy and Its Impact on Industries

Competition in the Digital EconomyThe mechanisms described in the previous sections help in creating EC applications that in turn impact our economy andorganizations. One of the major economic impacts of EC is its contribution to competitive advantage.

Competition in the Internet EcosystemThe Internet economy has low barriers to entry, and so e-business is expanding rapidly. As the Internet ecosystem evolvesboth technologically and in population, it will be even easier and likelier for countries, companies, and individuals to par-ticipate in it. Already, a $1.5 trillion technical infrastructure is in place, ready and available for anyone to use at anytime—free of charge. New ideas and ways of doing things can come from anywhere at any time in the Internet economy.Therefore, some of the old rules of competition no longer apply.

Competitiveness FactorsEC competition is very intense because online transactions enable the following:

◗ Lower search costs for buyers. E-markets reduce the cost of searching for product information (e.g., sellers, models,prices), frequently close to zero. This can significantly impact competition, enabling customers to find less expen-sive (or better) products and forcing sellers, in turn, to reduce prices and/or improve customer service. Sellers whoprovide information to buyers can exploit the Internet to gain a considerably larger market share. For example, com-panies including Walmart and Walgreens developed intelligent search tools that increased their online sales on theirsites by 25 to 50 percent.

◗ Speedy comparisons. Not only can customers find inexpensive products online, but they also can find them quickly.For example, a customer does not have to go to several bookstores to find the best price for a particular book. Usingshopping search engines such as allbookstores.com or shopping.com for consumer products, customers can find whatthey want and compare prices. Companies that sell online at competitive prices and provide that information tosearch engines will gain a competitive advantage.




(continued)

◗ Lower prices. Buy.com, Half.com, and other companies can offer low prices due to their low costs of operation (nophysical facilities, minimum inventories, and so forth). If volume is large enough, prices can be reduced by 40 per-cent or more (see the case of Blue Nile in Online File W1.14).

◗ Customer service. Amazon.com and Dell, for example, provide superior customer service. As will be shown in Chapter 3,such service is an extremely important competitive factor.

◗ Barriers to entry are reduced. Setting up a Web site is relatively easy, fast, and inexpensive, and doing so reducesthe need for a sales force and brick-and-mortar stores. Therefore, it is easy to start an online business. However,companies must view this as both a threat (e.g., Where will our next competitor come from?) and an opportunity(e.g., Can we use our core competencies in new areas of business?).

◗ Virtual partnerships multiply. With easy access to the Web and the ability to share production and sales informa-tion easily, the ability of a firm to create a virtual partnership to exploit an EC opportunity increases dramatically(recall the Boeing case in Online File W1.4).

◗ Market niches abound. The market-niche strategy is as old as the study of competitive advantage. What haschanged is that without the limits imposed by physical storefronts, the number of business opportunities is aslarge as the Web. The challenge strategists face is to discover and reap the benefits from profitable niches beforethe competition does so.

◗ Differentiation. Differentiation involves providing a product or service that is not avail-able elsewhere. For example, Amazon.com differentiates itself from other book retailers byproviding customers with information that is not available in a physical bookstore, such ascommunication with authors, almost real-time book reviews, and book recommendations.An example of customization of wedding rings is provided in Online File W1.14.

In addition, EC provides for personalization or customization and personalization of products and services (see OnlineFile W1.15).

Impact on CompetitionSeveral competitive factors have become less important as a result of EC. For example, the size of a company may nolonger be a significant competitive advantage (as will be discussed later). Similarly, location (geographical distance fromthe consumer) plays a less significant role in EC, and language is becoming less important as translation programs removesome language barriers. Finally, digital products are not subject to normal wear and tear, although some become obsolete.

It can also be said that competition between companies is being replaced by competition between networks. Thecompany with better communication networks, online advertising capabilities, and relationships with other Web compa-nies (e.g., having an affiliation with suppliers, with Google, or with Amazon.com) has a strategic advantage. It can alsobe said that competition is now mostly between business models. The company with the better business model will win.Finally, e-competition may lead to perfect markets.

Perfect CompetitionAll in all, EC supports market efficiencies and could result in almost perfect competition. In a perfect market, a commodity(an undifferentiated product) is produced when the consumer’s willingness to pay equals the marginal cost of producingthe commodity and neither sellers nor buyers can influence supply or demand conditions individually. The following arenecessary for perfect competition:

◗ Many buyers and sellers must be able to enter the market at little or no entry cost (no barriers to entry).◗ Large buyers or sellers are not able to individually influence the market.◗ The products must be homogeneous (commodities). (For customized products, therefore, there is no perfect competition.)◗ Buyers and sellers must have comprehensive information about the products and about the market participants’ demands,

supplies, and conditions.

differentiationProviding a product orservice that is unique.



Porter’s Competitive Analysis in an IndustryPorter’s competitive forces model (2001) identifies five major forces of competition that determine an industry’s structuralattractiveness. These forces, in combination, determine how the economic value created in an industry is divided amongthe players in the industry. Such industry analysis helps companies develop their competitive strategy.

Because the five forces are affected by both the Internet and e-commerce, it is interesting to examine how theInternet influences the industry structure portrayed by Porter’s model. Porter divided the impacts of the Internet intoeither positive or negative impacts for the industry. Of course, there are variations and exceptions to the impacts depend-ing on the industry, its location, and its size. A negative impact means that competition will intensify in most industriesas the Internet is introduced, causing difficulties to a company that controls or strongly influences its industry. Becausethe strength of each of the five forces varies considerably from industry to industry, it would be a mistake to draw generalconclusions about the impact of the Internet on long-term industry profitability; each industry is affected in differentways. Nevertheless, an examination of a wide range of industries in which the Internet is playing a role reveals some cleartrends. The Internet can boost an industry’s efficiency in various ways, expanding the overall size of the market by improv-ing its position relative to traditional substitutes. Thus, the Internet means stronger competition, especially for commodity-type products (e.g., toys, books, CDs); because of this, many dot-com companies collapsed between 2000 and 2003. Tosurvive and prosper in such an environment, a company needs to use innovative strategies.

Examples of how e-commerce is changing entire industries are financial services, especially stock trading, cyberbank-ing, and e-mortgages. Zopa.com (Chapter 7) may change money lending by moving some of it from banks to a person-to-person level. Obviously, retailing is changing, and so are travel, entertainment, and more.


REFERENCE FOR ONLINE FILE W1.13Porter, M. E. “Strategy and the Internet.” Harvard

Business Review (March 2001).

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HOW BLUE NILE, INC., IS CHANGING THE JEWELRYINDUSTRYBlue Nile, Inc. (bluenile.com), a pure-play online e-tailerthat specializes in diamonds and jewelry, capitalized ononline diamond sales as a dot-com start-up in 1999. Thecompany provides a textbook case of how EC fundamentallyundercuts the traditional way of doing business.

The OpportunityUsing the B2C EC model—knocking out expensive storesand intermediaries and then slashing prices (up to 35 per-cent less than rivals to gain market share), Blue Nile

captured a high market share in a short time, making asizable profit by inducing more people to buy online.

How did the start-up defy the conventional wisdomthat diamonds could not be sold online? Basically, BlueNile offers a huge selection of diamonds and more infor-mation on diamonds than a jewelry expert offers in aphysical store. In October 2008, Blue Nile offered about33,000 round diamonds that could be used to build a cus-tomized wedding ring. No physical store can offer so manydiamonds. It also features educational guides in plain



REFERENCES FOR ONLINE FILE W1.14BusinessWeek Online. “BusinessWeek’s Hot Growth

Companies: Blue Nile.” 2006. businessweek.com/hot_growth/2006/company/10.htm (accessedNovember 2008).

RedOrbit.com. “Blue Nile Launches New InteractiveDiamond Search.” March 27, 2006. redorbit.com/

n e w s / e n t e r t a i n m e n t / 4 4 5 2 6 2 / b l u e _ n i l e _launches_new_interactive_diamond_search(accessed November 2008).

Rivlin, G. “When Buying a Diamond Starts with aMouse.” New York Times, January 7, 2007.


English and provides independent (and trusted) qualityratings for every stone. A customer can look over a ratingscale for cut, clarity, color, and so on and then conduct aprice comparison with Diamond.com (diamond.com) andother online stores. Most important is the 30-day money-back guarantee (now an online industry standard). Thisprovides customers with a comfort level against fraud andgives Blue Nile a competitive edge against stores that takethe stones back but charge a fee to do so.

The ResultsBlue Nile sales reached $129 million in 2003 (a 79 percentincrease over 2002), with a net income of $27 million. In2008, sales exceeded $295 million (10 percent annualgrowth). The company became the eighth-largest specialtyjewelry company in the United States and went public in2004 (one of the most successful IPOs of 2004).

To sell $295 million in jewelry, a traditional retailchain needs 300 stores and close to 3,000 employees. BlueNile does it with one 10,000-square-foot warehouse and180 staffers. The company also bypasses the industry’stangled supply chain, in which a diamond may passthrough five or more intermediaries before reaching aretailer. Blue Nile deals directly with original suppliers.

This is one reason why some 465 small jewelry storesin the United States closed in 2003 alone. By 2008, largejewelry store chains were closing many of their physicalstores. The survivors specialize in custom-crafted pieces.Large rivals try to fight back, streamlining the supply

chain, emphasizing customer service, and even trying tosell some products online.

The future seems to be clear, as summarized by RogerThompson, a small jeweler in Lambertville, New Jersey,who said, “Anyone with half a brain, who wants a diamondengagement ring, will go to the Internet.” So, he stoppedselling diamonds. In the meantime, grooms make proposalswith Blue Nile rings, saving $3,000 to $5,000. Note thatthe competition in the jewelry business is very strong, notonly from jewelry retailers but also from general e-tailerssuch as overstock.com, ice.com, and amazon.com.

Sources: Compiled from Rivlin (2007), BusinessWeek Online(2006), RedOrbit.com (2006), and bluenile.com (accessed July2009).

Questions1. Using the classifications of EC (Section 1.3 Chapter 1),

what can you say about Blue Nile?

2. In what ways is the company changing its industry?

3. What are the critical success factors of thecompany?

4. Research Blue Nile’s affiliate marketing program viaLinkShare. How does this program help Blue Nile?



The terms customization and personalization are frequently used interchangeably. However,some distinguish between the two by defining customization as creating a product to thespecification of the buyer. For example, if you order a computer from Dell, it will make it asyou wish (from a list of options). This creates the build-to-order production process and theconcept of mass customization.

PersonalizationPersonalization refers to the ability to tailor a service or Web content to specific user pref-erences. For example, Amazon.com notifies customers by e-mail when new books on theirfavorite subjects or by their favorite authors are published. Several sites track news or stockprices based on the consumer’s preferences. For example, Google will e-mail all news regard-ing certain topics (e.g., Chinese stocks and companies) to a user. The aim of personaliza-tion is to increase the usability of complex information by customizing the presentation,making the user interface more intuitive and easier to understand, and reducing informationoverload by tailoring content and navigation. For personalization techniques, see Anke and Sundaram (2006).

Personalization ToolsPersonalization can be done by EC vendors (such as Amazon.com) and by individuals. Users can create highly personalizedpages for themselves that are constantly updated with information such as news articles and stock prices, view photos, use acalculator, and perform similar actions, all in one page. Users can also post necessary tools as modules, which appear as smallsquare or rectangular objects, with the content or functionality inside. Users can arrange the modules on their sites. Users canalso produce a wide variety of modules and upload software made available for free. Pages can be personalized online or offline.

One such personalization tool is My Yahoo! This tool can be used to combine page segments featuring Yahoo!’s ownnews and information with segments containing RSS feeds. Microsoft’s My MSN is another tool.

The best known mini-application for the desktop is Apple’s Dashboard, which allows Macintosh users to install tinyprograms called widgets that perform searches, display photo slideshows, track stocks, play music, and more. MicrosoftWindows’ Vista operating system has a comparable system called Sidebar. Netvibes (netvibes.com) offers the best featuresof My Yahoo! and Dashboard. Modules can be added easily and are arranged in a menu. For graphics-rich content, users canuse Pageflakes (pageflakes.com).

Here is how personalization is done at Amazon.com:

Example: Amazon.comAmazon.com’s catalog includes several million items. Easy navigation and personalization are provided as well. Forinstance, when a customer looks up a book on a certain topic, it recommends popular books on the same topic (“cus-tomers who bought this book also bought . . . ”). In addition, it recommends five authors in the customer’s area of inter-est. Recommendations appear several times during surfing of the site. Amazon.com also bundles a similar book with thebook the customer is interested in for a large discount.

Consumers like differentiation and personalization and are frequently willing to pay more for them. Differentiationreduces the substitutability between products, benefiting sellers who use this strategy. Also, price cutting in differentiatedmarkets does not impact market share very much: Many customers are willing to pay a bit more for customized or personal-ized products or services.

Mass CustomizationMass customization enables manufacturers to create specific products for each customerbased on the customer’s exact needs. For example, Motorola gathers customer needs for apager or a cellular phone, transmits the customer’s specifications electronically to the manu-facturing plant where the device is manufactured, and then sends the finished product tothe customer within a day. Dell pioneered this approach in building its products. Many other

Online File W1.15 Mass Customization, Personalization,and Build-to-Order Manufacturing

customizationCreation of a product orservice according to thebuyer’s specifications.

personalizationThe ability to tailor aproduct, service, or Webcontent to specific userpreferences.

mass customizationA method that enablesmanufacturers to createspecific products for eachcustomer based on thecustomer’s exact needs.



companies are following Dell’s lead: Mattel’s My Design lets fashion-doll fans custom-build a friend for Barbie at Mattel’sWeb site; the doll’s image is displayed on the screen before the person places an order. Nike allows customers to customizeshoes, which can be delivered in a week. Lego.com allows customers to configure several of its toys. Finally, De Beersallows customers to design their own engagement rings. Until the 2008 financial crisis, the automobile industry was cus-tomizing its products and expecting to save billions of dollars in inventory reduction alone every year by producing made-to-order cars. You can design your own T-shirt, Swatch watch, and many more products and services. Configuring thedetails of the customized products, including the final design, ordering, and paying for the products, is done online. Alsoknown as build-to-order, customization can be done on a large scale, in which case it is called mass customization. For ahistorical discussion of the development of the idea of mass customization, see en.wikipedia.org/wiki/Mass_customization.With the use of mass-customization methods, the cost of customized products is at or slightly above the comparable retailprice of standard products. Exhibit W1.15.1 shows how customers can order customized Nike shoes.


Log on to Nike.comGo to “USA”Go to “Nike iD”View 32 items

StartHere

Click on an itemYou are in “configuration”Nike iD: Create your ownConfigure your choice (see it in a 3D picture)

Select: size, color, personalized logo, etc.Submit and review

Order flows to production floorYour personalized logo is programmed into the machine

Shoes are inspected, packed, and transferred to shipper

Shoes arrive, enjoy them

Get shipping information (2 to 4 weeks to deliver)Arrange payment (credit card)

Place order in shopping cartUse express service if you are a member

(continued)

EXHIBIT W1.15.1 How Customization Is Done Online:The Case of Nike Shoes



Build-to-Order ManufacturingBuild-to-order (pull system) is a manufacturing process that starts with an order (usuallycustomized). Once the order is paid for, the vendor starts to fulfill it. This changes not onlyproduction planning and control but also the entire supply chain and payment cycle. Forexample, manufacturing or assembly starts only after an order is received.

Build-to-Order ProductionThe concept of build-to-order means that a firm starts to make a product or service onlyafter an order for it is placed. It is also known as demand-driven manufacturing (DDM),customization, personalization, and pull technology (Anderson 2008). This concept is as oldas commerce itself and was the only method of production until the Industrial Revolution.According to this concept, if a person needs a pair of shoes, he or she goes to a shoemaker,who takes the person’s measurements. The person negotiates quality, style, and price and pays a down payment. The shoe-maker buys the materials and makes a customized product for the customer. Customized products are expensive, and ittakes a long time to finish them. The Industrial Revolution introduced a new way of thinking about production.

The Industrial Revolution started with the concept of dividing work into small parts. Such division of labor makes thework simpler, requiring less training for employees. It also allows for specialization. Different employees become expertsin executing certain tasks. Because the work segments are simpler, it is easier to automate them. As machines wereinvented to make products, the concept of build-to-market developed. To implement build-to-market, it was necessary todesign standard products, produce them, store them, and then sell them.

The creation of standard products by automation drove prices down, and demand accelerated. The solution to theproblem of increased demand was mass production. In mass production, a company produces large amounts of standardproducts at a very low cost and then “pushes” them to consumers. Thus began the need for sales and marketing organiza-tions. Specialized sales forces resulted in increased competition and the desire to sell in wider, and more remote, markets.This model also required the creation of large factories and specialized departments such as accounting and personnel tomanage the activities in the factories. With mass production, factory workers personally did not know the customers andfrequently did not care about customers’ needs or product quality. However, the products were inexpensive and goodenough to fuel demand, and thus the concept became a dominant one. Mass production also required inventory systems atvarious places in the supply chain, which were based on forecasted demand. If the forecasted demand was wrong, theinventories were incorrect. Thus, companies were always trying to achieve the right balance between not having enoughinventory to meet demand and having too much inventory on hand.

As society became more affluent, the demand for customized products increased. Manufacturers had to meet thedemand for customized products to satisfy customers. As long as the demand for customized product was small, it could bemet. Cars, for example, have long been produced using this model (see the Toyota and others’ experiences in Parry andGraves 2008). Customers were asked to pay a premium for customization and wait a long time to receive the customizedproduct, and they were willing to do so. Note that the process starts with product configuration (Anderson 2008) namely,the customer decides what the product is going to look like, what operations it will perform, and what capabilities it willhave (e.g., the functionalities in Dell).

Slowly, the demand for customized products and services increased. Burger King introduced the concept of “having ityour way,” and manufacturers sought ways to provide customized products in large quantities, which is the essence ofmass customization, as pioneered by Dell. Such solutions were usually enhanced by some kind of information technology.The introduction of customized personal computers (PCs) by Dell was so successful that many other industries wanted totry mass customization. EC can facilitate customization, even mass customization. In many cases, EC is doing it via per-sonalization. To understand how companies can use EC for customization, let’s first compare mass production, also knownas a push system, and mass customization, also known as a pull system, as shown in Exhibit W1.15.2.

Notice that one important area in the supply chain is order taking. Using EC, a customer can self-configure thedesired product online. The order is received in seconds. Once the order is verified and payment arranged, the order is sent


build-to-order (pull system)A manufacturing processthat starts with an order(usually customized).Once the order is paidfor, the vendor starts tofulfill it.

(continued)



electronically to the production floor. This saves time and money. For complex products, customers may collaborate in realtime with the manufacturer’s designers, as is done at Cisco Systems. Again, time and money are saved and errors arereduced due to better communication and collaboration. Other contributions of EC are that the customers’ needs are visible


Manufacturer/assembler

Product to market;quantity based on demand forecast.Use mass production and inventories.

Wholesalers

Inventories

Retail distribution centers

Inventories

Retail stores

Inventories, rush orders, “push” to customers

Customers

ConventionalPush Systems

Process Characteristics

Customers

Orders

Manufacturer or retailer

Inventory of standarditems only

Manufacturers tofulfill order

Ship orders to distribution centers, or suppliers,if needed

Orders to manufacturers,if needed

Process

EC-Based PullSystems

Goals • Produce standard products from long-term demand forecasts.

• Manage stock reactively to allow for efficient production.

Characteristics

• Build products only after the customer orders them.

• Make customer needs visible to all parts of the value chain.

Benefits • Efficient production.

• Local optimization of factory operations.

• No stock other than that in showroom and demonstrators.

• No discounting.• Customer pays

before manufacturer has production expenses.

Weaknesses • High levels of finished stock in market.

• Requires alternative product specifications and discounting to sell aging stock.

• Customized orders compete with standard ones for capacity.

• System loses sight of real customer demand.

• System is sensitive to short-term demand fluctuations; method will not work without proactive demand management.

• Active revenue management required to maximize profit.

EXHIBIT W1.15.2 Push Versus Pull Production Systems

(continued)



to all partners in the order fulfillment chain (fewer delays, faster response time), inventories are reduced due to rapidcommunication, and digitizable products and services can be delivered electronically.

A key issue in mass customization is finding what the customers want. In many cases, the seller can simply ask thecustomer to configure the product or service. In other cases, the seller tries to predict what the customer wants. EC is veryhelpful in this area due to the use of online market research methods such as collaborative filtering (see Chapter 4 andHolweg and Pil 2001). Using collaborative filtering, a company can discover what each customer wants without asking thecustomer directly. Such market research is accomplished more cheaply by a machine than by human researchers.

From the production point of view, EC also can enable mass customization. In the factory, for example, IT in generaland e-commerce in particular can help in expediting the production changeover from one item to another. Also, becausemost mass production is based on the assembly of standard components, EC can help a company create the productionprocess for a product in minutes and identify needed components and their location. Furthermore, a production schedulecan be generated automatically, and needed resources can be deployed, including money. This is why many industries areplanning to move to build-to-order using EC. By doing so, they are expecting huge cost reductions, shorter order-to-deliverytimes, and lower inventory costs.

Mass customization on a large scale is not easy to attain (Anderson 2008; Larco et al. 2007), but if performed prop-erly, it may become the dominant model in many industries.


REFERENCES FOR ONLINE FILE W1.15Anke, J., and D. Sundaram. “Personalization Techniques

and Their Application.” In M. Khosrow-Pour (Ed.).Encyclopedia of E-Commerce, E-Government, andMobile Commerce. Hershey, PA: Idea GroupReference, 2006.

Holweg, M., and F. Pil. “Successful Build-to-OrderStrategies Start with the Customer.” MIT SloanManagement Journal, 43, no. 1 (2001).

Larco, J. A., R. Dekker, and U. Kaymak. “DistributedServices with Foreseen and Unforeseen Tasks: TheMobile Re-Allocation Problem.” Social ScienceResearch Network, July 12, 2007.

Parry, G., and A. P. Graves. Build to Order: The Road tothe 5-Day Car. London: Springer Verlag, 2008.


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