Chapter 2 E-commerce fundamentals

Learning objectives Evaluate changes in business relationships between organizations and their customers enabled by e-commerce Identify the main business and marketplace models for electronic trading Describe different revenue models and transaction mechanisms available through hosting an e-commerce site.

Issues for managers What are the implications of changes in marketplace structures for how we trade with customers and other partners? Which business models and revenue models should we consider to exploit the Internet? What will be the importance of online marketplace hubs or exchanges to our business?

The e-business environment Figure 2.1 The environment in which e-business services are provided

Activity – the e-business environment For each of the environment influences shown previously, give examples of why it is important to monitor and respond in an e-business context. For example, the personalization mentioned in the text is part of why it is important to respond to technological innovation.

Environment constraints and opportunities Customers – which services are they offering via their web site that your organization could support them in? Competitors – need to be benchmarked in order to review the online services they are offering – do they have a competitive advantage? Intermediaries – are new or existing intermediaries offering products or services from your competitors while you are not represented? Suppliers – are suppliers offering different methods of procurement to competitors that give them a competitive advantage? Macro-environment Society – what is the ethical and moral consensus on holding personal information? Country specific, international legal – what are the local and global legal constraints for example on holding personal information, or taxation rules on sale of goods? Country specific, international economic – what are the economic constraints of operating within a country or global constraints? Technology – what new technologies are emerging by which to deliver online services such as interactive digital TV and mobile phone-based access?

B2B and B2C models Figure 2.2 B2B and B2C interactions between an organization, its suppliers and its customers

Transaction alternatives between businesses and consumers Figure 2.3 Summary of transaction alternatives between businesses and consumers

B2B and B2C characteristics Proportion of adopters with access Low to medium High to very high Complexity of buying decisions Relatively simple – individual and influencers More complex – buying process involves users, specifiers, buyers, etc. Channel Relatively simple – direct or from retailer More complex, direct or via wholesaler, agent or distributor Purchasing characteristics Low value, high volume or high value, low volume. May be high involvement Similar volume/value. May be high involvement. Repeat orders (rebuys) more common Product characteristic Often standardized items Standardized items or bespoke for sale

Disintermediation Figure 2.4 Disintermediation of a consumer distribution channel showing (a) the original situation, (b) disintermediation omitting the wholesaler, and (c) disintermediation omitting both wholesaler and retailer

Example – Vauxhall

Reintermediation Figure 2.7 Reintermediation process: (a) original situation, (b) reintermediation contacts

Example - Kelkoo

Creation of a new intermediary Example: Countermediation Creation of a new intermediary Example: B&Q www.diy.com Opodo www.opodo.com Boots www.wellbeing.com www.handbag.com Ford, DaimlerChrysler (www.covisint.com) Partnering with existing intermediary – Mortgage broker Charcol and Freeserve

Portals Q1. Define portal Q2. Is a search engine the same as a portal? Yes, No Q3. Is a search engine the same as a directory? Yes, No Q4. List search engines / portals you use and explain why

Meta services Search engines Portal ‘A gateway to information resources and services’ Directories News aggregators MR aggregators Comparers Exchanges

Types of portal Type of portal Characteristics Example Access portal Associated with ISP Freeserve (www.freeserve.net) Horizontal or functional portal Range of services: search engines, directories, news recruitment, personal information management, shopping, etc. Yahoo! (www.yahoo.com) Excite (www.excite.com) Lycos (www.lycos.com) Vertical May cover a single function e.g.: news – and industry sector Moreover (www.moreover.com) SciQuest (www.sciquest.com) Geographical (region, country, local area) May be: – horizontal – vertical Yahoo! country versions Countyweb (www.countyweb.com) Marketplace – geographical CommerceOne (www.commerceone.net) PlasticsNet (www.plastics.net) Media type Voice portal Wireless portal Streaming media portal Verizon VoiceGear (www.voicegear.net) Vodafone Vizzavi (www.vizzavi.com) Silicon (www.silicon.com)

Importance of portals Rank Property Unique visitors Reach in % Ave time 1 MSN 7,924,421 47.0 00:39:24 2 Microsoft 6,910,303 40.9 00:09:48 3 Yahoo! 6,196,878 36.7 00:32:27 4 Google 5,935,960 35.17 00:15:47 5 AOL Time Warner 5,083,892 30.1 00:18:55 6 Wanadoo (Freeserve) 4,853,630 28.8 00:13:09 7 British Telecom 4,145,338 24.6 00:20:22 8 Amazon 3,757,606 22.3 00:12:58 9 BBC 3,399,175 20.14 00:17:28 10 Ask Jeeves 3,270,176 19.4 00:11:09   Nielsen//NetRatings – top 10 domains web properties in the UK (June 2000 measurement period, at home panel), September 2002 (http://epm.netratings.com/uk/web/NRpublicreports.toppropertiesmonthly). Data for other countries available at: www.mediametrix.com http://www.nielsen-netratings.com/hot_off_the_net_i.jsp)

Methods for finding web pages Invisible web Not indexed by search engines Google 5 Yahoo!

Location of trading Place of purchase A. Seller controlled B. Seller oriented C. Neutral v Example of sites Vendor sites, i.e. home site of organization selling products, e.g. www.del.com. Intermediaries controlled by third-parties to the seller such as distributers and agents, e.g. Opodo (www.opodo.net) represents the main air carriers. Intermediaries not controlled by buyer’s industry (e.g. industry net www.commerceone.com). Product specific search engines (e.g. CNET (www.computer.com)). Comparison sites, e.g. Barclay Square/Shopsmart (www.barclaysquare.com). Auction space, e.g. uBid (www.ubid.com).

Trading arrangements Commercial (trading) mechanism Online transaction mechanism of Nunes et al. (2000) 1. Negotiated deal Example: Can use similar mechanism to auction as on Commerce One(www.commerceone.net) Negotiation – bargaining between single seller and buyer. Continuous replenishment – ongoing fulfilment of orders under pre-set terms 2. Brokered deal Example: Intermediaries such as Screentrade (www.screentrade.co.uk) Achieved through online intermediaries offering auction and pure markets online 3. Auction Examples: C2C: E-bay (www.ebay.com) B2B: Industry to Industry (www.assetauctions.freemarkets.com) Seller auction – buyers’ bids determine final price of sellers’ offerings. Buyer auction – buyers request prices from multiple sellers. Reverse – buyers post desired price for seller acceptance 4. Fixed price sale Example: All e-tailers Static call – online catalogue with fixed prices Dynamic call – online catalogue with continuously updated prices and features 5. Pure markets Example: Electronic share dealing Spot – buyers’ and sellers’ bids clear instantly 6. Barter Example: www.intagio.com and www.bartercard.co.uk Barter – buyers and sellers exchange goods. According to the International Reciprocal Trade Association (www.irta.com) barter trade was over $9 billion in 2002.

Business model Timmers (1999) defines a ‘business model’ as: An architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenue.

Business models Figure 2.11 Alternative perspectives on business models

Reverse auction example Through 2001 there were over 512 online auction bidding events processed for DaimlerChrysler on vendor supported portal Covisint (www.covisint.com) amounting to approximately €10 billion. That is a third of their total procurement volume. In May 2001, DaimlerChrysler staged the largest online bidding event ever, with an order volume of €3.5 billion in just four days. As well as savings in material purchasing prices, DaimlerChrysler also reduced throughput times in purchasing by 80 percent

Revenue models Visit the Global Composites site and explore the different opportunities for revenue generation (see the Business Directory for company listings). You should include current and future possiblities for revenue generation. Global Composites (www.globalcomposites.com) is a business-to-business intermediary providing resources for over 10,000 professionals in the composites industry.More than 2000 companies are listed

Revenue model answers Simple listings are free, but more sophisticated company profiles with web links are charged for Banner advertising in different categories can be used to generate revenue Sponsorship of e-newsletters Commission on affiliate referrals to company sites Fees for hosting an e-commerce shop-front (future possibility) Commission on sales occurring at the site (future possibility) Commission on auctions (future possibility) Note that there is a careful balance for this business type of generating revenue and not discouraging potential suppliers or buyers. For this reason the service is free to buyers and sellers can list minimum services. Revenue models will use a combination of techniques as follows: Online commerce – sale of products (direct or indirect) Online commerce – sale of digital services (can be on subscription basis or pay per view) Ad revenue through banner advertising or sponsorship of content/services

Learning from the dot coms Explain these financials! Thomson Travel lastminute.com Formed 1965 1998 FY 2000 2002 FY 2002 Turnover £3 billion £2.6 million 18.4 m (on Total Transaction Value of 124.2m) Profit/loss £77 million – £6 million – £53 million Market capitalization £980 million £700 million £ 200 million

Dot com lessons – can you add to these? Explore new business and revenue models. Perform continuous scanning of the marketplace and respond rapidly. Set up partner networks to leverage the expertise and reputation of specialists. The real world is still important for product promotion and fulfilment. Examine the payback and return on investment of new approaches carefully. See also chapter 5 examining reasons for failure