Chapter 1 Foundations of Electronic Commerce

Md. Mahbobor Rahaman Lecturer Dept Md.Mahbobor Rahaman Lecturer Dept. of Business Administration Leading University

Learning Objectives Define electronic commerce and describe its various categories Distinguish between electronic markets and inter-organizational systems Describe the benefits of electronic commerce to organizations, consumers, and society Describe the limitations of electronic commerce Understand the forces that drive the widespread use of electronic commerce Describe and discuss the changes that will be caused by electronic commerce Discuss some major managerial issues regarding electronic commerce

Opening Vignettes: Intel Corp. and Happy Puppy Intel Corporation Business-to-business (B2B) products selling Customer service Purchasing from and dealing with suppliers Happy Puppy Retailing company’s games Marketing others’ games Business-to-consumers (B2C)

Definitions and Content of Field Electronic Commerce (EC) is where business transactions take place via telecommunications networks, especially the Internet. Electronic commerce describes the buying and selling of products, services, and information via computer networks including the Internet. The infrastructure for EC is a networked computing environment in business, home, and government. E-Business describes the broadest definition of EC. It includes customer service and intrabusiness tasks. It is frequently used interchangeably with EC.

Definitions and Content of Field (cont.) A global networked environment is known as the Internet A counterpart within organizations, is called an intranet An extranet extends intranets so that they can be accessed by business partners.

Pure Vs. Partial Electronic Commerce Three dimensions the product (service) sold [physical / digital]; the process [physical / digital] the delivery agent (or intermediary) [physical / digital] Traditional commerce all dimensions are physical Pure EC all dimensions are digital Partial EC all other possibilities include a mix of digital and physical dimensions

The Dimensions of Electronic Commerce Virtual process Virtual delivery agent Virtual product The core of electronic commerce Electronic commerce areas Digital Product Physical Product Digital process Traditional commerce Physical process Physical agent Digital agent

The Electronic Commerce Field Figure 1.2 shows that the EC applications are supported by infrastructures, and their implementation is dependent on four major areas (shown as supporting pillars) people, public policy, technical standards and protocols, and other organizations. The EC management coordinates the applications, infrastructures, and pillars. It also includes Internet marketing and advertisement.

Management Infrastructure A Framework for Electronic Commerce Electronic Commerce Applications • Stocks Jobs • On-line banking • Procurement and purchasing• Malls • On-line marketing and advertising • Home shopping • Auctions • Travel • On-line publishing People: Buyers, sellers, intermediaries, services, IS people, and management Public policy, legal, and privacy issues Technical standards for documents, security, and network protocols payment Organizations: Partners, competitors, associations, government services Infrastructure (1) Common business services infrastructure (security smart cards/authentication electronic payment, directories/catalogs) (2) Messaging and information distribution infrastructure (EDI, e-mail, Hyper Text Transfer Protocol) (3) Multimedia content and network publishing infrastructure (HTML, JAVA, World Wide Web, VRML) (4) Network infrastructure (Telecom, cable TV wireless, Internet) (VAN, WAN, LAN, Intranet, Extranet) (5) Interfacing (The databases, customers, and applications) Management A Framework for Electronic Commerce © Prentice Hall, 2000 9

Electronic Markets A market is a network of interactions and relationships where information, products, services, and payments are exchanged. The market handles all the necessary transactions. An electronic market is a place where shoppers and sellers meet electronically. In electronic markets, sellers and buyers negotiate, submit bids, agree on an order, and finish the execution on- or off-line.

Electronic Markets Shopper/Purchaser Seller/Supplier Electronic commerce network (Infrastructure) Response to information request Purchase acknowledgment Shipping notice Purchase/service delivery (if online) Payment acknowledgment Product/service information request Purchase request Payment or payment advice Purchase fulfillment request Purchase change request Response to fulfillment request Shipping notice Electronic Market (Transaction Hander) Payment approval Electronic transfer of funds Payment remittance notice Electronic transfer of funds Shopper/Purchaser’s Bank Transaction Handler’s Bank (Automated Clearing House) Seller/Supplier’s Bank Electronic transfer of funds Electronic Markets © Prentice Hall, 2000 11

Interorganization Information Systems An interorganizational information system (IOS) involves information flow among two or more organizations. Its major objective is efficient routine transaction processing, such as transmitting orders, bills, and payments using EDI or extranets. Scope: An IOS is a unified system encompassing two or several business partners. A typical IOS includes a company and its suppliers and and/or customers.

Types of Interorganizational Systems Electronic data interchange (EDI) Extranets Electronic funds transfer (EFT) Integrated messaging systems Shared databases Electronically-supported supply chain management

Classification of EC by the Nature of the Transactions Business-to-business Business-to-customer Intra business transactions Others Classification of Electronic Commerce © Prentice Hall, 2000

Electronic Commerce is Interdisciplinary Marketing Computer sciences Consumer behavior and psychology Finance Economic Production/Logistic Management information systems Accounting and auditing Management Business law and ethics

The Benefits of Electronic Commerce Benefits to Organizations Expands the marketplace to national and international markets Decreases the cost of creating, processing, distributing, storing and retrieving paper-based information Allows reduced inventories and overhead by facilitating “pull” type supply chain management The pull type processing allows for customization of products and services which provides competitive advantage to its implementers

Benefits to Organizations (cont.) Reduces the time between the outlay of capital and the receipt of products and services Supports business processes reengineering (BPR) efforts Lowers telecommunications cost - the Internet is much cheaper than value added networks (VANs)

Benefits to Customers Enables customers to shop or do other transactions 24 hours a day, all year round from almost any location Provides customers with more choices Provides customers with less expensive products and services by allowing them to shop in many places and conduct quick comparisons Allows quick delivery of products and services in some cases, especially with digitized products

Benefits to Customers (cont.) Customers can receive relevant and detailed information in seconds, rather than in days or weeks Makes it possible to participate in virtual auctions Allows customers to interact with other customers in electronic communities and exchange ideas as well as compare experiences Electronic commerce facilitates competition, which results in substantial discounts.

Benefits to Society Enables more individuals to work at home, and to do less traveling for shopping, resulting in less traffic on the roads, and lower air pollution Allows some merchandise to be sold at lower prices benefiting the poor ones Enables people in Third World countries and rural areas to enjoy products and services which otherwise are not available to them Facilitates delivery of public services at a reduced cost,increases effectiveness, and/or improves quality

The Limitations of Electronic Commerce Technical Limitations of Electronic Commerce Lack of sufficient system’s security, reliability, standards, and communication protocols Insufficient telecommunication bandwidth The software development tools are still evolving and changing rapidly Difficulties in integrating the Internet and electronic commerce software with some existing applications and databases

Technical Limitations of Electronic Commerce (cont.) The need for special Web servers and other infrastructures, in addition to the network servers (additional cost) Possible problems of interoperability, meaning that some EC software does not fit with some hardware, or is incompatible with some operating systems or other components

Non-Technical Limitations Cost and justification (35% of the respondents) The cost of developing an EC in house can be very high, and mistakes due to lack of experience, may result in delays. There are many opportunities for outsourcing, but where and how to do it is not a simple issue. Furthermore, to justify the system one needs to deal with some intangible benefits which are difficult to quantify.

Non-Technical Limitations (cont.) Security and Privacy (17% of the respondents) These issues are especially important in the B2C area, and security concerns are not truly so serious from a technical standpoint. Privacy measures are constantly improving too. Yet, the customers perceive these issues as very important and therefore the EC industry has a very long and difficult task of convincing customers that online transactions and privacy are, in fact, fairly secure. Lack of trust and user resistance (4%) Customers do not trust an unknown faceless seller, paperless transactions, and electronic money. So switching from a physical to a virtual store may be difficult.

Non-Technical Limitations (cont.) Other limiting factors are: Lack of touch and feel online Many unresolved legal issues Rapidly evolving and changing EC Lack of support services Insufficiently large enough number of sellers and buyers Breakdown of human relationships Expensive and/or inconvenient accessibility to the Internet

The Driving Forces of Electronic Commerce The New World of Business Business pressures Organizational responses The role of Information Technology (including electronic commerce)

Major Business Pressures Market and economic pressures Strong competition Global economy Regional trade agreements (e.g. NAFTA) Extremely low labor cost in some countries Frequent and significant changes in markets Increased power of consumers Societal and environmental pressures Changing nature of workforce Government deregulation of banking and other services Shrinking government budgets subsides Increased importance of ethical and legal issues Increased social responsibility of organizations Rapid political changes Technological pressures Rapid technological obsolescence Increase innovations and new technologies Information overload Rapid decline in technology cost Vs. performance ratio

Organizational Responses External Environment, Social, Economic, Political, etc Organization Structure and the Corporate Culture Individual and Roles Information Technology The Organization’s Strategy Management and Business Process Framework for Organizational and Societal Impacts of Information Technology

Business Process Reengineering Reducing cycle time and time to market Empowerment of employees and collaborative work Knowledge management Customer-focused approach Business alliances — virtual corporation

Everything Will Be Changed Improving Direct Marketing Product promotion New sales channels Direct savings Time-to-market (reduced cycle time) Customer service Brand or corporate image

Other Changes in the Workplace Transforming Organizations Work will change Technology learning Organizational learning Redefining Organization New product capabilities New business models

Other Changes in the Workplace (cont.) Impacts on Manufacturing Pull processing, mass customization, shorter cycle time, integration (ERP), electronic bidding and procurement Impacts on Finance and Accounting Electronic payment systems, electronic cash, automating back office, home banking, electronic stock trading Human Resource Management Electronic recruiting, training, distance learning

Plan of the Book Part I Part II Part III Part IV Part V Ch1 Introduction Part I Part II Ch2 Retailing Ch3 Consumer Behavior and Market Research Ch4 Advertisement Ch5 Service Industries Applications Ch6 Business-to-Businesses Ch7 Intranet and Extranet Applications EC Application Support and Implementation Ch8 Payments Ch9 Corporate Strategy Ch10 Public Policy Part III Technological Support Ch11 Infrastructure Appendix A Appendix B Appendix C Part IV Ch12 Economics, Global, Research in EC Part V

Management Issues Is it real? How to evaluate the magnitude of the business pressures? What should be my company’s strategy towards EC? What is the best way to learn about EC?