Prepared by: Ms Melinda Chung Chapter 13: Electronic Commerce

2 of 41 Objectives Visit Web sites that conduct electronic commerce. Understand the basics of electronic commerce. Learn how companies generate revenues. Learn how companies reduce costs and improve operational efficiency using Web technologies

3 of 41 Objectives Learn about new ways of doing business on the Web, such as online auctions. Learn about consumer concerns regarding purchasing items online. Understand why international, legal, and ethical concerns are important in electronic commerce.

4 of 41 What is Electronic Commerce? Electronic business/ electronic commerce: business process, or collection of business processes, conducted using Internet technologies. Business processes include all the processes and requirements that companies do to achieve their objectives.

5 of 41 Electronic Commerce Classification Schemes Business-to-consumer (B2C) Participant-based Classifications Business-to-business (B2B) Business-to-government (B2G) Consumer-to-consumer (C2C) Activity-based Classifications Revenue Processes Operations Processes

6 of 41 Participant-Based Classification A participant-based electronic commerce: based on the types of participants in the process. Participants might be businesses, consumers, or government entities. Business-to-consumer (B2C) electronic commerce: a process undertaken by a company to sell goods or services to individuals.

7 of 41 Participant-Based Classification Business-to-business (B2B) electronic commerce: process processes selling goods or services to other business firms. Business-to-government (B2G): processes of dealing with government agencies. Consumer-to-consumer (C2C): processes use by individuals who are not operating formal businesses to conduct transactions.

8 of 41 Activity-Based Classification Activity-based electronic commerce classification scheme is organized by what the business activities are designed to accomplish. business model: includes the way a company does business, the sum of its business activities and processes. Revenue model: the business processes that a company uses to find new customers, make sales, and deliver the goods or services that it sells.

9 of 41 Activity-Based Classification Operations model: the other business processes in a company, such as purchasing, hiring, receiving, and manufacturing. Electronic commerce activities are designed to improve a company’s revenue processes; to reduce the cost or increase the efficiency of its operation processes.

10 of 41 Competitive Advantage and Transaction Cost Reduction Competitive advantage: a way of generating more revenues, incurring lower costs, or performing tasks more efficiently than other companies in the same business. A must for a company to stay in business. Transaction costs: the total costs that a buyer and a seller incur in a purchase-sale transaction. Transaction costs: include brokerage fees, sales commissions, the costs of information search and acquisition.

11 of 41 Revenue Models for Electronic Commerce Approaches for businesses to generating revenue on the Web: Online catalog revenue model Advertising and Subscription Revenue Models Direct Fee Model

12 of 41 Online Catalog Revenue Model Web catalogs: replace/supplement a co’s distribution & printed catalogs. Customer orders through the Web site, by telephone or by mail. 3 types of company using this model: sell only on the Web, sell through print catalogs and the Web, have physical stores and also sell on the Web.

13 of 41 Online Catalog Revenue Model Channel conflict: the threat of losing sales from existing stores to the new online catalog. Cannibalization: when Web site’s sales replace sales that would have otherwise occurred in the company’s retail stores. Web is used by established companies to extend their existing businesses.

14 of 41 Advertising and Subscription Revenue Models Some businesses (e.g. television networks) rely on advertising as their sole source of revenue. Some businesses derive their revenue only from subscription fees (magazines that carry no advertising). Most magazines charge a subscription and also carry advertising. Many Web sites use mixed advertising-subscription revenue models.

15 of 41 Advertising and Subscription Revenue Models Major problems of Web advertising: 1. No consensus has emerged on how to measure and charge for advertising on the Web. 2. Very few Web sites have enough visitors to interest large advertisers.

16 of 41 Advertising and Subscription Revenue Models A Web portal (or portal): a doorway to the Web. Web Portals include general interest information and can help users to find just about anything on the Web. Portals earn most of their revenue by selling advertising.

17 of 41 Advertising and Subscription Revenue Models Characteristics of Web portals : Free Links to search engines Web directories Membership services News headlines and articles Discussion groups Chat rooms Links to virtual shopping malls Calendars and address books

18 of 41 Advertising and Subscription Revenue Models One way to increase advertising revenue is to sell target marketing opportunities to advertisers through use of its search engine. Newspaper and magazine publishers have not been successful in using the advertising supported model for their sites. Target marketing: delivering ads to site visitors with specific demographic characteristics.

19 of 41 Business Week Online Home Page

20 of 41 Advertising and Subscription Revenue Models Web sites that offer classified advertising have been more successful than magazines and newspaper publishers. Some sites specialize in employment advertising, while others offer classified ads for autos, boats, motorcycles, houses, etc.

21 of 41 Direct Fee Revenue Model Direct fee revenue model: services are offered for a fee. Customer service: provide personal services or give Web site visitors the information they need about the transaction on the Web site. The cost of providing personal service is lower on the Web than in physical store locations.

22 of 41 Direct Fee Revenue Model Services: such as online games, tax-planning advices, streaming video of concerts and films to paying subscribers. Web entertainment sites charge a monthly fee to cover the additional bandwidth costs in order to make a profit.

23 of 41 Direct Fee Revenue Model Sties that charge fees are: Prepare tax returns online (H&R Block or TurboTax) Legal services (PrePaidLegal.com) Services of attorneys who will review your case online (Law Office Live) Resume preparation (Resume.com) Travel agencies Ticket agencies Banks and insurance brokers

24 of 41 Reduce Operational Costs and Increase Efficiency Companies aim: To earn more money by either increasing revenue or reducing costs. To increase efficiency (makes the amount spent on a particular cost do more work). The real challenge is using the Internet to achieve the above.

25 of 41 Business Cost Reductions Using Electronic Technologies Electronic funds transfers (EFTs or wire transfers): electronic transmissions of account exchange information over private networks. Electronic data interchange (EDI): a business transmits computer-readable data in a standard format to another business. To use EDI: both parties must have compatible computer systems, and follow the same set of EDI standards.

26 of 41 Business Cost Reductions Using Electronic Technologies When two businesses meet the three criteria, they are called trading partners. EDI replaces the paper purchase order and invoice with electronic messages, thus creating a paperless environment. Reduce human errors. Financial EDI includes payment information.

27 of 41 Business Cost Reductions Using Electronic Technologies Banks use automated clearinghouses (ACHs) – electronic inter-bank account clearance systems to settle their customers’ business transactions. Value-added networks (VANs) were created to meet the demands imposed by EDI. A VAN is a third party that can offer assurances and dispute-resolution services to both EDI trading partners.

28 of 41 Traditional vs EDI of Sale- Purchase Transactions invoice Traditional Sale-Purchase Transaction EDI SalePurchase Transaction buyer seller purchase order purchase order data invoice

29 of 41 Improve Operational Efficiency Using Intranets and Extranets: Intranet - A network of Web sites that is accessible only to employees of a company. Extranet - When an intranet is made available to users outside the company. Many companies use Intranets to reduce operational costs and create efficiency.

30 of 41 Using Intranets and Extranets Many companies use intranets and extranets to coordinate employee, supplier, and customer activities. Smaller companies that cannot afford to create a dedicated intranet or extranet can use the services of a Web portal.

31 of 41 Using Automated Messaging a good way to stay in contact with existing customers —but only if they agree to receive it. Marketing experts recommend that automatically generated messages with announcements should not be sent > 1 a week to clients.

32 of 41 Consumer Concerns Participants in electronic commerce have two major concerns: 1. Transaction security 2. Non violation of their privacy An assurance/certificate provider is a third party that, (for a fee), certifies the site meets some criteria for conducting business in a secure and privacy-preserving manner ( eg. Better Business Bureau, TRUSTe, International Computer Security Association, VeriSign, and WebTrust ).

33 of 41 Transaction Security and Privacy SSL protocol is used to protect sensitive information as it travels over the Internet. Hacker or cracker: breaks into a web site’s computer to steal names, addresses, and credit card information. By recording a user’s clickstream, the Web server can gather extensive knowledge about that visitor A clickstream: a record of pages visited by the user on a site.

34 of 41 Transaction Security and Privacy No general standards currently exist for maintaining confidentiality regarding clickstream information. Many business Web sites include statements of privacy policy directed at concerned customers. The Children’s Online Privacy Protection Act of 1998 (USA) makes it illegal for Web sites to collect identifiable information from children < 13 years old without first obtaining their parents’ consent.

35 of 41 Ethical Standards Companies conduct business on the Web should try to follow the ethical standards as they were doing business in the physical world. High ethical standards can establish a company’s reputation and increase the level of trust of customers, suppliers, and employees. Lack of ethical practices can cause immediate damage to a company’s reputation.

36 of 41 International Nature of E-Commerce: Language Issues The Internet brings people together from different countries. Without the language barrier, e-commerce can be conducted with consumer, anywhere in the world. Language translation that takes into account the culture and customs of the country is called localization.

37 of 41 International Nature of E-Commerce: Legal Issues Doing business internationally presents a number of challenges. Many of the international issues relate to legal, tax, and privacy concerns. A country has the right to pass laws and levy taxes on businesses that operate within its jurisdictions.

38 of 41 International Nature of E-Commerce: Legal Issues Many smaller sites list the countries for merchandise delivery or provision of services. Terms of service statement: available on a Web site to protect it from laws and regulations. Terms of service statement: include rules, copyright statement for the site design and content, the types of business that a visitor can conduct with the site etc.

39 of 41 Future of Electronic Commerce Many businesses, organizations and individuals are interconnected via the Internet. The Web provides an easy-to-use interface. The combination of the Web’s interface and the Internet computer networking opens new opportunities for e-commerce. Not all hype, need time to mature.

40 of 41 Summary Companies use Web strategies to generate revenues, increase operational efficiency, and reduce costs. Emergence of new Web-based business models. E-commerce companies have taken steps to reassure consumers of their transaction security and their privacy. E-commerce operates in an international, legal and ethical environment.

41 of 41 Reference and websites Schneider, G. & Evans J. (2004), “The Internet, New Perspectives”, 5 th edition, Course Technology, Tutorial