Chapter 1 Introduction to Electronic Commerce

Learning Objectives In this chapter, you will learn about: The basic elements of electronic commerce Differences between electronic commerce and traditional commerce Economic forces that have created a business environment that fosters electronic commerce The ways in which businesses use value chains to identify electronic commerce opportunities The ways in which businesses use SWOT analysis and evaluate business opportunities

Traditional Commerce and Electronic Commerce To many people, the term electronic commerce means shopping on the part of the Internet called the World Wide Web. Although consumer shopping on the Web was running about $130 billion per year in 2002 and is expected to exceed $500 billion by 2004, electronic commerce is much broader and encompasses many more business activities than just Web shopping.

Traditional Commerce and Electronic Commerce Electronic commerce refers to business activities conducted using electronic data transmission via the Internet and the World Wide Web. The three main elements of e-commerce are: –Business-to-consumer –Business-to-business –The transactions and business processes that support selling and purchasing activities on the Web Other categories include: consumer-to-consumer and consumer-to-government.

Electronic Commerce

Electronic Funds Transfers (EFTs) have been used by banks for many years. Electronic Data Interchange (EDI) occurs when one business transmits computer-readable data in a standard format to another business.

Electronic Commerce Businesses who engage in EDI with each other are called trading partners. The standard formats used in EDI contain the same information that businesses have always included in their standard paper invoices, purchase orders, and shipping documents. Firms, such as General Electric and Wal-Mart, have been pioneers in using EDI to improve their purchasing process.

Value Added Network (VAN) A value added network is an independent firm that offers connection and EDI transaction forwarding services to buyers and sellers engaged in EDI. VANs are responsible for ensuring the security of transmitted data. VANs charge a fixed monthly fee plus a per- transaction charge to subscribers.

Activities as Business Processes Business processes refer to the group of logical, related, and sequential activities and transactions in which businesses engage, including: –Transferring funds –Placing orders –Sending invoices –Shipping goods to customers

Comparing Traditional Commerce and Electronic Commerce – Buyer’s Side

Comparing Traditional Commerce and Electronic Commerce – Seller’s Side

Business Process Suitability to Type of Commerce

Electronic Commerce Commodity item – product or service that is hard to distinguish from the same products or services provided by other sellers, making them especially well suited to electronic commerce. Shipping profile – collection of attributes that affect how easily a product can be packaged and delivered.

Advantages of Electronic Commerce Electronic commerce can increase sales and decrease costs. Web advertising reaches a large amount of potential customers throughout the world. The Web creates virtual communities for specific products or services.

Advantages of Electronic Commerce A business can reduce its costs by using electronic commerce in its sales support and order-taking processes. Electronic commerce increases sale opportunities for the seller. Electronic commerce increases purchasing opportunities for the buyer.

Disadvantages of Electronic Commerce Some business processes are difficult to be implemented through electronic commerce. Return-on-investment is difficult to apply to electronic commerce. Businesses face cultural and legal obstacles to conducting electronic commerce.

International Electronic Commerce About 60 percent of all electronic commerce sites are in English, therefore many language barriers need to be overcome. The political structures of the world present some challenges. Legal, tax, and privacy are concerns of international electronic commerce.

Economic Forces and Electronic Commerce Business activity today occurs within large hierarchical business organizations, referred to as firms or companies. Transaction costs are the total of all costs that a buyer and a seller incur as they gather information and negotiate a purchase-sale transaction.

Transaction Costs Transaction costs are the total of all costs that a buyer and a seller incur as they gather information and negotiate a purchase-sale transaction. Another significant component of transaction costs can be the investment a seller makes in equipment or in the hiring of skilled employees to supply the product and services to the buyer.

Economic Forces and Electronic Commerce

Network Effects As more people or organizations participate in a network, the value of the network to each participant increases. Example: An account that is part of the Internet is far more valuable than an account that connects only to other people in the company.

Value Chains Electronic commerce includes so many activities and transactions that it can be difficult for managers to decide where and how to use it in their businesses. One way to focus on specific business processes as candidates for electronic commerce is to break the business down into a series of value-adding activities that combine to generate profits and meet other goals.

Value Chains A strategic business unit is one particular combination of product, distribution channel, and customer type. A value chain is a way of organizing the activities that each strategic business unit undertakes to design, produce, promote, market, deliver, and support the products or services it sells.

Strategic Business Unit Value Chains The support activities of a value chain for a strategic business unit include: –Finance and administration –Human resources –Technology development

Industry Value Chains Value system describes the larger stream of activities into which a particular business unit’s value chain is embedded. Industry value chain (IVC) refers to value systems. IVC is used to identify opportunities for cost reduction, product improvement, or channel reconfiguration.

Value Chain for Strategic Business Units

SWOT Analysis: Evaluating Business Unit Opportunities Most electronic commerce initiatives add value by either reducing transaction costs, creating some type of network economics effect, or a combination of both. In SWOT analysis, you list the strengths and weaknesses of the business unit and then identify opportunities presented by the markets of the business unit.

SWOT Analysis: Evaluating Business Unit Opportunities

The Role of Electronic Commerce Electronic commerce can play a role in –reducing costs –improving product quality –reaching new customers or suppliers –creating new ways of selling existing products

The Role of Electronic Commerce By examining elements of the value chain outside of the individual business unit, managers can identify many business opportunities, including those that can be exploited by using electronic commerce.