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Electronic Commerce

Session 1: An Introduction to Electronic

Session Objectives
To provide an introduction to electronic
commerce (e-commerce) by answering the
following questions:
What is e-commerce?
What are the advantages and disadvantages of
What were the 1st and 2nd waves of e-
commerce characterised by?
What are the categories of e-commerce?
Session Objectives Contd
To discuss concepts such as:
Value chains
Transaction cost
To evaluate international electronic
commerce issues
What is Commerce?
Traditional commerce may be defined as:
From Webster's Revised Unabridged
Commerce : \Com"merce\, noun.

The exchange or buying and selling of commodities;

esp. the exchange of merchandise, on a large scale,
between different places or communities; extended
trade or traffic.
What is E-Commerce?
Electronic commerce (e-commerce) is a general
term for any type of business, or commercial
transaction that involves the transfer of
information across the Internet. This covers a
range of different types of businesses from
consumer-based retail sites, like Amazon.com,
through auction and music sites like eBay or
MP3.com, to business exchanges trading goods
or services between corporations.
What is E-Commerce Contd?
Electronic commerce is the use of
electronic communication to do business.
E-commerce is not about technology. It is
not a new business. E-commerce is a
method for companies to create and
operate their business in new and efficient
ways. [1]
What is E-Commerce Contd?
Most fundamentally, e-commerce
represents the realization of digital, as
opposed to paper-based, commercial
transactions between businesses, between a
business and its consumers, or between a
government and its citizens or constituent
business. [2]
What is E-Commerce Contd?
In summary, e-commerce is the
use of electronic communication to do business
Specifically, the transfer of information (transactions), over
the Internet
Some people use the term e-business to refer to
all the categories of e-commerce
E.g. IBM defines e-business as:
The transformation of key business processes through the
use of Internet technologies
From Traditional Commerce to
Opened avenues for
Sailing ships trade between buyers
and sellers. Ancient
times (thousands of
Printing press years ago)

Steam engine

From Traditional Commerce to
E-commerce Contd
Wire transfers - used
Electronic Funds Transfer (EFTs) by banks

Businesses transfer
electronic data
Electronic Data Interchange (EDI) - data not re-keyed
- high implementation
cost, thus excluded
small businesses

Internet On-line shopping

Business Processes Suited to
Certain Type of Commerce
Sale/purchase of books & CDs, travel
services, investments and insurance services
Online delivery of software
Online shipment tracking
Business Processes Suited to
Certain Type of Commerce Contd
E-commerce & Traditional
Sale/purchase of automobiles and residential
real estate (e.g. do research online then buy
from a dealer or real estate agent)
Online banking
Roommate matching service
Business Processes Suited to
Certain Type of Commerce Contd
Sale/purchase of impulse items for immediate
use, high fashion jewelry and antiques
(personal inspection required; prefer to touch,
smell or examine closely)
Small denomination purchases and sales
(since there is not yet a standard for
transferring small amounts of money)
What Are the Advantages of E-
Increases sales, decreases cost
Allows small businesses to have global customer
Reduced cost through electronic sales enquires, price
quotes and order taking
Provides purchasing opportunities for buyers
(businesses can identify new suppliers and
Increase speed and accuracy for exchanged
information, thus reducing cost
What Are the Advantages of E-
commerce Contd?
Business can be transacted 24hrs a day
The level of detail of purchase information is
selected by user
Digital products can be delivered instantly
Tax refunds, public retirement and welfare
support costs less when distributed over the
Allows products and services to be available in
remote areas, e.g. remote learning
What Are the Disadvantages of
Inability to sell some products (e.g. high cost
jewelry and perishable foods, although
supermarkets like www.Tesco.com delivers to
your home)
The newness and evolution of the current
Many products require a large number of people
to purchase to be viable
High capital investment
What Are the Disadvantages of
E-commerce Contd?
Difficulty in integrating current databases and
transaction processing systems into e-commerce
Cultural and legal obstacles
Transmission of credit card details
Some consumers resistant to change
Laws are unclear
Shipping profile: Products with a low value-to-
weight ratio that can not be efficiently packed and
shipped are unsuitable (use traditional commerce)
The 1st Wave of E-commerce
The 1st wave was from
the mid 1990s to 2003
Dot-com boom (over
$100 billion in
investment): Rapid
growth from mid-1990s
to 2000
Dot-com bust: in 2000
Gloom years: 2000
2003 (over $200 billion
in investment)
Characteristics of the 1st Wave3
It was primarily a U.S. phenomenon
Web pages were in English
Internet technologies were slow and inexpensive
(e.g. dial-up lines)
Bar codes and scanners used to track parts (B2B
and Business processes)
Email, tool for unstructured communication
On-line advertising main revenue source
The 2nd Wave of E-commerce
Beginning in 2003 e-
commerce has shown
signs of new life
Companies like
Amazon.com (books),
and eBay.com (auctions)
who survived the
downturn were beginning
to show profits
Continuous growth of
B2C sales: 20-30% each
year since 2000
Characteristics of the 2nd Wave
International scope where sellers do business in
many countries and languages
Faster, cheaper connections (x20 faster),
broadband at home (although more expensive)
Radio frequency ID devices and smart cards
Fingerprint readers and retina scanners (biometric
technologies) used for tracking
Email, integral part of marketing
Characteristics of the 2nd Wave
E-commerce integral part of marketing and
customer contact strategy
Some categories of on-line advertising, e.g.
employment services (job want ads) have
replaced traditional advertising outlets
Language conversions
Currency conversions
E-commerce Categories3
There are five general e-commerce categories:
Business to Consumer (or B2C) e-commerce
Business to Business (or B2B) e-commerce
(sometimes called e-procurement)
Business processes that support buying and selling
Consumer-to-consumer (or C2C) e-commerce
Business-to-government (or B2G) e-commerce
B2C e-commerce
Businesses sell products or services to
individual customers (consumers)
Walmart.com sells merchandise to consumers
through its Web site
Web site
B2B E-commerce
Businesses sell products or services to other
Grainger.com sells industrial supplies to large
and small businesses through its Web site
Web site
Business Processes that Support
Buy/Sell Activities
Businesses and other organisations maintain and use
information to identify and evaluate customers,
suppliers and employees (and to support buying,
selling hiring, planning and other activities). More
and more this information is being shared
Dell Computer uses secure internet connections to
share current sales and forecasts with suppliers who
use it to plan their production, therefore they deliver
the right quantities of components at the right time
C2C e-commerce
Participants in an online marketplace can buy and sell
goods with each other
Consumers and businesses trade with each other on
Web site
B2G e-commerce
Business sell goods or services to
governments and government agencies
Cal-Buy portal for businesses that want to sell
online to the State of California
Web site
E-commerce Categories Example
You are a computer manufacturing company who
performs the following activities on the Internet:
Sells computers to individuals (B2C)
Purchases parts (e.g. hard drives, power supplies etc.)
from a supplier (B2B)
Hires staff, manage customer accounts, advertise, etc.
(Business processes)
Sells computers to the Government to be used in
schools (B2G)
On eBay.com individuals buy and sell this brand of
computers (C2C)
Relative Sizes of E-commerce

Business processes B2B

Relative Sizes of E-commerce
Categories Contd
Year B2C Sales B2B Sales
($ Billions) ($ Billions)
2005 150 4100

2004 130 2800

2003 100 1600

2000 50 60
Economic Forces
Economics is the
study of how people
allocate scare
Resources are
allocated through:
Government actions
(e.g. taxes)
A market is a place where sellers can come into
contact with buyers and a medium of exchange
(e.g. currency) is available (e.g.the stock market)
Some hierarchal organisations (companies)
however, due to high transaction cost, choose to
replace supplier markets with its own hierarchal
structure for creating the product. This is called
vertical integration
E.g. Thomson Financial, a financial software
provider, purchased the data supplier Datastream
Hierarchical Organisations
Firms participate in markets to purchase raw
materials and sell finish products.
Chief Operating Officer

Executive1 Executive2 Executive3

ManagerA ManagerB ManagerE ManagerF ManagerJ ManagerK

WorkerA WorkerB WorkerE WorkerF WorkerJ WorkerK

Transaction Costs
Transaction costs are the total costs that a buyer
and seller incur as they gather information and
negotiate a purchase/sale transaction
Transaction costs are the main reason for vertical
integration (Ronald Coase)
Businesses can use e-commerce to reduce
transaction costs (e.g. telecommuting rather than
physical commuting to allow global employment
Transaction Costs Example
Transaction costs incurred by a sweater
dealer when purchasing from independent
sweater knitters:
Cost of identifying independent knitters
Cost of site visit to negotiate purchase price,
arrange delivery and inspection of sweaters
Costs incurred by knitters:
Knitting tools and yarn purchase
Network Economic Structures
Many businesses operate in an economic
structure that is neither market or hierarchical
These businesses form, long-term, strategic
alliances with other companies who share
common goals and strategies
These alliances may occur over the Internet
which are called virtual companies
Teams complete a project or activity then dissolve
New teams are creating as required
Value Chains
A value chain is a way to organise the
activities that a business undertakes to
design, produce, promote, market, deliver
and support the products or services it sells
There are several types of value chains
Business unit value chains
Industry value chains
Strategic Business Unit Value
A strategic business unit is a particular
combination of product, distribution channel and
customer type (large firms often break down their
business into these units)
The value chain for a strategic business unit
Primary activities (the activities that the strategic
business unit undertakes
Support activities (such as human resource
management and purchasing)
Manufacturer Value Chain
Primary activities
Manufacture After sales
Design deliver
product or create service & support

Identify Purchase materials

Market & sell and supplies

Finance Technology Support activities

& admin HR
Primary Activities
Identify new customers, and sell new services to
existing customers (research & surveys)
Design from concept to manufacturing
Purchase materials and supplies includes
contracts, vendor selection, monitoring quality
and delivery timeliness
Manufacture product or create service transform
materials and labour into finished products
Primary Activities Contd
Market and sell advertising, promoting,
managing sales staff, pricing and monitoring sales
Deliver store, deliver distribute and ship final
product warehousing, consolidating freight,
selecting shippers and monitoring delivery
Provide after-sale service and support promote
relationship with customer, e.g. installing,
maintaining, testing, repairing, and warranties
Primary Activities Contd
If a strategic business unit provides a
service then the value chain will include a
Provide service activity instead of
Manufacture activity
Support Activities
Each business unit must also undertake support
activities that provide the infrastructure for the
primary activities:
Finance and administration accounting, paying
bills, borrowing, compliance with laws
Human resources recruiting, hiring, training,
compensation and benefits
Technology development improves the product or
service, including basic and applied research and
development, process improvement and field tests of
maintenance procedures
Industry Value Chains
Industry value chains describes the larger stream
of activities into which a particular business units
value chain is embedded
When a business unit delivers a product to a
customer the customer might use the product as
purchased materials in its value chain
By examining how other business units in the
industry value chain conduct their business cost
reduction and product improvement may result
Industry Value Chain Example
A value chain for a wooden chair
Logger cuts down tree
Sawmill converts logs to lumber
Lumberyard provides selection of lumber
Chair manufacture assembles chair
Furniture retailer markets and sells chair
Consumer purchases and uses chair
Landfill or recycler disposes of chair
International Issues
Trust issues
Language issues
Culture issues
Infrastructure issues
Trust Issues
Anyone can create a site on the Web
These individuals or businesses can easily remain
Without an established brand consumers find it
difficult to trusts on-line businesses:
especially with personal information and credit card
The key is developing methods which allow
legitimate businesses to establish trusts
relationships quickly with consumers
Language Issues (localisation)
Global impact requires local language Web sites
customers prefer to buy from sites in native language
60% of web content today is in English; but more
than 50% of the current users do not read English
Multiple translations may be required for
different dialects, e.g. Spanish- Mexico and Spain
Translating entire Web sites is expensive
25-90 cents per word for human translators (400-600
words per hour)
Automated software translation (machine translation)
is cheaper (400,000 word per hour) - less accurate
Culture Issues
Culture is the combination of language and
Culture varies across national boundaries
and in many cases regions within nations
General Motors Chevrolet Nova automobile
amused people in Latin America since no va
means it will not go
Culture Issues Contd
Choice of icons on Web pages becomes
problematic on international Web sites:
In the US a shopping cart is useful, in the UK
a shopping basket is more appropriate,
Australians call shopping carts, shopping
In many places other than Brazil the thumbs
up gesture means okay, in Brazil it is an
obscene gesture
Infrastructure Issues
Limited telecommunication infra-structure
may lead to unreliable Internet access
Internet connection cost might be high
Reduces time businesses might spend surfing
for new suppliers or products
Flat-rate access to the Internet required
A commodity item is a product or service that is hard to
distinguish from the same products or services provided
by other sellers (e.g. gasoline, office suppliers, soap and
A transaction is an exchange of value, such as a purchase
or sale, or the conversion of raw materials into finished
products (a transaction has one or more associated
A business process is the set of logically related and
sequential activities and transactions in which businesses
Definitions Contd
Merchandising is a combination of store
design, layout and product display
A shipping profile is the collection of
attributes that affect how easily that
product can be packaged and delivered
(e.g. airline tickets have a high value-to-
weight ratio)
Definitions Contd
The definition of a market satisfies two
Potential seller of a good (product) comes
into contact with buyers
A medium of exchange is available (e.g.
currency or barter (to exchange goods or
services directly without the use
of money))
Definitions Contd
Transaction costs are the total costs that a
buyer and seller incur as they gather
information and negotiate a purchase/sale
transaction. This includes:
Brokerage fees and sales commissions
Cost of information search and acquisition
Sellers investment in equipment or hire of
skilled employees
[1] NSW Department of State and Regional Development, Brief on Electronic Commerce,
[2] Ford, Warwick, Secure Electronic Commerce: Building the Infrastructure for Digital Signatures and
Encryption (2nd Edition), pp. 1, 2000
[3] Schneider, Gary, P., Electronic Commerce: The second wave, Thomson Course Technology, Fifth
Annual Edition, 2004