The Digital Firm: Electronic Business and Electronic Commerce

1
The Digital Firm Electronic Business and
Electronic Commerce

• Chapter 4 (9th Ed.)

2
Chapter 4 and Our Questions

• What is the role of the Internet and networking
  technology in modern organizations?
• Distinguish among internets, intranets, extranets
• Describe the evolution of e-business and how
  e-business is transforming organizations and
  markets
• Explain organizational implications of the
  pervasiveness of the Internet

3
Outline of Ch 4

• I. Big ideas
• A. E-business e-commerce
• B. Impact of Internet
• C. Changes resulting from the Internet
• II. Internet business models
• III. Categories of e-commerce
• A. B2C B2B
• B. Other classifications
• IV. B2C environment
• A. Uniqueness
• B. Benefits

• V. B2B environment
• A. Buying selling (sourcing and
  procurement)
• B. Transaction types
• C. Auctions exchanges
• D. Supporting technologies
• 1. EDI
• 2. Electronic payments
• 3. Digital signature/certif.
• VI. Electronic business
• A. Collaborative commerce
• B. Extranets
• C. Intranets
• VII Management challenges
• A. Unproven business models
• B. Organizational change
• C. Trust, security, and privacy
• D. Examples

4
E-Business and E-Commerce

• E-commerce concerns the processes for buying and
  selling goods and services electronically
• E-business is the use of the Internet and IT to
  execute all of the business processes for the
  firm. E-business includes e-commerce, all
  internal processes, and coordination with
  business partners such as customers and suppliers
  

5
The Internet and the Digital Firm

• The Internet is the key enabling technology
  required to build a digital firm
• Internet technologies are becoming the
  infrastructure of choice for most firms
• Firms adopt Internet protocols for all networking
  activity
• The browser becomes the front-end for all
  applications and access to internal databases
• Internet enables seamless integration of
  information
• Within the firm and
• Between the firm and its business partners

6
Changes Resulting from the Internet

• Unbundling of information about products from the
  products physical location
• Retailing (e.g., books)
• Financial services
• Economics of information search costs
• For customers for merchants
• Information asymmetry
• Richness and reach
• Richness is the depth and detail of information
• Reach is how many people you can connect with
• Pre-Internet a business would have to choose one
• New business models

7
Internet Business Models

• Virtual storefront Sells goods or services
  online (Amazon.com)
• Information broker Provides information on
  products or services (Edmunds.com)
• Transaction broker Provides online transaction
  facility (eTrade.com, Expedia.com)
• Online marketplace Provides a trading platform
  for individuals and firms (eBay.com, alibaba.com)

8
More Internet Business Models

• Content provider Creates revenue by providing
  content (WSJ.com, TheStreet.com, mp3.com)
• Online service provider Provides online
  services, including search service. (Google.com,
  Xdrive.com)
• Virtual community Provides an online community
  to focused groups (Friendster.com, iVillage.com)
• Portal Provides initial point of entry to Web,
  specialized content, services (Yahoo.com,
  MSN.com)

9
Categories of E-Commerce

• Business-to-customer (B2C) Retailing of products
  and services directly to individual customers
  (Wal-Mart.com)
• Business-to-business (B2B) Sales of goods and
  services to other businesses (Grainger.com,
  Ariba.com)
• Consumer-to-consumer (C2C) Individuals using the
  Web for private sales or exchange (eBay.com
• Consumer-to-government, business-to-government,
  government-to-government

10
Other Way to Classify Businesses

• Pure play
• What happens when a pure player enters existing
  markets?
• Clicks and bricks
• Do Internet sales reduce conventional sales?
• How do you segment your product line?
• Should everyone sell directly to their customers?
  
• Bricks and mortar alone
• Catalog
• Where do catalog sales come in?
• Victoria Secret, LandsEnd, LL Bean

11
Uniqueness of the B2C Environment

• Direct sales via the Web (a new channel)
• Eliminate intermediaries (disintermediation)
• New roles for intermediaries (reintermediation)
  information brokers (edmunds.com)
• Interactive marketing and personalization
• Richness of information at the Web site
• Ability to capture customers web behavior at low
  cost (clickstream tracking)
• Ability to customize/personalize for each
  customer (Amazon and Dell)
• Collaborative filtering
• Corporate blogs
• Customer survey and focus groups

12
Uniqueness of the B2C Environment (continued)

• Customer self-service
• Find information
• Ask questions
• Review transactions
• Track shipments
• Push to talk links
• Online chats with tech support
• Using email
• Establish continuing relationships with customers
• Encouraging purchases

13
Benefits of B2C to Consumers

• Convenience (shop 24/7 from any location)
• Time savings
• Comparison shopping
• More choices
• Less expensive products due to more choices and
  competition
• Faster delivery for digital products
• Participate in virtual auctions
• Interact with other customers in virtual
  communities

14
Characterizing the B2B Environment

• B2B includes transactions between business
  conducted electronically over the Internet,
  extranets, intranets, or private networks
• In the B2B environment businesses are both buyers
  and sellers
• B2B activity is often called
• Sourcing the process of identifying, conducting
  negotiations with, and forming supply agreements
  with vendors of goods and services
• Procurement involves not only purchasing goods
  and services but also sourcing, negotiating with
  suppliers, paying for goods, and making delivery
  arrangements
• B2B activity takes place along the entire supply
  chain of a firm
• Size
• By 2004 market may reach 10 trillion much
  larger than B2C market
• About 10 of non-Internet B2B market by 2005

15
Characteristics of the B2B Transactions

• Parties to the transaction
• direct between buyer and seller
• online intermediary that brokers the transaction
• Types of transactions
• spot sourcing where goods and services are
  purchased as needed at prevailing market prices
• systematic sourcing where purchases are made in
  long-term supplier-buyer relationships negotiated
  in private

16
More Transaction Characteristics

• Types of materials or services
• direct materials used in making a product (steel
  in a car)
• indirect materials such as office supplies or
  used in maintenance, repair, and operations
  (MRO).
• Direction of trade
• Vertical marketplaces involve one industry or
  segment examples include electronics, cares
  steel, or chemical
• Horizontal marketplaces concentrate on a service
  or product used by many industries (office
  supplies, PCs, or travel services)

17
Auctions and Exchanges

• An exchange is a public electronic market with
  one or many buyers and one or many sellers there
  may or may not be dynamic pricing
• Auction a market mechanism by which a seller
  places an offer to sell a product and buyers make
  bids sequentially and competitively until a final
  price is reached (dynamic pricing)
• A reverse auction is when sellers are invited to
  bid on the fulfillment of an order to provide a
  product or service the lowest bid wins (e.g.,
  Priceline is a B2C reverse auction)

18
Exchange Types

• Types
• Sell-side with one seller to many buyers
  (private)
• Buy-side with one buyer from many sellers
  (private industrial exchange)
• Exchanges where there are many sellers and many
  buyers (public)
• Alibaba.com
• Ariba.com
• Converge.com (spot market)
• Globalsources.com

19
Sell-Side with One Seller

• Sellers may be click-and-mortar manufacturer or
  intermediaries (wholesalers like avnetcom)
  intermediaries may be pure-play (bigboxx.com)
• Use the Internet to sell through electronic
  catalogs
• Cisco, Dell, Staples
• Separate pages and catalogs for major buyers
• Another type is a forward auction to dispose of
  capital assets (GM does this)
• Boeing sponsors a website for which airlines can
  find maintenance and parts

20
Buy-Side with One Buyer

• This model arises from the procurement needs of
  firms where procurement involves the purchase of
  goods and services needed to accomplish the
  mission of the business
• In this model a buyer opens an electronic market
  on its own server and invites potential suppliers
  to bid on the items the buyer needs. The
  invitation is called a request for quote (RFQ).
  This process is called the reverse auction of
  bidding mode.
• GE was one of the first to do this
• Online directories exist for suppliers that list
  open RFQs

21
Exchanges with Many Buyers and Sellers(Net
Market Places or E-Hubs)

• A way to classify these exchanges is by (a) the
  type of materials traded (direct or indirect) and
  (b) the sourcing (systematic or spot)
• Spot sourcing of direct materials occurs in a
  vertical exchange (chemconnect.com)
• Spot sourcing of indirect materials occurs in a
  horizontal exchange (EmployEase.com)
• Systematic sourcing of direct materials is often
  done with an intermediary (plastics.com)
• Systematic sourcing of indirect materials
  (MRO.com)

22
Ownership of Exchanges

• Industry giant
• IBM established an exchange for selling patents
  (www.delphion.com)
• Neutral entrepreneur
• ChemConnect.com
• The consortia or co-op
• Covisint (automobile)
• Orbitz (airlines)

23
Services Provided by Intermediaries in an Exchange

• Services for buyers
• Automate buying, contract management, purchase
  orders, requisitions, business rules enforcement,
  and payment
• Services for sellers
• Catalog creation and content management, order
  management, invoicing, and settlement

24
Perspective on Exchanges

• Private exchanges are the fastest growing type of
  B2B commerce
• Early exchanges failed because suppliers were
  reluctant to participate fearing competitive
  bidding in spot buying would reduce prices.
  Suppliers are much more willing to reduce prices
  in systematic sourcing
• There is only room for 2 to 3 exchanges at most
  in a given industry

25
Technologies that Support B2B

• Electronic data interchange
• Proprietary
• Web-enabled
• Electronic payment systems
• Electronic funds transfer
• New methods of electronic payment
• Digital signatures and digital certificates

26
Electronic Data Interchange

• What is EDI?
• Exchange of standard business documents
  electronic data using interorganizational
  information systems
• Shipping data, payment data, production/inventory
  requirements
• Set of hardware, software, and standards that
  accommodate the EDI process
• Forms of EDI
• Earliest was through a VAN (since 80s)
• Newest is through the Web

27
Electronic Data Exchange

• How does EDI work?
• Suppliers proposal sent electronically to buyer
  organization.
• Electronic contract approved over network.
• Supplier manufactures and packages goods,
  attaching shipping data recorded on a bar code.
• Quantities shipped and prices entered in system
  and flow to invoicing program shipping data and
  invoices are transmitted electronically to buyer
  organization.

28
Electronic Data Exchange(How does it work?)

• Supplier ships the order.
• Buyer organization receives packages, scans bar
  code, and compares data to invoices actual items
  received.
• Payment approval transferred electronically from
  the buyers accounts payable dept. to buyers
  bank .
• Bank transfers funds from buyer to suppliers
  account using electronic fund transfer (EFT).

29
Electronic Data Interchange
30
Electronic Data Interchange Standards

• EDI requires companies to agree on
• Compatible hardware and software
• Electronic form format
• Established EDI standards
• X.12 de facto umbrella standard in U.S. and
  Canada
• EDI for Administration, Commerce, and Trade
  (EDIFACT) umbrella of standards in Europe

31
EDI Implementation

• VAN suppliers
• GE Information Services, Sprint, WorldCom,
  Sterling Commerce
• Majority of EDI transaction take place with VAN
• Web EDI
• Rapidly overtaking VAN EDI
• Use Web technologies
• Accessible to businesses of all sizes
• Success attributed to XML
• Complements HTML by allowing users to put tags
  around an element that tells the browsers about
  the data content of an element
• Businesses can create their own tags

32
Web Enabled EDI

• Advantages of Web EDI
• Lower cost
• More familiar software
• Worldwide connectivity
• Fast communication
• Real time information exchange
• Disadvantages of Web EDI
• Unpredictable speeds
• Security is not always up to VAN EDI

33
Electronic Payment Systems

• Electronic funds transfer (EFT)
• Electronic checks
• Automated bill paying
• Digital wallet stores credit card and owner id
  information and provides that information at
  checkout
• Digital cash (e-cash) in exchange for cash you
  get electronic files that represent various
  denomination you send files to merchant as
  payment merchant exchanges files for cash
• Smart card (or electronic purse)
• Special card reader required
• Recharging

34
Electronic Commerce Payment Systems
35
Digital Signatures and Digital Certificates

• A digital signature is a digital code attached to
  an electronically transmitted message (e.g., an
  EDI document) that is used to verify the origin
  and contents of the message. It provides a way
  to associate a message with a sender similar to a
  written signature.
• Digital certificates verify (off line) that the
  holder of a digital signature is who he/she
  claims to be. Third parties called certificate
  authorities issue digital certificates. One
  company that does this is VeriSign.

36
Major Benefits of B2B to Business

• Reduction of paper and administrative costs
• Reduces cycle time (time compression)
• Reduces search costs/time for buyers and sellers
• Reduces inventory levels and costs
• Reduction in errors and/or improved quality of
  service
• Enables JIT and production flexibility
• Enables mass customization
• Expands the marketplace

37
Electronic Business and the Digital Firm

• Collaborative commerce
• Intranets are internal networks based on Internet
  and WWW standards that enable employees to
  exchange ideas, share information, and work
  together
• Specific intranet applications for functional
  areas
• Coordination of cross functional supply
  processes order processing, accounting,
  shipping, inventory, procurement, production,
  planning (ERP with Internet technologies)
  internal processes
• Provide external entities (customers, suppliers,
  shippers) with access to the intranet extranet
  concept

38
Collaborative Commerce

• Collaborative commerce concerns the use of
  digital technologies to improve planning,
  production, and distribution of goods and
  services
• Aspects of interaction other than buying/selling
• Coordination in product design
• Sharing of information along the supply chain
• Sharing shipping costs
• Closely related to the extranet concept

39
Information Most Frequently Found in Corporate
Intranets

• Customer databases
• Corporate policies and procedures (Winthrop)
• Corporate phone directories
• Human resource forms (Winthrop)
• Training programs
• Product catalogs and manuals (Winthrop)
• Data warehouse and decision support access
• Internal purchase orders (Winthrop)
• Travel reservations

40
Functional Applications of the Intranet Idea
41
The Extranet Concept

• An extranet is created when authorized users from
  outside the firm have access to the firms
  intranet
• Extranets enable the external entities to
  coordinate their business processes with the
  internal processes of a given firm
• The extranet may or may not be involved with
  direct sales.

42
Specific Extranet Examples

• AMP is an electronic-connectors distribution
  company customers use AMP Connect to access an
  electronic catalog with product descriptions, 3-D
  models, and comparative charts for all products
  customers can place orders
• Receives 100,000 hits daily from 15,000 business
  customers worldwide
• CSX (railroad) developed an extranet that allows
  CSX customers to trace shipments, initiate work
  orders, and view pricing data over the Internet

43
Management Challenges

• Unproven business models
• Making money via e-commerce is not easy
• Need for clear strategies
• Organizational changes
• Direct sales impact on distributors/retailers
• Inexperience with direct sales
• Impact on sales force
• Change in business processes
• Trust, security, and privacy
• Sharing information with business partners
  requires considerable trust and confidence about
  security
• Privacy regarding collection of customer
  information is an on-going issue

44
An Example of Process Changes

• Winthrop University processes
• Online applications
• Online course registration
• Online payments
• Online grade reporting
• Online transcript access
• Impact of process changes at Winthrop University
• Role of traditional print media and web site
• Need for managing consistency
• Increased security for online grading

45
More on the Privacy Challenge Consumer Privacy

• Consumer information has great value and is
  inexpensive to gather
• Puts pressure on firms to use information
  irresponsibly
• No comprehensive consumer protection laws in US
• Example of legal consumer rights for EU citizens
• Know the marketers source of information
• Check information for accuracy
• Correct any incorrect information
• Specify that information cannot be transferred to
  a third party without consent
• Know the purpose for which the information is
  being collected