e comm

MD253 / MK253 Electronic Commerce
April 19, 2006 Telecom How the Internet Works Telecommunication Markets

Issues Covered
• How the Internet Works
– IP addresses, TCP/IP, packet switching, and why you should care

• Telecom markets
– RBOCs, Cable, CLECs, VoIP, and more – Crushing monopolies, shifting billions in wealth

The Transmission Speed Crib Sheet
• Bandwidth
– measure of transmission speed / capacity

• Bits & Bytes
– bit - smallest form of computer memory - 1 or 0 – byte - 8 bits, roughly 1 character (Latin alphabet)

• How do we measure speeds?
– – – – – bps - bits per second Kbps - kilobit, thousands of bits per second Mbps - megabit, millions of bits per second Gbps - gigabit, billions of bits per second Tbps – terabit, trillions of bits per second (a.k.a wicked fast)

Anatomy of a URL
• URL
– Uniform Resource Locator (web address)
http://www2.bc.edu/~gallaugh/directory/file.html

application protocol (http is assumed by current browsers). Others: FTP, NNTP

host (others @ BC: agora, www)

domain user ID name, top level domain

directory

file

case sensitive

The DNS & IP Addresses
• IP Address
– Unique number identifying Internet computers. Expressed as four numbers between 0 and 255. – ex: www.bc.edu = 136.167.2.96 (32 bit address) – IPv6: 128 bit addressing, more efficient/faster, secure

• DNS - Domain Name Service
– A distributed database used to translate host/domain names, into Internet Protocol (IP) Addresses.

• Registry of an Internet domain name:
– for com, net, org, over 60 firms (see icann.org for list) – for country-specific domains (.jp,.uk, .tv) fees vary widely (see icann.org for list)

Network Interconnections
dial-in web server www2.bc.edu users (56.6 Kbps) dorm users class/office users

modem pool

dorm LAN

office LAN

wireless

R

BC Campus Network Backbone (1 Gbps)

(IP #s 136.167.xxx.xxx domain)
Internet Leased Line through our ISPs (100 Mbps)

stanford.edu

The Internet
google.com whitehouse.gov
local ISP

TCP/IP
• TCP/IP - the Internet‘s common language • TCP - Transmission Control Protocol. Breaks up transmissions (e-mail messages, web pages, etc.) into packets of no more than about 1500 characters each, checks the integrity of incoming packets, and reassembles packets on the other end • IP - Internet Protocol. Routes packets.

Packet Traffic
• What‘s in a packet?
– source address – destination address – error checking (checksum) – time to live – options (timestamp, record route, etc.) – your data!

A Packet Switched Network at Work
packet1 E-mail message:
Prof. Gallaugher, I just wanted to let you know that I got a job based on the stuff I learned in your class...

R
packet1 packet2 R packet3 packet2 E-mail message:
Prof. Gallaugher, I just wanted to let you know ...

R packet1
packet3

R
packet2

R
packet2 packet3

R

= router

packet3

US Internet Infrastructure

Portions of the Abilene Intenet2 Backbone

Circuit vs. IP Telephony
Circuit Switching

Guaranteed QoS (quality of service)

Internet VoIP (e.g. Vonage, AT&T CallVantage, Skype)

packets over the Internet, variable QoS

The Internet

Private Network VoIP (e.g. corporate VoIP) packets over private network, improved QoS

Private IP Network

Words from the Powerful
VoIP is the most significant paradigm shift in the entire history of modern communications since the invention of the telephone. Employees ask me what I‘m most excited about and I tell them Voice over the Internet. It is going to be a really big deal for us.

Former FCC Chair Michael Powell

Time Warner CEO Richard Parsons

MD253/MK252 Electronic Commerce
April 10, 2006 Web 2.0: Power through User-Created Content

Topics Covered
• User-Contributed Web
– Technologies – Examples:
• • • • • Blogs social networking sites Flickr Digg And more…

– Pros & Cons – Wikipedia

MD253/MK252 Electronic Commerce
March 22, 2006 Strategy & the Internet

Topics Covered
• E-Commerce & The Five Forces of Industry Competitiveness • Operational Effectiveness & Strategic Positioning • Resources for Competitive Advantage
– Characteristics – Examples of key resources – The Value Chain

• Strategy & the Internet – a critical look

ICA: Industry & Competitive Analysis
(Porter‘s Five Forces)
Potential New Entrants

Power of Suppliers

Industry Competitors

Power of Buyers

Substitute products or services

Critical Concepts in Understanding Competitive Advantage
• Operational Effectiveness – performing the same tasks better than your rivals. • Strategic Positioning – performing different tasks than your rivals, or performing the same tasks in a different way.

How Do We Know if Assets Yield Sustainable Advantage?
• Rareness
– Is the asset in limited supply or difficult to acquire?

• Value
– Does the asset yield value to the firm/customers?

• Imperfectly Imitable
– Is the asset impossible to imitate?

• Non-Substitutable
– Is the asset without comparable substitutes?

87% Decline in International DS-3 Pricing in two years

Source: BandXChange

Key Resources for Competitive Advantage
– Imitation-resistant Value Chain Organization – Brand – Scale Economies – Alliances (with complementary firms & competitors) – Network Effects – Data and Switching Costs – Distribution Channels – Differentiation – product or service – Patents?

Value Chain
Infrastructure: general mgmt, planning, finance, IS HRM: recruiting, hiring, training, and development Tech. Development: R&D Procurement Inbound Operations Outbound Marketing logistics logistics & Sales

Service

MD253/MK252 Electronic Commerce
April 3, 2006 Search & Advertising: Google, Yahoo, Microsoft

Topics Covered
• Online Advertising Spending/Growth • Google
– Firm background – Revenue streams – Weaknesses/challenges w/model – Areas for development

• Competitors
– Yahoo, Microosft, & others – Exploitable resources

Ad Spending: Comparisons & Growth

The U.S. Ad Market
$283B
Cable TV Mags $16.7B $13.0B

Direct Mail $57.2B

Newspapers $49.6B

Broadcast TV $46.7B

Radio $21.0B

YP $14.5B

Internet $11.3B

Other $53.0B

Experiments with Offline Ads

Google Growth
Revenue ($ Millions)
$7,000 $6,139M $6,000 $5,000 $4,000 $3,189M $3,000 $2,000 $1,000 $0 2002 2003 2004 2005 $440M $0.45 $0.41 $0 $2 $1,466M $1.46 $1
Revenue EPS (diluted)

EPS (diluted)
$6 $5.02 $5 $4

$3

Google Revenue Streams
AdWords AdSense

Licensing

Google Enterprise Products

AdSense
The Power of the ―Tail‖
• Coverage for advertisers beyond search targeting
– AdSense network covers nearly every topic imaginable – Matches highly targeted advertising with niche content

3.9 Million Daily Page Views on Hip Hop Related Sites

• Broad reach for branding advertisers
– Site Targeting allows advertisers to reach their target audience – Aggregates the long tail

Top 10 Highest Paying Keywords
$54.33 mesothelioma lawyers $47.79 what is mesothelioma $47.72 peritoneal mesothelioma $47.25 consolidate loans $47.16 refinancing mortgage $45.55 tax attorney $41.22 mesothelioma $38.86 car accident lawyer $38.68 ameriquest mortgage $38.03 mortgage refinance
Source: San Jose Mercury News, March 2006

Despite Click Fraud, Advertisers are Spending More

Source: TNS-MI; 2005 and 2003 US online display advertising, excludes companies with online spend less than $400K in 2003

AdWords Editor for Sophisticated Advertisers

Options for SMBs
Simple Bidding

Straightforward Reporting

Intuitive Targeting

Ads In Local Search
Targeted Advertising

61

Ads In Google Earth

Targeted Advertising

70-20-10 Product Framework
10%
AdSense Offline Google Movies

Google Code

Google Video Google Talk

20%
Enterprise Book Search
Google Reader

Google Suggest

Gmail

Core 70%
Search

AdSense

Google Pack

Orkut

Google Earth Local Search

Ads

Desktop Search Mobile Search

WiFi

Google - A Global Product
= Engineering and PM offices
• • • • • • Mountain View, CA Kirkland, WA Phoenix, AZ Pittsburgh, PA New York, NY Santa Monica, CA • • • • • • • • • • Bangalore, India Beijing, China Belo Horizonte, Brazil Hyderabad, India London, U.K. Munich, Germany Tokyo, Japan Trondheim, Norway Waterloo, Canada Zurich, Switzerland

Cost/performance evolution is not just in chips…

Cookies
• stored in a text file on your hard drive • usage – track users (unique ID) – save passwords / prefs. – temporary storage (shopping basket) • each cookie can only be accessed by the domain that placed it (ads have own domain) • may be disabled (prefs) • a cookie  single user

Targeting
Targeting Options • site categorization • visitor frequency • geography • domain name • service provider • SIC codes • company size (emp, $) • browser type • operating system • click stream

Chapter 9: Electronic Commerce Software

Objectives
In this chapter, you will learn about: • Finding and evaluating Web hosting services • Basic functions of electronic commerce software • Advanced functions of electronic commerce software • Electronic commerce software for small and midsize businesses • Electronic commerce software for midsize to large businesses

• Electronic commerce software for large businesses that have an existing information technology infrastructure

Web Hosting Alternatives
• Self-hosting
– Running servers in-house

• Commerce service providers (CSPs)
– Provide Internet access to companies and individuals
– Offer Web server management and the renting of application software

Web Hosting Alternatives
• Shared hosting
– Client‘s Web site is on a server that hosts other Web sites simultaneously

• Dedicated hosting
– Service provider makes a Web server available to a client

• Co-location
– Service provider rents a physical space to the client to install its own server hardware

Basic Functions of Electronic Commerce Software
• Electronic commerce solutions should, at a minimum, provide:
– A catalog display – Shopping cart capabilities – Transaction processing

Basic Functions of Electronic Commerce Software
• Additional software components can include:
– Middleware – Enterprise application integration – Web services – Integration with enterprise resource planning (ERP) software – Supply chain management (SCM) software

– CRM
– Content Management Software – Knowledge Management Software

Catalog Display
• Catalog
– Listing of goods and services
• Static catalog: Simple list written in HTML that appears on a Web page • Dynamic catalog: Stores information about items in a database

Shopping Cart
• Early shopping carts relied on forms for submitting orders. • Problems with forms-based shopping:
– Shoppers have to write down product information before going to the order form – Customers sometimes forgot whether they had clicked the submit button – Confusing and error prone

Shopping Cart (continued)
• Forms-based method of ordering has given way to electronic shopping carts • Shopping cart
– Keeps track of items a customer has selected – Allows customers to view contents of their carts, add new items, or remove items

Transaction Processing
• Transaction processing occurs when a shopper proceeds to the virtual checkout counter by clicking a checkout button • The server must then perform any necessary calculations
– Computing taxes and shipping costs – Provisions for coupons, special promotions, and time-sensitive offers

Advanced Functions of Electronic Commerce Software
• Middleware
– Establishes a connection between electronic commerce software and, for example, an accounting system

Enterprise Application Integration and Databases
• Application program
– Program that performs a specific function

• Application server
– Computer that takes request messages received by the Web server and runs application programs

• Business logic
– Rules used in the business

Enterprise Application Integration and Databases
• Page-based application systems
– Return pages generated by scripts

• Component-based application systems
– Separate presentation logic from business logic

• Database manager
– Software that stores information in a highly structured way

Enterprise Application Integration and Databases
• Distributed information systems
– Large information systems that store the same data in many different physical locations

• Distributed database systems
– Databases within distributed information systems

Web Services
• Combination of software tools that let application software in one organization communicate with other applications over a network
– Companies are using Web services to offer improved customer service and reduce costs

SOAP, WSDL, and UDDI Specifications
• Simple Object Access Protocol (SOAP)
– A message-passing protocol that defines how to send marked up data from one application to another across a network – A protocol for exchanging XML-based messages
<soap:Envelope xmlns:soap="http://schemas.xmlsoap.org/soap/envelope/"> <soap:Body> <getProductDetails xmlns="http://warehouse.example.com/ws"> <productID>827635</productID> </getProductDetails> </soap:Body> </soap:Envelope>

SOAP, WSDL, and UDDI Specifications
• Web Services Description Language (WSDL)
– Describes characteristics of logic units that make up specific Web services

• Universal Description, Discovery, and Integration (UDDI) specification
– Set of protocols that identify locations of Web services and their associated WSDL descriptions

Electronic Commerce Software for Small and Midsize Companies
• Commerce Service Providers (CSPs)
– Have same advantages as ISP hosting services
• Low cost is biggest single advantage

• Offer free or low-cost electronic commerce software for building electronic commerce applications
– Valueweb.com – Tophosts.com – Interland.com

Mall-Style Commerce Service Providers
• Provide small businesses with:
– Internet connection – Web site creation tools

– Little or no banner advertising clutter
– shopping cart software

• Example CSPs
– eBay Stores – Bigsteps.com

Mall-Style Commerce Service Providers
• Bigstep received many industry awards for its CSP offering
• It provides two different storefront packages • Reports
– Provide data-mining capabilities

– Data mining
• Looking for hidden patterns in data

Electronic Commerce Software for Midsize to Large Businesses
• Midrange packages allow a merchant to have explicit control over:
– Merchandising choices – Site layout – Internal architecture – Remote and local management options

Intershop Enfinity
• Intershop Enfinity MultiSite provides:
– Search and catalog capabilities – Electronic shopping carts – Online credit card transaction processing – The ability to connect to existing back-end business systems and databases

IBM WebSphere Commerce Professional Edition
• Set of software components that provides software suitable for midsize to large businesses

• Includes:
– Catalog templates – Setup wizards – Advanced catalog tools

Microsoft Commerce Server 2002
• Allows businesses to sell products or services on the Web using the following tools:
– User profiling and management – Transaction processing – Product and service management – Target audience marketing

• Provides many predefined reports for analyzing site activities and product sales data

Electronic Commerce Software for Large Businesses
• Examples of enterprise-class products that can be used to run a large online business:
– IBM WebSphere Commerce Business Edition – Oracle E-Business Suite – Broadvision One-To-One Commerce

• Enterprise-class software
– Typically provides good tools for linking to and supporting supply and purchasing activities

Customer Relationship Management Software
• Must obtain data from operations software that conducts activities such as:
– Sales automation

– Customer service center operations
– Marketing campaigns

• Must also gather data about customer activities on the company‘s Web site and any other points of contact

Supply Chain Management Software
• Helps companies to coordinate planning and operations with their partners in the industry supply chains • Performs two general types of functions:
– Planning – Execution

Content Management Software
• Helps companies control large amounts of text, graphics, and media files
– EMC Software – Vignette – WebMethods

Knowledge Management Software
• Helps companies do four main things:
– Collect and organize information
– Share information among users

– Enhance ability of users to collaborate
– Preserve knowledge gained through the use of information

Summary
• A company must first choose between paying a service provider to host the site and self-hosting • External hosting options
– Shared hosting, dedicated hosting, and colocation

• Key elements of electronic commerce software
– Catalogs, shopping carts, and transaction processing capabilities

Summary
• Commerce service provider (CSP)
– Used by small enterprises just starting an electronic commerce initiative

• If a company already has computing equipment and staff in place, purchasing a midrange electronic commerce software package provides more control over a site • Large enterprises with high transaction rates need to invest in larger, more customizable systems

CHAPTER 8

E-COMMERCE APPLICATIONS

E-COMMERCE TECHNOLOGIES
Electronic commerce – the electronic transmission of buyer/seller transactions and related information between individuals and businesses or between two or more businesses that are trading partners

Page 239

E-COMMERCE TECHNOLOGIES
• Will we see continued growth in e-commerce (Internet) applications? Consider Metcalfe‘s Law: The value of a network to each of its members is proportional to the number of other users, expressed as (n2 – n) / 2
– There are increasing returns to be gained as more organizations and people use the Web

•

Page 240

E-COMMERCE TECHNOLOGIES
Commercial History of the Internet

Figure 8.1 Internet Technology Innovations for E-Commerce

Page 241

E-COMMERCE TECHNOLOGIES Technologies for B2C Applications
•
• • •

•

Improvements for online sales or auction bidding New channels for customer service Collection of clickstream metrics and personal data from Web site users Acceptance of Web ―cookies‖ stored on user‘s hard drive to enable customization of Web sites Web browser improvements with multimedia
Page 240

E-COMMERCE TECHNOLOGIES Technologies for B2B Applications
• Most important technological advance for B2B applications – XML markup language
– – Now have accepted standards Can be used for a flexible, low-entry form of EDI Electronic data interchange (EDI) – proprietary applications for communicating with trading partners based on agreedupon standards for business document transmission

Page 242

E-COMMERCE TECHNOLOGIES Technologies for B2B Applications
• EDI Benefits:
– – – Reduced cycle times for doing business Cost savings for automated transaction handling and elimination of paper documents Improved interfirm coordination and reduced interfirm coordination costs Start-up coordination challenges (EDI standards agreement and legal issues) Start-up and ongoing IT costs

•

EDI Constraints:
– –

Page 242-243

E-COMMERCE TECHNOLOGIES Technologies for B2B Applications
• Prediction:
– Web forms using XML and extranet applications will continue to grow!

Page 242-243

E-COMMERCE TECHNOLOGIES Technologies for IT Security
• • Potential constraint to e-commerce: lack of security for Internet transactions Issues:
– – How to control access to a computer that is physically networked to the Internet How to ensure that security of a given communication is not violated

Page 243

E-COMMERCE TECHNOLOGIES Technologies for IT Security
How to control access to a computer that is physically networked to the Internet?

•

Use of a firewall – devices that sit between the Internet and an organization‘s internal network to block intrusions from unauthorized users and hackers
How to ensure that security of a given communication is not violated?

•

Encryption – based on two decoding keys and mathematical principles for factoring a product into its two prime numbers, where one key codes a message and the other decodes it
Page 243-244

(Adapted from Applegate, Holsapple, et al. 1996; Kalakota and Whinston, 1996)

Figure 8.2 E-Commerce Framework

Page 244

LEGAL AND REGULATORY ENVIRONMENT
• • • • Tax Policies Copyright Lays Antitrust Laws Privacy Issues

Page 244-246

STRATEGIC OPPORTUNITIES AND THREATS
•
1. Supplier power
2. Customer power 3. Threat of new entrants

Porter‘s Competitive Forces Model

4. Threat of substitute products or services 5. Responses of competitors

Page 246

STRATEGIC OPPORTUNITIES AND THREATS
• Opportunities due to the Internet:
1. Procurement of supplies via Internet can increase company‘s power over suppliers
2. Size of potential market is expanded 3. Distribution channels between traditional company and customer can be eliminated

Page 246

STRATEGIC OPPORTUNITIES AND THREATS
• Threats to traditional companies due to the Internet:
1. Migration to price competition – difficult to keep offerings proprietary 2. Increased number of potential competitors 3. Internet reduces some traditional barriers (such as in-person sales force) 4. Customers increase their bargaining power – Internet reduces customer‘s switching costs
Page 246-247

The four main areas where companies conduct business online
1. Direct marketing, selling, and services 2. Financial and information services 3. Maintenance, repair, and operations (MRO) 4. Intermediaries

Maintenance, Repair, & Operations (MRO)
• MRO goods include – office suppliers, office equipment, furniture, computers, and replacement parts

• Internet transforms corporate purchasing from a labor-and paperwork-intensive process into a self-service application

Intermediaries
• Content providers – companies that use the Internet to distribute copyrighted content, including news, music, games, books, movies, and many other types of information • Online brokers – intermediaries between buyers and sellers of goods and services • Market makers –intermediaries that aggregate three services for market participants – A place to trade – Rules to govern trading – An infrastructure to support trading

Types of Intermediaries

E-BUSINESS MODELS
B2C Applications

Figure 8.4 Potential Benefits to Sellers and Buyers

Page 249

B2B Applications • If Buyers and Sellers are Fragmented, Independent Intermediaries are likely to be successful. • If Sellers are Concentrated, Sellers are likely to dominate.

• If Buyers are Concentrated, Buyers are likely to dominate.

Figure 8.5 Opportunities for B2B Marketplace

Page 250

E-BUSINESS MODELS
Atomic Business Models

Weill and Vitale proposition: The value
propositions of eight business models differ according to the degree to which the following ebusiness assets are captured online: – Customer transaction – to capture revenue – Customer data – to capture data about customer‘s purchasing needs – Customer relationship – ability to influence customer‘s behaviors
Page 251

E-BUSINESS MODELS
Atomic Business Models

(Based on Weill and Vitale 2001, Straub 2004)

Figure 8.6 Business Models and Their E-Business Assets

Page 251

E-BUSINESS MODELS
Atomic Business Models

(Based on Weill and Vitale 2001, Straub 2004)

Figure 8.6 Business Models and Their E-Business Assets

Page 251

DIRECT-TO-CUSTOMER EXAMPLES
Amazon.com

• Dot-com pioneer in online retailing of thirdparty products • Began as bookseller competitor • Now a multi-store, online mall • First profitable year 2003 • Provides excellent online shopping experiences for millions of customers
Page 252

(© 2004 Amazon.com, Inc. All right reserved.)

Figure 8.7 Amazon.com Home Page

Page 253

DIRECT-TO-CUSTOMER EXAMPLES
Dell.com

• Traditional direct seller and market leader of made-to-order microcomputers • Developed custom software to support ―mass customization‖ strategy • Took advantage of early penetration of Internet market

Page 254

(Used with permission of Dell Corporation.)

Figure 8.8 Dell.com Home Page

Page 254

DIRECT-TO-CUSTOMER EXAMPLES
Landsend.com

• Traditional catalog company that developed capability to give online tools to customers so they could make orders for new custom clothing via its Web site

Page 255

(© 2004 Lands‘ End, Inc. Used with permission.)

Figure 8.9 Landsend.com Home Page

Page 256

DIRECT-TO-CUSTOMER EXAMPLES
Successful Online Models

• Amazon.com • Dell • Lands‘ End

All developed B2C Web sites that use advanced technologies to support customized interactions with customers

Page 256

DIRECT-TO-CUSTOMER EXAMPLES
Successful Online Models

Source: Pew Internet & American Life Project Surveys, 2002

Figure 8.10 Common Online Activities by U.S. Consumers

Page 257

INTERMEDIARY EXAMPLES

(Based on Weill and Vitale, 2001)

Figure 8.11 Key Characteristics of Six Types of Intermediaries

Page 257

INTERMEDIARY EXAMPLES
eBay

• A dot-com pioneer in electronic auctions • One of first to achieve profitability • Now is a C2C, B2B, and B2C intermediary

Page 258

These materials have been reproduced with the permission of eBay, Inc. Copyright © eBay, Inc. All rights reserved.

Figure 8.12 eBay.com Home Page

Page 259

INTERMEDIARY EXAMPLES
Yahoo!

• Early dot-com intermediary • Has recently leveraged IT innovations and business acquisitions to become a leading portal • As a portal, site owns only the customer relationship • Primary source of revenue is advertisements • Through acquisition, now offers online job searches
Page 259-260

(Reproduced with permission of Yahoo! Inc. Copyright © 2004 by Yahoo! Inc. YAHOO! And the YAHOO! Logo are trademarks of Yahoo! Inc.)

Figure 8.13 Yahoo.com Home Page

Page 260

INTERMEDIARY EXAMPLES
Manheim

• Traditional B2B intermediary for sale of used cars • Has leveraged the Internet to reduce purchasing and sales costs • Provides remote, real-time bidding during physical auctions

Page 260-261

(Used with permission of Manheim.)

Figure 8.14 Manheim.com Home Page

Page 261

Types of Intermediaries

SPECIAL ISSUE: WHAT MAKES A GOOD WEB SITE?
• • Why is Web page design important? For e-commerce applications, the company‘s Web site is the company

Page 262

(Based on Rayport and Jaworski, 2004)

Figure 8.15 7Cs Framework for Web Site Design

Page 262

• E-commerce is a new way of conducting business, and as with any other new application of technology, it presents both opportunities for improvement and potential problems

• Identify several advantages of e-commerce • Outline a multistage model that describes how ecommerce works • Identify some of the major challenges that

• E-commerce requires the careful planning and integration of a number of technology infrastructure components

• Outline the key components of technology infrastructure that must be in place for ecommerce to succeed

• Users of e-commerce technology must use safeguards to protect themselves

• Identify the major issues that represent significant threats to the continued growth of e-commerce

• Organizations must define and execute a strategy to be successful in e-commerce

• Outline the key components of a successful e-commerce strategy

An Introduction to Electronic Commerce
• Business-to-consumer (B2C) ecommerce: customers deal directly with the organization, avoiding any intermediaries • Business-to-business (B2B) ecommerce: participants are organizations

• Consumer-to-consumer (C2C) e-

Multistage Model for Ecommerce
• Search and identification • Selection and negotiation • Purchasing products and services electronically • Product and service delivery • After-sales service

Figure 8.1: Multistage Model for E-Commerce (B2B and B2C)

E-Commerce Challenges
• Define an effective e-commerce model and strategy • Need to change distribution systems and work processes • Integrate Web-based order processing with traditional systems

Figure 8.3: Three Basic Components of a Successful E-Commerce Model

Figure 8.4: Web-Based Order Processing Must Be Linked to Traditional Back-End Systems

The E-Commerce Supply Chain
• Supply chain management is a key value chain composed of:
– Demand planning

– Supply planning
– Demand fulfillment

Figure 8.5: Supply Chain Management

The E-Commerce Supply Chain (continued)
• E-commerce supply chain management allows businesses an opportunity to achieve:
– Increased revenues and decreased costs – Improved customer satisfaction – Inventory reduction across the supply chain

Business-to-Business (B2B) E-Commerce
• Allows manufacturers to buy at a low cost worldwide

• Enterprises can sell to a global market
• Offers great promise for developing countries

Business-to-Consumer (B2C) E-Commerce
• Convenience
• Many goods and services are cheaper when purchased via the Web • Comparison shopping

• Disintermediation: elimination of intermediate organizations between the producer and the consumer

Consumer-to-Consumer (C2C) E-Commerce
• Often done through Web auction sites such as eBay

• Growth of C2C is responsible for reducing the use of the classified pages of newspapers to advertise and sell personal items

Global E-Commerce
• Localization: adapting an existing U.S.centric Web site to another language and culture • Steps involved in localization
– Recognizing and conforming to the nuances, subtleties, and tastes of local cultures – Supporting basic trade laws such as those covering each country‘s currency, payment preferences, taxes, and tariffs

Global E-Commerce (continued)
• Determine which global markets make the most sense for selling products or services online • Decide whether Web content should be generated or updated centrally or locally

Mobile Commerce
• Mobile commerce (m-commerce) relies on the use of wireless devices, such as personal digital assistants, cell phones, and smart phones, to place orders and conduct business • Issues confronting m-commerce
– User-friendliness of the wireless device
– Network speed

Technology Needed for Mobile Commerce
• Handheld devices used for mcommerce have limitations that complicate their use • Wireless application protocol (WAP): a standard set of specifications for Internet applications that run on handheld, wireless devices

E-Commerce Applications: Retail and Wholesale
• Electronic retailing (e-tailing): the direct sale from business to consumer through electronic storefronts, typically designed around an electronic catalog and shopping cart model
• Cybermall: a single Web site that offers many products and services at one Internet location

Manufacturing
• To raise profitability and improve customer service, many manufacturers move their supply chain operations onto the Internet • Electronic exchange: an electronic forum where manufacturers, suppliers, and competitors buy and sell goods, trade market information, and run backoffice operations

Figure 8.6: Model of an Electronic Exchange

Marketing
• Market segmentation: the identification of specific markets to target them with advertising messages • Technology-enabled relationship management: use of detailed information about a customer‘s behavior, preferences, needs, and buying patterns to set prices, negotiate terms, tailor promotions, add product

Investment and Finance
• Online stock trading • Online banking

Figure 8.7: Key Technology Infrastructure Components

Hardware
• Storage capacity and computing power required of the Web server depends on:
– Software that will run on the server

– Volume of e-commerce transactions

• Website hosting

Web Server Software
• Security and identification
– Web sites must be designed to protect against attacks

– Denial-of-service (DOS) attack

• Retrieving and sending Web pages • Web site tracking

Web Server Software (continued)
• Web site development • Web page construction
– Static Web page – Dynamic Web page

E-Commerce Software
• Catalog management
• Product configuration

• Shopping cart facilities
• E-commerce transaction processing • Web traffic data analysis

Figure 8.8: Electronic Shopping Cart

E-Commerce Transaction Processing
• E-commerce transaction processing software: connects participants in the e-commerce economy and enables communication between trading partners, regardless of their technical infrastructure • Fully automates transaction processes from order placement to reconciliation

Electronic Payment Systems
• Digital certificate: an attachment to an email message or data embedded in a Web page that verifies the identity of a sender or a Web site

• Certificate authority (CA): a trusted third party that issues digital certificates • Secure Sockets Layer (SSL): a communications protocol used to secure sensitive data

Electronic Payment Systems (continued)
• Electronic wallet: a computerized stored value that holds credit card information, electronic cash, owner identification, and address information

• Credit card
• Charge card • Debit card

Threats to E-Commerce
• E- and m-commerce incidents • Theft of intellectual property
– Intellectual property: music, books, inventions, paintings, and other special items protected by patents, copyrights, or trademarks – Patents on business processes

Fraud
• Phishing: bogus messages purportedly from a legitimate institution to pry personal information from customers by convincing them to go to a ―spoof‖ Web site • Online auction fraud • Spam: e-mail sent to a wide range of people and Usenet groups

Fraud (continued)
• Pyramid schemes • Investment fraud • Stock scams

Invasion of Consumer Privacy
• Online profiling: the practice of Web advertisers‘ recording online behavior to produce targeted advertising • Clickstream data: data gathered based on the Web sites visited and the items clicked on • Safe harbor principles: principles that address the e-commerce data privacy

Figure 8.9: TRUSTe Seal

Figure 8.10: BBB Online Privacy Seal

Table 8.4: How to Protect Your Privacy While Online

Strategies for Successful E-Commerce: Developing an Effective Web Presence
• Decide which tasks the site must accomplish
• An effective Web site creates an attractive presence and meets the needs of its visitors

• It may be necessary to redefine your site‘s business model to capture new

Putting up a Web Site
• Web site hosting companies: companies that provide the tools and services required to set up a Web page and conduct e-commerce within a matter of days and with little up-front cost • Storefront broker: companies that act as middlemen between your Web site and online merchants that have the products and retail expertise

Building Traffic to Your Web Site
• Obtain and register a domain name • Make your site search-engine-friendly
– Meta tag: a special HTML tag, not visible on the displayed Web page, that contains keywords representing your site‘s content, which search engines use to build indexes pointing to your Web site

• Web site traffic data analysis software

Maintaining and Improving Your Web Site
• Be alert to new trends and developments in e-commerce • Be prepared to take advantage of new opportunities • Personalization: the process of tailoring Web pages to specifically target individual consumers

Summary
• In business-to-consumer (B2C) ecommerce, customers deal directly with the organization • In business-to-business (B2B) ecommerce, the participants are organizations

• In consumer-to-consumer (C2C) ecommerce, the participants are individuals

Summary (continued)
• Supply chain management is a key value chain composed of demand planning, supply planning, and demand fulfillment • Mobile commerce (m-commerce) uses wireless devices to place orders and conduct business • Electronic retailing (e-tailing) is the direct sale from business to consumer through electronic storefronts

Summary (continued)
• Threats to e-commerce include e- and m-commerce incidents, theft of intellectual property, fraud, and invasion of consumer privacy • Strategies for successful e-commerce
– Developing an effective Web presence – Putting up a Web site – Building traffic to your Web site

Chapter 08: E-Commerce

Objectives
• Define e-commerce and understand its role as a transaction processing system • List the three types of e-commerce, and explain how e-commerce supports the stages of the buying process and methods of marketing and selling • Discuss several examples of ecommerce applications and services
207

Objectives
• Define m-commerce, and describe several m-commerce services • List the components of an e-commerce system, and explain how they function together to provide e-commerce services

208

Chapter Content
• • • • • The Roots of E-Commerce Overview of Electronic Commerce E-Commerce Applications Mobile Commerce E-Commerce Implementation

209

Electronic Commerce
• Electronic commerce (e-commerce)
– Systems that support electronically executed business transactions – The fundamental purpose of e-commerce is to execute transactions

210

Electronic Commerce
• Electronic commerce (e-commerce)

211

Electronic Commerce

212

E-Commerce History
• EDI
– Uses private communications networks (VANs) to transmit standardized transaction data between business partners and suppliers

• Automating transactions using EDI
– Drastically reduced the amount of paperwork and the need for human intervention

• Internet
213

E-Commerce History

214

Transaction Processing
• Transaction
– An exchange involving goods or services

• Transaction processing system (TPS)
– Information system used to support and record transactions such as paying for products or paying an employee (e.g.
payroll system that calculates an employee‘s pay and cuts a check) – transaction processing systems share a common set of activities called the transaction processing cycle

• Batch processing
– Transactions are collected over time and processed together in batches – useful in situations where transactions take place away from the computer system

• Online transaction processing
– Takes place at the point of sale
– critical to time-sensitive transactions such as selling concert tickets and making flight reservations
215

The Transaction Processing Cycle
• Data collection
– The process of capturing transaction related data

• Data editing
– Checking the validity of data entered

• Data correction
– Implemented if an error is found in the entered data
216

The Transaction Processing Cycle
• Data manipulation
– Processing transaction data

• Data storage
– Altering databases to reflect the transaction

• Data output
– Receipts, picking lists, and other documents
217

The Transaction Processing Cycle

218

Different Transaction Processing for Different Needs
• Order processing system
– Supports the sales of goods or services to customers – Arranges for shipment of products

• Purchasing system
– Supports the purchase of goods and raw materials from suppliers

219

Different Transaction Processing for Different Needs

220

Types of E-Commerce
• Business-to-consumer e-commerce (B2C)
– Connects individual consumers with sellers , cutting out the middleman – E.g. Amazon.com

• Business-to-business e-commerce (B2B)
– Supports business transactions on across private networks, the Internet, and the Web

• Consumer-to-consumer e-commerce (C2C)
– Connects individual sellers with people shopping for used items
– E.g. ebay.com
221

Types of E-Commerce

222

E-Commerce from the Buyer‘s Perspective
• Process of buying or acquiring goods or services
– Realizing a need – Researching a product – Selecting a vendor – Providing payment – Accepting delivery – Using product support
223

E-Commerce from the Buyer‘s Perspective

224

E-Commerce from the Seller‘s Perspective
• Sellers business practices
– Market research to identify customer needs – Manufacturing products or supplying services that meet customer needs – Marketing and advertising to make customers aware of available products and services

225

E-Commerce from the Seller‘s Perspective
• Sellers business practices
– Providing a method for acquiring payments – Making arrangements for delivery of the product – Providing after-sales support

• Supply chain management
– From the seller‘s perspective, the process of producing and selling goods – Involves three areas of focus: demand planning, supply planning, and demand fulfillment
226

E-Commerce from the Seller‘s Perspective

227

Benefits and Challenges of ECommerce
• Buyers enjoy the convenience of shopping from their desktop • B2C e-commerce
– Levels the playing field between large and small businesses

• Challenges
– Established businesses must alter systems and business practices – Security, privacy, reliability: E-commerce can survive only if all involved can trust the system – Social concerns
228

Benefits and Challenges of ECommerce

229

E-Commerce Applications
• E-Commerce
– Playing an increasingly important role in our personal and professional lives – Allows us to discover new and interesting products – Allows us to find better deals – Used to monitor bank accounts and transfer electronic funds

230

Retail E-Commerce: Shopping Online
• E-tailing provides customers with
– Product information – The ability to comparison shop

• E-tailing options
– Set up an electronic storefront – Lease space in a cybermall
• Web site that allows users to browse through a wide variety of products offered by several different retailers
231

Retail E-Commerce: Shopping Online

232

Online Clearing Houses, Web Auctions, and Marketplaces
• Provide a platform for businesses and individuals to sell their products and belongings
– www.ubid.com
• Provides a method for manufacturers to liquidate stock and consumers to find a good deal

– eBay.com
• Most popular auction/marketplace

233

B2B Global Supply Management and Electronic Exchanges
• Global supply management (GSM)
– Businesses can find the best deals for raw materials and supplies needed to manufacture their products on the global market

• Electronic exchange
– an industry-specific Web resource created to provide a convenient centralized platform for B2B e-commerce among manufacturers, suppliers, and customers – Promotes cooperation between competing companies
234

Marketing
• Web is used for
– Unsolicited advertising
• Banner: A rectangular area embedded in the Web page content for advertising, often across the top of the page

– Access to product information through business Web sites
• Get better deals and make informed decisions

– Market research
• Traditionally done by interviewing customers • Market segmentation divides customer opinions based on various criteria • E-commerce allows market segmentation to take place on an individual level
235

Marketing

236

Banking, Finance, and Investment
• Online banking provides
– Convenient access to bank balance information – Ability to transfer funds, pay bills, and obtain account histories

• Electronic funds transfer
– Popular for paying bills and receiving paychecks

• Online brokerages
– Able to execute trades fast, within seconds
237

Mobile Commerce (MCommerce)
• A form of e-commerce • Takes place over wireless mobile devices such as
– Handheld computers and cell phones – takes place in emerging technologies such as dashtop computers embedded in automobile dashboards

• Presents unique opportunities and challenges
238

Mobile Commerce

M-Commerce Technology
• Technologies and standards
– Wireless Application Protocol (WAP)
• a communication standard used by developers to create m-commerce applications

– Wireless Markup Language (WML) – Infrared or Bluetooth wireless networking technology
• Near Field Communications (NFC)

• Open Mobile Alliance (OMA)
– Hundreds of mobile operators, device and network suppliers and companies have joined together to create standards and

240

Types of M-Commerce Applications
• Methods for delivering m-commerce services
– Directly from cell phone service providers – Via mobile Internet or Web applications
• Location-based m-commerce applications

– Using Short Message Service (SMS) text messaging or Multimedia Messaging Service (MMS) – Using short-range wireless technology, such as infrared
• Proximity payment system
241

Types of M-Commerce Applications

242

E-Commerce Implementation
• Implementing e-commerce
– Requires large investment and expertise

• E-Commerce host
– A company that takes on some or all of the responsibility of setting up and maintaining an e-commerce system for a business or organization

243

Infrastructure
• E-Commerce requires significant infrastructure changes • Businesses must have employees who are technically savvy • B2C e-commerce
– Often connects manufacturers directly with consumers, cutting out the middleman – Requires shipping individual products directly to consumers
244

Infrastructure

245

Hardware and Networking
• Underestimating the amount of Web traffic
– Leads to network stalls and long wait times

• Typical e-commerce Web site
– Employs one or more server computers and a high-speed Internet connection

• Outsourcing to a Web hosting company
– Can operate 24 hours a day, 7 days a week – Load-balancing

246

Software
• Web Server Software
– Responds to requests for Web pages

• Web Server Utility Programs
– Provide statistical information about server usage and Web site traffic patterns

• E-Commerce Software
– Supports e-commerce activities – Includes catalog management, electronic shopping cart, and payment software
247

Software
• Web Site Design Tools
– What-you-see-is-what-you-get (WYSIWYG) applications or wizards

• Graphics Applications
– Design and create graphic elements of Web sites

• Web Site Development Tools
– Application programming interfaces (API‘s)
• Allow software engineers to develop Webdriven programs
248

Software
• Web services
– Programs that automate tasks by communicating with each other over the Web – Systems developers can provide tools for automating trivial or repetitive tasks – Important in transaction processing

249

Building Traffic
• The 3Cs Approach
– Content, community, and commerce

• Keywords and Search Engines
– Choose name and product names that best describe business purpose and features – Select descriptive domain names – Business-related keywords can be listed in the HTML meta tag
• Read by search engines and servers, but not displayed on the page
250

Building Traffic
• Marketing
– Online advertising methods include banner ads, pop-up ads, and e-mail

– market segmentation: customer opinions are divided into demographic variables such as race, gender, income, education, and age to determine which segment a product appeals to most
– Offline advertising methods include magazines, newspapers, radio, and
251

Building Traffic

252

Electronic Payment System
• proximity payment system
– allows customers to transfer funds wirelessly between their mobile device and a point-of-sale terminal

• Electronic cash (e-cash or digital cash)
– Provides a private and secure method of transferring funds from a bank account or credit card to online vendors or individuals – PayPal
• Best-known e-cash provider

• E-cash benefits
– Privacy - hides account information from vendors – Convenient if seller cannot process a credit card

• Smartcards
– Credit cards with embedded microchips that can store
and process data and can be used as electronic wallets
253

Electronic Payment System

254

Electronic Payment System

255

International Markets
• Internet users of all nationalities will have access to your products • First consideration of a global e-commerce strategy
– Visitors of all nationalities and cultures should feel comfortable while viewing your Web content

• Costly approach
– Create multiple versions of your Web site, each in a different language

• Once the international market is won over, etailer faces other challenges
256

E-Commerce Security Issues
• There are significant privacy and security concerns
– Public network – No buyer or seller identity verification – Hacker attacks

257

E-Commerce Security Issues
• Digital certificate
– A type of electronic business card – Attached to Internet transaction data

– Verifies the sender of the data
– Provided by certification authorities – Encryption
• Uses high-level mathematical functions and computer algorithms to transform data so that it is unintelligible to all but the intended recipient
258

E-Commerce Security Issues
• Securing data in transit
– Secure Sockets Layer (SSL)
• Digital certificates combined allows for encrypted communications to occur between Web browser and Web server

– Transport Layer Security (TLS)
• A URL associated with this begins with https • Allow for encrypted communication to occur between browsers and servers • Secures usernames, passwords, credit card information
259

E-Commerce Security Issues

260

Business Resumption Planning
• Great pains are taken to ensure that transaction processing systems remain in working order • Business resumption planning (BRP)
– Takes into account every possible disaster and provides courses of action to minimize negative effects – The goal is to protect data and keep key systems operating until order is resumed
261

Summary
• E-Commerce
– Systems that support electronically executed transactions

• Transaction processing system (TPS)
– Supports and records transactions

• Three main types of e-commerce
– Business-to-consumer (B2C) – Business-to-business (B2B) – Consumer-to-consumer (C2C)
262

Summary
• Retail Web sites
– Allow consumers to comparison shop

• Mobile commerce
– A form of e-commerce that takes place over wireless mobile devices

• E-Commerce
– Requires investment in networking, hardware, and a wide variety of software
– Requires changes in infrastructure
263

MD253/MK252 Electronic Commerce
March 29, 2005 Amazon.com

Issues Covered
• Amazon‘s strategy
– competitive advantage

• Inventory efficiencies
– turns & float

• Excellence in customer service
– Personalization & switching costs

• Partnerships & ‗service‘ businesses
– Syndication model, merchants.com, web services

• Challenges

Amazon‘s Strategy

Offline vs. Online Retail Efficiencies
• Turnover
– 3 times / year – avg. book in store 121 days – Book on shelf 68+ days after paying suppliers

• Turnover
– 16 times / year – avg. book in house 22 days – avg. 28 days of float / title

• Inventory
– shelf & warehouse stock – 30% returns

• Inventory
– all warehouse stock – few returns

Capital Efficiency – Negative Operating Cycle (Float)
28 Days

Day 0 Product Received

22 25 Product Customer Shipped Payment

53 Supplier Paid

Inventory Turns for Full Product Line, 2004 Amazon = 16 B&N = 3, Home Depot = 5, Best Buy = 5, Wal-Mart = 7

Amazon‘s Warehouse Network
• 5 facilities, > 4 million sq. feet • Extremely diverse product mix • Mixed Automation & Manual Sorting and Conveyance • Direct to consumer fulfillment

Photos: blog link provided by the San Jose Merc News

captures early demand & improves inventory forecasting

Leveraging the Amazon Platform
• Amazon.com as seller
– AMZN inventory & product detail pages

• Syndicated stores / Merchants@
– AMZN tech & inventory, co-branded website – Ex: Borders, HMV, Waterstones, Waldenbooks, VirginMegastore

• Marketplace
– 3rd party inventory, AMZN product detail pages

• Merchant.com (Amazon Enterprise Solutions)
– AMZN technology powers partner websites – Ex: Target, NBA.com, Bombay Company, DVF Shops

MD253 / MK252 Electronic Commerce
Feb. 15, 2006 Channel flux: channel pressure, digital music network effects, CEIs, and auction systems

Issues Covered
• Channel Pressure
– Power & partners, pressure & innovation limits

• New Channels & Media Industry Disruption • Network Effects
– the secret sauce of tech markets

• New Intermediaries
– examples, impact, threats, market creation

• Auction Models
– markets of first choice and last resort

Channel Conflict
Internet Retailers customer

supplier

Distributors

Traditional Retailers (small)

customer

Traditional Retailers (big box)

customer

customer

“We recognize that a vendor has the right to sell through whatever distribution channels it desires. However, we too have the right to be selective in regard to the vendors we select and we trust that you can understand that a company may be hesitant to do business with its competitors.”

HomeDepot memo to suppliers

Major Labels in Crisis
3 Years: 26% Sales Drop • Online piracy • CD piracy • Shrinking retail space • Competition from other media • Music Quality

Traditional Client/Server vs. BitTorrent
More Computers Require More Bandwidth Customers Distribute Content

Understanding Network Effects
(a.k.a. Network Externalities, Metcalfe‘s Law)
When present, product or services become more valuable as its installed base expands. Why? Users crave… • Exchange opportunities • Stability • Extrinsic Benefits Characteristics: Early competition, bandwagons, monopolistic tendencies ‗Best‘ products don‘t always win. Innovation effect • Lowers competition with established standard • Increases innovation within standard

buyers

sellers

Users (Windows, PS2) Developers (programs, game titles)

members

Channel Extending Intermediaries
supplier supplier CEI supplier supplier customer customer customer customer

Search for opportunities to add value: e.g. high customer search costs, switching costs, low customer satisfaction Wield new power by consolidating traditional buyers & customers. Become the first-line interface with consumers.

Auction Formats
Liquidation Auctions: (e.g. Priceline)
Seek first to maximize existing channels & reduce inventory Seek lowest price on widely available goods and services suppliers customers

auction

disincentives to use auction shrink supply over time

Market Efficiency Auctions: (e.g. eBay)
Auction format is favored over the inefficiency of existing channels Seek access to unique / rare products or services

suppliers

auction

customers

incentives to use auction increase supply over time

Leading Global Retailers

Shop, Buy/Transact, Communicate Search, Be Entertained

Dependent on paid & natural search

IPO Inefficiencies
pays a 7% fee $27/share $45/share

small Investors The Firm
Underwriting syndicate Institutions & large investors small Investors small Investors
Company JetBlue PayPal NetScreen Technologies Magma Design Automation Global Power Equipment Simplex Solutions Shares Date Underwritten 4/12/2002 5,500,000 2/15/2002 5,400,000 12/11/2001 10,000,000 11/19/2001 4,850,000 5/17/2001 7,350,000 5/1/2001 4,000,000 Initial Offer Price $27 $13 $16 $13 $20 $12 First Day Close Share Price $45.00 $20.01 $23.72 $18.99 $31.45 $21.20 $ $ $ $ $ $ Difference 99,000,000 37,854,000 77,200,000 29,051,500 84,157,500 36,800,000 Percent Undervalued 67% 54% 48% 46% 57% 77%

Company JetBlue PayPal NetScreen Technologies Magma Design Automation Global Power Equipment Simplex Solutions Transmeta CoSine Active Power StorageNetworks VA Linux Red Hat mp3.com Efficient Networks Tibco Software China.com CommTouch eToys iVillage AutoWeb Auto-by-Tel Prodigy VerticalNet Healtheon Pacific Internet Theglobe.com

Date 4/12/2002 2/15/2002 12/11/2001 11/19/2001 5/17/2001 5/1/2001 11/7/2000 9/26/2000 8/8/2020 6/30/2000 12/9/1999 8/11/1999 7/20/1999 7/15/1999 7/14/1999 7/13/1999 7/13/1999 5/19/1999 3/18/1999 3/23/1999 3/24/1999 2/11/1999 2/11/1999 2/11/1999 2/5/1999 11/13/1998

Shares Underwritt en 5,500,000 5,400,000 10,000,000 4,850,000 7,350,000 4,000,000 13,000,000 10,000,000 8,000,000 9,000,000 4,400,000 6,000,000 12,300,000 4,000,000 7,300,000 4,200,000 3,000,000 8,300,000 3,500,000 5,000,000 3,500,000 8,000,000 3,500,000 5,000,000 3,000,000 3,100,000

Underwritin g Share Price $27 $13 $16 $13 $20 $12 $21 $23 $17 $27 $30 $14 $28 $15 $15 $20 $16 $20 $24 $14 $23 $15 $16 $8 $17 $9

First Day Close Share Price $45 $20 $24 $19 $31 $21 $45 $63 $53 $90 239 1/4 $52 $63 $53 $40 $67 $24 $77 $56 $28 $40 $28 $45 $31 $48 $64

Difference $ 99,000,000 $ 37,854,000 $ 77,200,000 $ 29,051,500 $ 84,157,500 $ 36,800,000 $ 315,250,000 $ 400,600,000 $ 286,000,000 $ 569,250,000 $ 920,700,000 $ 228,375,000 $ 434,343,750 $ 152,000,000 $ 182,500,000 $ 197,862,000 $ 24,000,000 $ 473,100,000 $ 112,000,000 $ 71,250,000 $ 60,375,000 $ 105,040,000 $ 102,830,000 $ 116,900,000 $ 93,000,000 $ 168,950,000

Percent Undervalu ed 67% 54% 48% 46% 57% 77% 115% 174% 210% 234% 698% 272% 126% 253% 167% 236% 50% 285% 133% 102% 75% 88% 184% 292% 182% 606%

MD253/MK252 Electronic Commerce
Jan. 25, 2006 Distribution Channels: Disintermediation

Topics Covered
• Collapsing Channels
– Failures & successes – the role of value gaps

• Firms ‗changing the channel‘
– Expedia & the travel industry – BlueNile & the jewelry industry – NetFlix & the movie industry

Disintermediation
Price

Unit Sales

Price/Shirt Savings Retailer Consumer $52.72 0%

Producer

W holesaler

Producer

W holesaler

Retailer

Consumer

$41.34

28%

Producer

W holesaler

Retailer

Consumer

$20.45

62%

Source: Benjamin & Wigand (SMR)

Value Gaps
Value Added = A, Expense = X
source firm distributor

Value Added = B, Expense = Y
retailer customers

Expense Savings = (X+Y) - Cost of New Effort Value Gap = (A+B) - Value Added by New Effort

The Long Tail

Source: Wired

Revenue sharing for DVDs

Source: Video Rental Developments & the Supply Chain: Netflix Inc., WUSTL.EDU case http://www.olin.wustl.edu/workingpapers/pdf/2004-03-225.pdf

MD253 – Electronic Commerce

Jan. 23, 2006 Are eBusinesses Better?

Topics Covered
• A first look at online businesses
– FreshDirect – how is this ‗pure play‘ business different from more traditional rivals?
• • • • Value proposition Dealings with suppliers Operations differences Customer acquisition issues

– Are any of the firm‘s advantages sustainable?

Switching Costs Value of service Value of service

Incumbent

Late Entering Rival

MD253/MK252 Electronic Commerce

Feb. 8, 2006 Single & Multi-Channel firms

Issues Covered
• Single Channel Case Study
– ING Direct

• Classifying Online Retail Efforts
– Characteristics & reason for focus
• • • • Efficiency Machines Niche Players Traffic Drivers Triple Plays

• Success in a multi-channel environment
– ―Right Channeling‖ / ―Re-Routing‖ – Success factors & technologies

Fire Bad Customers!
If someone has a lot of demands we'll say "This is not the right thing for you. You need to go back to your community bank, which will gladly charge you for the service you want."
Arkadi Kulhmann CEO ING Direct USA

A ‗bad‘ customers might • Call customer service too often • Ask for paper copies of statements • Demand special treatment b/c they have high account balances

Mitigating Risk in ‗Re-Routing‘
• Understand channel economics
– ‗true cost‘ beyond raw margins: loyalty, frequency, acquisition costs, freight, returns, service

• Incentives to guide customers to the right channel
– ―carrots & sticks‖

• Provide a safety net • Communication program
– for internal & external constituencies

True Cross-Channel Design
Customer clicks “Save Application” from any application page

Banker in store retrieves all saved application data and can Complete the application.

Source: Watson, Latinbanking.com

Rightchanneling Messages & Results

Messaging & alerts

E-Commerce:
Fundamentals and Applications
Chapter 1 : Introduction

Outline
• • • • • • • • • Electronic commerce and physical commerce The DIGITAL phenomenon Looking at e-commerce from different perspectives Different types of e-commerce Examples of the types of e-commerce Some e-commerce scenarios Effect of e-commerce Advantages of e-commerce Myths about e-commerce development and implementation • System model of this book

Types of Commerce
Commerce Electronic Commerce Physical or Traditional Commerce

Internet Commerce



Business focused e-commerce

Consumer focused e-commerce



Digital Phenomenon
• What do you think? •Data networks the drivers of e-commerce? What are
Intense competition Globalization Information age Technologies Automation Low cost high quality products/services

DIGITAL

E-commerce from different perspectives
• Three layer models for e-commerce (e.g. Zwass‘s model). • E-business: a wider perspective than ecommerce. • E-commerce improves the value chain. • E-commerce provides an effective tool for building, managing and enhancing these relationships.

Different types of ECommerce
Business (organization) Customer (individual) Business (organization) B2B (e.g TPN) B2C (e.g Amazon)

Customer (individual)

C2B (e.g Priceline)

C2C (e.g eBay)

Examples
• • • • B2C: www.amazon.com C2C: www.eBay.com B2B: www.tpn.com C2B: www.priceline.com

Let‘s visit these web sites in turn and discuss its features.

E-commerce scenarios
• • • • Retailing Servicing Publishing Supply chain management

Discussion: How are they changing?

What are the advantages of ecommerce?
• To consumers (think about the consumer buying process: search, evaluate and execute):

• To businesses (think about the common objective of every business):

Discussion
• How should different departments participate in an e-commerce project?
– Management – Marketing – Production – Finance – Procurement – Customer support

Transformation of a Compartmentalized Organization into Integrated Organization
Management Production Marketing Management Production Department Marketing Department Finance Department Personnel Department Finance Personnel

Three-tier Technical Model
Server side

Client side

Service system

Backend system

Architecture of Webbased E-Commerce System
Service system

Backend system

Web Server

Application Server

Internet

Database

Firewall

Intranet (Secure)

Client side

Server side

CS 155b: E-commerce
Lecture 17: April 12, 2001 Introduction to B2C E-Commerce
(Acknowledgement: Helen Chiang)

E-Commerce Definitions
• Electronic commerce is a set of technologies, applications, and business processes that link business, consumers, and communities
– For buying, selling, and delivering products and services – For integrating and optimizing processes within and between participant entities

What is B2C?
• B2C Commerce: Interactions relating to the purchase and sale of goods and services between a business and consumer—retail transactions. • ―Novelty‖ is that retail transaction is done on the Internet, rather than a ―brick and mortar‖ store location. • Technical evolution of B2C from ―brick and mortar‖ model not new.

Revenue Models
• Sell goods and services and take a cut (just like B&M retailers). (e.g., Amazon, E*Trade, Dell) • Advertising
– Ads only (original Yahoo) – Ads in combination with other sources

• Transaction fees • Sell digital content through subscription. (e.g., WSJ online, Economist Intelligence Wire)

A Different Approach to Location Retailing
• In 1886, a jeweler unhappy with a shipment of watches refuses to accept them • A local telegraphy operator bought the unwanted shipment • Used the telegraph to sell all the watches to fellow operators and railroad employees • Becomes so successful that he quits his job and started his own enterprise, specializing in catalog sales • Name: Richards Sears of Sears Roebuck

E-Commerce Retail Sales
Estimated Quarterly U.S. Retail E-Commerce Sales 4th Quarter 1999 - 4th Quarter 2000
10 9 8 7 6 5 4 3 2 1 0 8.686 6.393 5.198 5.24 5.526

Worldwide B2C E-commerce Revenues 2000-2004 (in billions)
2004 2003 2002 2001 2000 $0.0 $59.7 $100.0 $200.0 $300.0 $400.0 $500.0 $101.1 $167.2 $250.0 $428.1

Billions of Dollars

4th Q 1999 1st Q 2000 2nd Q 2000 3rd Q 2000 4th Q 2000

Source: eMarketer

Estimated Quarterly U.S. Retail Sales: Total and Ecommerce
Data in millions of dollars. Not adjusted for seasonal, holiday, and trading-day differences. E-commerce as a Percent Quarter to Quarter Percent Period Retail Sales of Total Sales Change E-commerce Sales NA 0.8 5.5 15.7 35.9

4Q 1999 1Q 2000 2Q 2000 3Q 2000 4Q 2000 Source: Commerce Dept.

Total 821,351 747,934 815,677 812,158 856,234

E-commerce 5,198 5,240 5,526 6,393 8,686

0.63 0.70 0.68 0.79 1.01

Total Sales 8035 -8.9 9.1 -0.4 5.4

The State of B2C E-commerce in the U.S.
• U.S. consumers remain #1 the wired world as they increase frequency and volume of their online purchases • But, the number of Internet purchases by U.S. consumers is second to the U.K. • Among U.S. respondents using the Internet, 74% have purchased an item online in last 2 months, and 87% expect to make an online purchase in the next year.

US vs. the World
Global Annual Online Transactions (Median = 10 transactions)
1-5 32% 41+ 10% 26-40 12%
41+ 26-40

16-25

11-15

16-25 15% 6-10 19% 11-15 12%

6-10

1-5

• Online buyers in the U.S. spent, on average, $898 last year shopping online. • Worldwide: Median online expenditure total was $460.

Global Annual Online Expenditures (Median = $460)

$4,001+ 9% $1-200 32% $2,001-$4,000 10% $1,001-$2,000 13% $201-$500 20% $501-$1,000 16%
$4,001+ $2,001-$4,000 $1,001-$2,000 $501-$1,000 $201-$500 $1-200

Top Ten U.S. Purchase Categories
60% 50% 40% 30% 20% 10% 0% 52% 49% 49% 37% 29% 28% 28% 27% 25% 18%

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Top 20 Internet Retailers (based on 1999 values)
Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 eBay A mazon.com Dell buy.com E gghead.com Gatew ay Quixtar uBid Barnes & Noble Cyberian Outpost V alue A merica* MicroWareho use Of f ice Depot eToys.com Lands' E nd The Spiegel Group Fingerhut CDW JCP enney Gap Online Sales to U.S. Consumers $3.5-3.7B 1.7-1.9B 1.1-1.3B 700-800M 500-600M 500-600M 400-450M 275-325M 275-325M 200-250M 200-250M 200-250M 175-200M 150-175M 150-175M 150-175M 150-175M 150-175M 150-175M 125-150M P ast-Y ear Customers 10M 12M 600K 3M 700K 350K 600K 600K 3M 425K 250K 175K 250K 1.7M 800K 450K 400K 200K 500K 800K A verage 12month Spending $350 150 2,000 250 800 1,500 700 500 100 550 900 1,200 750 100 200 350 375 800 300 175

Source: National Retail Association

Open Issues in E-commerce
• Globalization • Contractual and Financial Issues • Ownership • Privacy and Security • Interconnectivity and Interoperability • Deployment
• Barriers to E-commerce (U.S.): Old retail inconveniences and inefficiencies
Barriers
1. Concern that credit card will be stolen 2. Item is still high cost 3. Item is very large 4. Personal sizing, fit are important 5. High shipping costs 0% 10% 20% 30% 40% 50% 60% source: Ernst & Young

First-Generation B2C
• Main Attraction: Lower Retail Prices • ―B2C Pure Plays‖ could eliminate intermediaries, storefront costs, some distribution costs, etc. • Archetype: www.amazon.com

Basic Problems Encountered Immediately
• ―Customer-Acquisition Costs‖ are huge. • Service is technically commoditizable, and there are no significant network effects. • Customers‘ switching costs are tiny. (Lock-in to online book-buying is high. Lockin to Amazon is low. Recall Netscape and IE.) • Competition is fierce in almost all segments. Few e-tailers are profitable. • Investors have run out of money and patience.

Internet Customer Acquisition Costs
Customer acquisition cost = total spent on advertising and marketing divided by the total number of new customers obtained
– Amazon.com  $29 – DLJ Direct  $185 – E*Trade  $257 – Various E-Commerce Sites  $34

E-tailing is Difficult in Low-Margin Businesses
• Toys (e-Toys.com) – Typical online order contributes $11 to gross revenues. – Warehouse, marketing, website, and other fixed overhead is high. – A pure-play e-tailer needs to capture at least 5% of the toy market to reach profitability. • Groceries (Webvan.com, Peapod.com) – Typical online order contributes $9 to gross revenue (fulfillment costs are very high). – Steady customer orders ~30 times/year. – McKinsey/Salomon-Smith-Barney‘s estimate of the value of one steady customer: ~$900 over 4

Current Theories (after first shakeout)
• High order frequency and large order size are more important than large customer base. • E-tailers should strive for average order sizes of >$50 and concentrate on high-margin product categories (>35%). [Traditional grocery margins: 2-3%.] • Concentrate on making transactions profitable, not on VC-supported market-share wars. • Combine e-tailing with B&M stores.

―Multi-Channel‖ Retail (B2C w/ B&M)
• Exploit multiple marketing and distribution channels simultaneously
– B&M (―bricks and mortar‖) stores: Customers browse on the web before going to the store. – Catalog sales, telephone, tv advertising,…

• In 1999, multi-channel retailers (i.e., B&Ms or traditional catalog companies that also sell online) made up 62% of B2C e-commerce. Mostly high-margin sales, e.g., computers, tickets, and financial service. • Projected to reach 85% in next 5 years. (Source: Boston Consulting Group)

Advantages of Multi-channel Retail
• Leverage existing brands. • Biggest B&M retailers have huge clout. (Walmart‘s annual sales are $138B, much more than all e-tailers‘ combined.) • Profits from existing channels can subsidize e-tail start-up. No need to quit when VCs lose interest. • Use established distribution and fulfillment infrastructure (e.g., LL Bean, Land‘s End,…). • Cross-marketing and cross-datamining.

E-tailers are Adding ―Offline‖ Channels
• Alloy.com sold clothes and accessories, but it became a hit only after its catalog was launched. • Drugstore.com once dismissed B&M retailing, but it agreed to sell a 25% stake to Rite-Aid not long after rival Soma.com was bought by CVS. • Gateway sells computers through WWW and catalog, but it also has 164 stores across U.S. They carry little stock, but they allow customers to ―get a feel for the product‖ before ordering it.