To many people, e-commerce means shopping on the Internet or online as
illustrated in Figure 1.1. However, e-commerce is much broader and
encompasses many business activities than just online shopping. This topic will
provide a comprehensive description and definition of e-commerce. We will see
the unique features of e-commerce and its differences from traditional
commerce as well as describe the categories of e-commerce business models.
Then, the origin and growth of e-commerce will be explained and followed by
the discussion of the three broad interrelated themes in e-commerce.
1.1
TRADITIONAL COMMERCE AND
E-COMMERCE
Before we venture into e-commerce, it is good to learn about the activities that
companies undertake manually when they do any kind of business, and then
learn how these firms might undertake these activities electronically. Therefore,
in the following sections, we will look into two types of commerce: traditional
and electronic.
1.1.1
Traditional Commerce
Commerce or doing business is a negotiated exchange of valuable objects or
services between two or more parties and includes all activities that each party
undertakes to complete the transaction.
We can examine any commerce transaction from either the buyer or the sellerÊs
viewpoint. Let us look at the activities involved in traditional commerce for
buyers as shown in Table 1.1.
Table 1.1: Activities of Traditional Commerce for Buyers
Activities
Description
Identify specific need
A buyer begins by identifying a need. This may be a
simple need, such as when an individual decides to buy a
sandwich as he feels hungry, or it could be a very complex
need such as looking for the most suitable school.
Search for products or
services that will
satisfy the specific
need
Once the buyers h a v e identified their specific needs, they
must find the products or services that will satisfy those
needs. In traditional commerce, buyers use a variety of search
techniques. They may refer to catalogues, ask friends, read
advertisements, or examine directories. Buyers may consult
salespersons to gather information about specific features and
capabilities of the products they are considering.
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Select a vendor
After t h e buyers h a v e selected a product or service that
will meet their identified need, they must select a vendor that
can supply that product or service. Buyers in traditional
commerce contact vendors in a variety of ways, for instance,
by telephone, by mail and by meeting face-to-face at trade
shows.
Negotiate a purchase
transaction
After choosing a vendor, the buyer negotiates a purchase
transaction. This transaction might have many elements,
including delivery date, logistic information, method of
shipment, price, warranty, payment terms and will often
include detailed specification to be confirmed by inspection
when the product is delivered or the service is performed.
Make payment
When the buyer is satisfied that the purchased product or
service meets the terms and conditions agreed by the buyer
and seller, the buyer pays for the purchase.
Perform regular
maintenance and
make warranty claims
After the sale is completed, the buyer may have further
contact with the seller regarding warranty claims, upgrades
and regular maintenance.
Do you know that each action taken by a buyer engaging in commerce will
trigger a corresponding action by the seller? The activities involved in traditional
commerce from a sellerÊs viewpoint are as shown in Table 1.2.
Table 1.2: Activities of Traditional Commerce for Sellers
Activities
Description
Conduct market
research to identify
customer needs
Sellers often undertake market research to identify potential
customersÊ needs. Even businesses that have been selling the
same product or service for many years look for ways to
improve and expand their offerings. Firms conduct surveys,
have salespeople talk with the customers, run focus groups and
hire outside consultants to help them in this identification
process.
Create product or
service that will meet
customersÊ needs
Once customer needs are identified, sellers create the products
and services that they believe will meet those needs. This
includes design, testing and production activities.
Advertise and
promote product or
service
The next step for the sellers, is to make potential customers
aware of the new products or services. T o communicate
information about their products and services, sellers engage in
many different kinds of advertising and promotional activities
to the existing and potential customers.
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Negotiate a sale
transactions,
including delivery
logistic, inspection,
testing and
acceptance
Once a customer responds to the sellerÊs promotional
activities, the two parties must negotiate the details of the
purchase transaction. In some cases, this is simple; for example,
many retail transactions involve nothing more than a buyer
entering a sellerÊs store, selecting and inspecting items to
purchase and paying for them. In other cases, purchase
transactions require prolonged negotiations to settle the
terms of delivery, inspection, testing and acceptance.
Ship goods and
invoice customer
After the seller and buyer resolve the delivery logistics, the seller
ships the goods or provides the service and sends an invoice to the
buyer.
Receive and process
customer payments
In some cases, the seller requires payment before or at the time of
shipment. However, most businesses sell to each other on credit, so
the seller must keep a record of the sale and wait for the customer to
pay. Most businesses maintain sophisticated systems for receiving
and processing customer payments. They need to track the
outstanding amounts and ensure that payments they received are
credited to the proper customers accounts and invoiced.
SELF-CHECK 1.1
What are the similarities between the activities of commerce from
the viewpoints of a buyer and a seller ?
1.1.2
E-commerce
For decades, firms have used various electronic communication tools to conduct
different kinds of business transaction. Banks have used Electronic Fund
Transfers (EFT) to move customersÊ money around the world. All kinds of
businesses have used Electronic Data Interchange (EDI) to place orders and send
invoices. Retailers have used television advertising to generate telephone orders
from the general public for various types of merchandise.
Are you aware that some people use the term „e-commerce‰ for activities that
specifically uses the Internet to conduct business? In essence, e-commerce is
characterised by several attributes as shown in Figure 1.2.
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Figure 1.2: E-commerce attributes
ACTIVITY 1.1
1.
In your own words, describe what you understand of
e-commerce.
2.
Give some examples of e-commerce activities. You can search the
Internet or any related books to find out.
Let us look at the detailed explanation for each attribute as depicted in Table 1.3.
Table 1.3: E-commerce Attributes
E-commerce Attribute
Description
Exchange of digitised
information between
parties
This information exchange can represent communication
between two parties, coordination of the flow of goods and
services, or transmission of electronic orders. These
exchanges can be between organisations, individuals or both.
Technology-enabled
E-commerce uses technology-enabled transactions such as
Internet browsers in the World Wide Web (WWW),
Automated Teller Machine (ATM), and Electronic Data
Interchange (EDI) between business-to-business partners,
and electronic banking. Businesses used to manage such
transactions with customers and markets strictly through
face-to-face interaction; in e-commerce, such transactions can
be managed by using technology.
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Technology-mediated
Gradually, from technology-enabled transactions, e-commerce
is moving into technology-mediated relationship. Buyers and
sellers no longer meet to transact in the physical worldÊs
„marketplace‰ but meet in the virtual worldÊs „market-space‰.
Business transactions and relationship with the customers in
the market-space are largely managed by technology. Hence,
the success of a business rests on how well the screens and
machines manage customers and their expectations.
Based on Table 1.3, e-commerce can be summarised as follows:
E-commerce involves digitally enabled commercial transactions between
and among organisations and individuals.
1.1.3
Differences between E-commerce and Traditional
Commerce
How to distinguish e-commerce from traditional commerce? The following are
the elements that make e-commerce unique or different from traditional
commerce as shown in Figure 1.3:
Figure 1.3: Elements of e-commerce
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There are eight elements of e-commerce. Each will be elaborated in Table 1.4.
Table 1.4: Elements of E-commerce
Elements
Description
Core Strategic
Decisions are
Technology-Based
The strategic decisions about the virtual storefront, customer service,
and customer experience, the content of site are co-mingled with the
technological decisions. These decisions are related to the following:
(i)
Selection of service providers;
(ii)
Common business systems; and
(iii)
Approaches to web design.
In contrast to the traditional commerce, digital business cannot
extract technological choices from the strategic decision-making
process. This does not mean that technology is unimportant to
traditional commerce; but rather their technological decisions are
not as tightly linked to strategy.
Ubiquitousness
E-commerce is ubiquitous, meaning that it is available just about
everywhere and at all times. The Web storefront is expected to be
open seven days a week, 24 hours a day, and 365 days a year. This
level of access has significant implications for the following parties:
(a)
Customers
The customers are always able to do the following:
(i)
Gather information;
(ii)
Conduct product searches;
(iii)
Compare prices across multiple websites;
(iv)
Order products; and
Customers are also able to shop at home, at work, or even
from the car by using mobile commerce or wireless digital
devices such as hand phones, laptops and Personal Digital
Assistants (PDA) to enable transactions on the Web (refer to
Figure 1.4).
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Figure 1.4: Wireless digital devices
Source: http://www.topnews.in
(b)
Real-Time
Competitive
Responsiveness
Firms
For the firm, the level of access has forced businesses to
adjust both tactical responsiveness to competitive moves and
strategic responsiveness. It also reduces transaction costs
and the cost of participating in a market. To transact, it is no
longer necessary to spend time and money travelling to the
market.
E-commerce storefronts are frequently engaged in dynamic
dialogues on the public platform on the Web. Hence, it is easier for
companies to duplicate their competitorsÊ success. In e-commerce
markets, prices and costs become more transparent. Price
transparency refers to the ease with which consumers can find out
the variety of prices in the market.
This does not mean that the e-commerce marketplace will
eventually evolve to commodity-like status, with price being the
only consideration. Quite the contrary, speed of innovation,
branding, ease of use, operational effectiveness, product assortment
and affiliate agreements can be used by companies to maintain or
increase differentiation.
Technology-Based
Customer
Interface
In traditional commerce, customers conduct transactions either
b y face-to-face or over the phone with store clerks, account
managers, or other individuals. In contrast, the e-commerce
customers interface is in a „screen-to-face‰ interaction. This
includes computer-based monitors, ATM machines, PDAs, or other
electronics devices.
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These types of interfaces place enormous responsibility on the
organisation to capture and represent the customer experience
because there are often no opportunity for direct human
intervention during the encounter. If the interface is designed
correctly, the customer will have no need for simultaneous or
follow-up phone conversation.
Customer
Controlled
Interaction
In most websites, the customer is in control during screen-toface interactions. The customer controls the following elements:
(a)
Search process;
(b)
Time spent on various sites;
(c)
Degree of price or product comparison;
(d)
People with whom the customers comes into contact; and
(e)
Decision to buy.
In a face-to-face interchange, the control can rest with the buyer,
seller or community member. The virtual store can attempt to
shape the customer experience with uniquely-targeted promotions,
reconfiguration of storefronts to reflect past search behaviour,
recommendations based on previous behaviour of other similar
users, and access to proprietary information. However, the seller
has much less power in the online environment due to the control
and information flow that the online world puts into customersÊ
hands.
Knowledge of
Customer
Behaviour
While the customer controls the interaction, the firm has
unprecedented access to observe and track individual consumer
behaviour. Companies, through third-party measurement firms,
can track a host of behaviours such as:
(a)
Websites visited;
(b)
Length of stay on a site;
(c)
Content of wish lists and shopping carts;
(d)
Amount purchased;
(e)
Repeat purchase behaviour; and
(f)
Other metrics.
This level of customer behaviour tracking as compared with
tracking consumerÊs attitude, knowledge, or behavioural intentions
is not possible in traditional commerce.
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Permit
Personalisation
and
Customisation
E-commerce technologies permit the following:
(a)
Personalisation
Merchants can target their marketing messages to specific
individuals by adjusting the message to a personÊs
name, interests and past purchases.
(b)
Customisation
Changing the delivered product or service based on a
userÊs preferences or prior behaviour.
In sum, each of these differences from traditional commerce
makes e-commerce business unique. The combination of screento-customer interfaces, real-time competitive responses, and oneto-one customisation lead to „value increases‰ for both customer
and firm.
Global Reach
E-commerce technology permits commercial transactions to cross
cultural and national boundaries far more conveniently and costeffectively than traditional commerce. As a result, the potential
market size for e-commerce merchants is roughly equal to the
size of the worldÊs online population. The total number of
customers that can be obtained by an e-commerce business is a
measure of its reach.
In contrast, most traditional commerce is local or regional and it
involves local merchants or national merchants with local outlets.
Television, radio stations and newspapers, for instance, are
primarily local and regional institutions with limited but powerful
national networks that can attract a national audience. In contrast
to e-commerce technology, these older commerce technologies do
not easily cross national boundaries to a global audience.
1.1.4
Business Processes in Commerce
Do you know that since the introduction of e-commerce, many new terms have
evolved to describe the various types of business? For example, look at the
following terms:
(a)
Brick and Mortar Business
A business that has a physical location, such as a store, which we can walk
into and purchase merchandise; and
(b)
Clicks and Brick Business
A business that has a physical location and an online presence.
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However, in this section, we will look into the common business processes
involved in commerce. In many cases, business processes use traditional
commerce activities very effectively, and technology cannot improve upon them.
Products that buyers prefer to touch, smell, or examine closely are difficult to sell
using electronic commerce. For example, customers might be reluctant to buy
high-fashion clothing and perishable food products as shown in Figure 1.5, such
as meat and fruits, if they cannot closely examine the products before agreeing to
purchase them.
Retail merchants have years of traditional commerce experience in creating store
environments that help convince customers to buy. This combination of store
design, layout and product display knowledge is called merchandising. In
addition, many salespeople have developed skills that allow them to identify
customer needs and find products or services that meet those needs. The art of
merchandising and personal selling can be difficult to practise remotely.
On the other hand, some products are easier to sell on the Internet than others.
As can be seen in Figure 1.6, products such as books or CDs are good candidates
for e-commerce because customers do not need to experience the physical
characteristics of the particular item before they buy it. Since one copy of a new
book is identical to other copies, and since the customer is not concerned about
fit, freshness or other such qualities, customers are usually willing to order a title
without examining the specific copy they will receive.
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Figure 1.6: Books are potential e-commerce products
Source: http://earth911.com
Let us look at Table 1.5 which shows examples of business processes. They can be
divided as follows:
(a)
Processes well-suited to e-commerce;
(b)
Processes better-suited to traditional commerce; and
(c)
Processes well-suited to e-commerce and traditional commerce.
Table 1.5: Examples of Business Processes
E-commerce
Traditional Commerce
E-commerce and
Traditional Commerce
Sale/purchase of books,
CDs and travel services
Sale/purchase of impulse
items for immediate use
Sale/purchase of
automobiles
Online delivery of software
Sale/purchase of perishable
food products
Online banking
Sale purchase of investment
and insurance products
Small-denomination
purchases and sales
Roommate-matching
services
Online shipment tracking
Sale/purchase of high value
jewellery and antiques
Sale/purchase of residential
real estate
Of course, these suitability classifications depend on the current state of
available technologies, and thus, might change as new tools emerge for
implementing e-commerce. One business process that is especially well-suited
to electronic commerce is the selling of commodity items.
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A commodity item is a product or service that is hard to distinguish from
the same products or services provided by other sellers. Its features have
become standardised and well- known. Gasoline, books, CDs office
supplies, soap, computers, and furniture are all examples of commodity
products or services.
A product that has a strong brand identity such as a Sony CD player is easier to
sell on the Web than an unbranded item, as the brandÊs reputation reduces or
increases the buyerÊs concerns about the itemÊs quality. Other items that are wellsuited to e-commerce are those that appeal to small, but geographically dispersed
groups of customers. Collectible comic books are an example of this type of
product.
A combination of traditional and e-commerce strategies works best when the
business process includes both commodity and personal inspection elements. For
example, many people are finding information on the Web about new and used
automobiles, but only a few people would be willing to buy a used car without
driving and personally inspecting it.
In the above case, e-commerce provides a good platform for buyers to obtain
information about available models, options, reliability, prices and dealerships.
However, the variability in the condition of used cars makes the traditional
commerce component of personal inspection a key part of the transaction
negotiation. The next two sections summarise some advantages and
disadvantages of e-commerce.
SELF-CHECK 1.2
In which business process does a combination of traditional and ecommerce strategies work best? Explain.
1.1.5
Advantages of E-commerce
Do you know why firms are interested in e-commerce? Firms are interested in
it because, quite simply, it can help increase the profits. All the advantages of
e-commerce for businesses can be summarised in one statement as shown.
E-commerce can increase sales and decrease costs.
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The advantages of e-commerce are as shown in Table 1.6:
Table 1.6: Advantages of E-commerce
Advantages
Description
Easily reach the target
market
Well-planned Web advertising can get even a small firmÊs
promotional message out to potential customers in every
country in the world. A firm can use e-commerce to reach
narrow market segments that are geographically scattered. The
Web is particularly useful in creating virtual communities,
gathering of people who share common interests on the
Internet, that become ideal target markets for specific types of
products or services.
Cost-effective
A business can reduce the costs of handling sales inquiries,
providing price quote and determining product availability by
using e-commerce in its sales support and order-taking
processes. Just as e-commerce increases sales opportunities for
the seller, it increases purchasing opportunities for the buyer.
Negotiating price and delivery terms is easier in e-commerce
because the Internet can help companies efficiently obtain
competitive bid information. E-commerce increases the speed
and accuracy with which businesses can exchange information,
which reduces costs on both sides of transactions.
Great variety
E-commerce provides buyers with a wider range of choices
than traditional commerce because buyers can consider many
different products and services from a wider variety of sellers.
Some buyers prefer a great deal of information in deciding on a
purchase; others prefer less. E-commerce provides buyers with
an easy way to customise the level of detail in the information
they obtain about a prospective purchase.
Fast access
Instead of waiting for days for the mail to bring a catalogue or
product specification sheet, or even minutes for a fax
transmission, buyers can have instant access to detailed
information on the Web. Some products such as software, audio
clips or images can even be delivered through the Internet,
which reduces the time buyers must wait to begin enjoying
their purchases.
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Safe
Electronic payment can be easier to audit and monitor than
payment made by cheque, providing protection against fraud
and theft losses.
Availability
E-commerce enables people to work from home and this brings
the benefit of avoiding commuter-caused traffic and pollution.
E-commerce can also make products and services available in
remote areas. For example, distance education is making it
possible for people to learn skills and earn degrees no matter
where they live.
1.1.6
Disadvantages of E-commerce
We have looked at the advantages of e-commerce. Now, let us move on to the
disadvantages of e-commerce. Most of the disadvantages stem from the newness
and rapidly developing pace of underlying technologies. These disadvantages
will disappear as e-commerce matures and becomes more available and
acceptable by the general population.
The disadvantages of e-commerce are as shown in Table 1.7.
Table 1.7: Disadvantages of E-commerce
Disadvantages
Difficulty in
examining and
selecting
Description
Some business processes may never adopt e-commerce. For
example, perishable foods, unique high-cost items and antiques
as it might be impossible to inspect adequately from a remote
location, regardless of any technologies that may be devised in
the future.
Many products and services require that a significant mass of
potential buyers to be equipped and willing to buy through the
Internet. Most online grocers focus their sales efforts on
packaged goods and branded items. Perishable grocery products,
such as fruit and vegetables, are much harder to sell online
because customers want to examine and select specific items that
are still fresh and appealing.
Difficulty in
calculating the
cost
Businesses often calculate return-on-investment numbers before
committing to any new technology. In e-commerce, investments
are difficult to calculate, because the costs and benefits are
unquantifiable. Costs, which are a function of technology, can
change dramatically even during a short-lived e-commerce
implementation projects, as the underlying technologies are
changing too fast.
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Difficulty in
recruiting and
retaining
employees
Many firms have had trouble recruiting and retaining employees
with the technological, design, and business process skills
needed to create an effective e-commerce presence.
Difficulty in
integrating
existing databases
and software
Business face the difficulty of integrating existing databases and
transaction-processing software designed for traditional
commerce into the software that enables e-commerce.
Difficulty in terms
of cultural and
legal aspects
Many businesses face cultural and legal obstacles in conducting
e-commerce as some consumers are fearful to send their credit
card details to online merchants that they have never met.
However, as more businesses and individuals find the benefits of e-commerce to
be compelling, many of these technology and culture-related disadvantages will
be resolved and become less challenging.
1.1.7
Differences between E-commerce and
E-business
The rapid advancement of technology and its application in the business seem to
be accompanied by similar rapid changes in terminology. The use of the term
„e-commerce‰ has been supplemented by additional terms such as „e-business‰.
There is a debate among consultants and academicians about the meaning and
limitations of both terms: e-commerce and e-business.
Some argue that e-commerce encompasses the entire world of electronically
based organisational activities that support a firmÊs market exchanges including
a firmÊs entire information systemÊs infrastructure. On the other hand, others
argue that e-business encompasses the entire world of internal and external
electronically based activities, including e-commerce.
For the purposes of this module, we will use the term „e-business‰ to refer
primarily to the digital enabling of transactions and processes within a firm,
involving information systems under the control of the firm. For most of the part,
e-business does not include commercial transactions involving an exchange of
value across organisational boundaries.
For example, a companyÊs online inventory control mechanisms are a component
of e-business, but such internal processes do not directly generate revenue for the
firm from outside businesses or consumers, as e-commerce does.
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It is true; however, that an e-business infrastructure can also support e-commerce
exchanges.
For example, an e-commerce and e-business systems can blend together at the
business firm boundary, at the point where internal business systems link up
with suppliers for example, e-business applications turn into e-commerce
precisely when an exchange of value occurs.
In simple words, we can conclude that e-commerce primarily involves
transactions that cross firm boundaries. In contrast, e-business primarily
concerns the applications of digital technologies to business processes within the
firm.
ACTIVITY 1.2
1.
Name one type of business process which is not listed in the topic
that you believe would be a good candidate for e-commerce.
Explain why.
2.
Surf the following websites which deal with business processes in
E-commerce. Then, answer the questions.
http://www.mphonline.com (Books)
http://www.cimbclicks.com (E-banking)
http://www.airasia.com (Airline tickets reservation)
http://www.parksononline.com (Department stores)
(a)
What does these business deal with?
(b)
What are other examples of business processes which
involve e-commerce?
EXERCISE 1.1
1.
Define e-commerce.
2.
By using your own words, explain how e-commerce is unique and
different from traditional commerce.
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CATEGORIES OF E-COMMERCE
In this section, you will get to know the different categories of e-commerce. There
are four major categories (refer to Figure 1.7):
(a)
Business-to-consumer (B2C);
(b)
Business-to-business (B2B);
(c)
Consumer-to-consumer (C2C);
(d)
Consumer-to-business (C2B).
Figure 1.7: Four categories of e-commerce
Source: Adapted from Rayport, J. F., & Jaworski, B. J. (2008).
Introduction to e-commerce. Boston: McGraw-Hill
In the following sections, you will learn in depth, the categories of e-commerce
and m-commerce.
1.2.1
Business-to-Consumer E-commerce
What is business-to-consumer e-commerce?
Business-to-consumer (B2C) e-commerce consists of the sale of product
or services from a business to the general public or an end user.
In this model, the seller is the business and the buyer is the consumer (public).
Products for sale can be physical objects such as books, flowers, computers,
groceries, prescription drugs, music, movies, and cars. They also can be
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intangible items. For example, an online magazine or download purchase
software. Popular services offered by B2C businesses include online banking,
stock trading, and airline reservations.
Sellers that use a B2C business model can maximise benefits by eliminating the
middleman. Businesses sell products directly to consumers without using
traditional retail channels. This enables some B2C companies to sell products at a
lower cost and with faster service than comparable traditional commerce.
Consumers also derive benefits from the B2C business model. They have access
to a variety of products and service without the constraints of time or distance.
Consumers easily can make comparisons between shops to find the best buy.
Many B2C websites provide consumer services such as access to product
reviews, chat rooms and other product-related information. These services often
attract and retain customers.
Many B2C businesses personalise their websites to consumers by tracking
visitorsÊ preference while they browse through the web pages. This enables the
B2C business to target advertisement, determine customer needs, and personalise
offerings to a customer Ês profile.
You will learn more on B2C businesses in Topic 2. For now, we will move on to
the second category of e-commerce: Business-to-Business (B2B).
1.2.2
Business-to-Business E-commerce
What is meant by business-to-business e-commerce?
Business-to-business (B2B) e-commerce consists of the sale and exchange
of products and service between businesses.
An example of B2B is when, a company that manufactures bicycles uses the
Internet to purchase tires from its supplier.
Many businesses use the unique advantages of Internet to communicate with
business partners. For example, some companies provide services to assist a
manufacturer with locating suppliers. The Internet enables all participants in a
supply chain to relay information to each other. A supply chain consists of the
interrelated network of facilities and a distribution method that obtains
materials, transforms materials into finished products and delivers the finished
products to customers.
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Most businesses that engage in B2C e-commerce also participate in B2B
e-commerce. Thus, many companyÊs websites also provide goods and services to
other businesses. A company engages in B2B e-commerce when stocking its
warehouse and engages in B2C e-commerce when selling goods in the
warehouse to consumers.
Basic examples of B2B e-commerce sites are vendor, service, broker and infomediary sites. A vendor for B2B site, also called an e-procurement site, is a
product supplier that allows purchasing agents to use a network to shop, submit
request for quotes (RFQs), and purchased items. A service B2B site uses the
network to provide one or more services to businesses such as financing,
warehousing or shipping. A brokering B2B site acts as a middleman by
negotiating the contract of a purchase and a sale. An info-mediary (acronym for
information intermediary) B2B site provides specialised information about
suppliers and other businesses.
1.2.3
Consumer-to-Consumer E-commerce
Now, let us look at the meaning of C2C.
Consumer-to-consumer (C2C) e-commerce consists of individuals using
the Internet to sell products and service directly to other individuals.
The most popular vehicle for C2C e-commerce is the online auction. An online
auction is similar to negotiating, in which a consumer auctions goods to other
consumers. If you are interested in an item, then you will bid on it. The highest
bidder at the end of the bidding period purchases the item.
In C2C e-commerce, the consumer does the following:
(a)
Prepares the product for market;
(b)
Places the product for auction or sale; and
(c)
Relies on the market-maker to provide a catalogue, search engine and
transaction-clearing capabilities so that products can be easily displayed,
discovered and paid for. Websites like eBay (www.ebay.com.my) and
lelong (www.lelong.com.my) are the perfect examples for C2C e-commerce.
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Another form of C2C e-commerce is Internet peer-to-peer (P2P) as shown below.
Internet peer-to-peer (P2P) describes an Internet network that enables
users with the same networking software to connect to each otherÊs hard
disks and exchange files directly without having to go through a central
web server.
With the appropriate software and Internet connection, users can copy files from
someone elseÊs hard disk to their hard disks. Although music-sharing services are
now fee based, these programmes initially stirred controversy related to musicÊs
copyright infringement. They allowed users to easily copy MP3 music files from
one computer to another.
Other activities in C2C e-commerce include:
(a)
Classified ads (e.g. www.freeclassifields.com);
(b)
C2C exchange (e.g. www.targetbarter.com)
(c)
Personal service (e.g. www.match.com).
(d)
Virtual property (e.g. www.mmorpg.com)
1.2.4
Consumer-to-Business E-commerce
What is meant by consumer-to-business e-commerce?
Consumer-to-business (C2B) e-commerce is a complete reversal of the
business-to-consumer (B2C) model. In a consumer-to-business model, a
consumer offers goods or services to companies and the companies pay
for them.
These groups may be economically-motivated, as with demand aggregators, or
socially-oriented, as with cause-related advocacy groups at SpeakOut.com.
Examples of C2B are in the forms of affiliate marketing, answering online polls
for companies, being a freelance developer, etc.
For example, a shampoo-producing company sends you an online survey and
asks you to fill it out. When you have filled in the survey, you will be paid a
particular amount of money for your service in the form of answers given for the
questions posed in the survey.
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1.2.5
Mobile Commerce (M-commerce)
Even though it is not regarded as one of the main categories of e-commerce, mcommerce still plays a significant role in e-commerce.
Mobile-commerce (m-commerce) takes traditional e-commerce models
and leverages emerging new wireless technologies to permit mobile
access to the web.
Traditional e-commerce provides access to anyone, anytime and anywhere via
wireless devices such as the Internet.
In essence, wireless networks utilise newly available bandwidth and
communication protocols to connect mobile users to the Internet. While existing
wireless networks have limited bandwidth capacity, soon their capacity will
increase significantly. In general, wireless web technology will enable the
extension of existing Web business models to service the mobile work force and
consumer of the future.
For instance, Amazon.com recently made its site accessible by wireless mobile
devices. Currently, there are many more cell phone subscribers than there are
Internet users. When cell phones become truly Web-ready, a development
expected within the next several years, analysts predict an explosion of interest in
m-commerce.
SELF-CHECK 1.3
What traditional barriers are almost eliminated by e-commerce?
Discuss your answers.
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ACTIVITY 1.3
Visit these websites to get a clear view of each category of e-commerce
below:
x
Mobile commerce (m-commerce)
http://www.cimbclicks.com.my/mobilebankinguide.htm
After viewing each website, describe how the features of websites in
each categories are different compared to others.
EXERCISE 1.2
1.3
1.
How does B2C business model maximise their benefits?
2.
Describe B2B e-commerce.
3.
What is the role of consumer in a C2C e-commerce?
ORIGIN AND GROWTH OF E-COMMERCE
Although e-commerce is a very recent phenomenon of the 1990s, it already has a
history. The history of e-commerce can be divided into three periods:
(a)
Innovation (1995-2000);
(b)
Consolidation (2001-2006); and
(c)
Reinvention (2007-future).
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Let us look at the definition given for each period.
Innovation era was a period of explosive growth, beginning in 1995 with
the first widespread use of the web to advertise products, and ending in
2000 when stock market valuations for dot.com companies began to
collapse.
Consolidation era began in 2001, by which time the sobering reassessment of
e-commerce companies and the value of their stock had occurred. Emphasis
was shifted to business-driven approach rather than technology-driven
approach where large traditional firms learned to use the web to strengthen
their market position.
Reinvention era began in 2007 and extends through the present day and
into the uncertain future. This period involves the extension of Internet
technologies, the discovery of new business models based on consumergenerated content, social networking and virtual-online lives.
Each of these e-commerce periods is characterised by a set of visions and driving
forces. In the following sections, we will take a look at each period in detail.
1.3.1
Innovation Era (1995-2000)
The early years of e-commerce were the time where key e-commerce concepts
were developed and explored. Thousands of dot.com companies were formed
and backed by over $125 billion in financial capital in the United States. For
computer scientists and information technologists, the earlier success of
e-commerce was attributed to a powerful set of information technologies
developed over 40 years, from mainframe computer to personal computer,
Internet and networking technologies. The vision was that everyone in the world
could afford inexpensive computer with access to Internet.
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For economists, e-commerce raised the realistic prospect of a perfect Bertrand
market. Let us look at the definition provided.
Bertrand market is a market where price, cost, and quality information is
equally distributed, where a nearly infinite set of suppliers compete
against one another, and where customers have access to all relevant
market information worldwide.
Merchants in turn would have equal direct access to hundreds of millions of
customers. In this near-perfect information market-space, transaction costs would
plummet because the costs of searching for prices, product descriptions, payment
settlement, and order fulfilment would all fall drastically.
New „shopping bot‰ programmes would automatically search the entire web for
the best prices and delivery times. For merchants, the cost of searching for
customers would also fall, reducing the need for wasteful advertising. Prices and
even costs would be increasingly transparent to the customer, who could now
know exactly, and instantly the worldwide best cost, quality, and availability of
most products.
In turn, the market middleman would disappear. The distributors, wholesalers
and other factors in the marketplace that are intermediates between producers
and consumers, each demanding a payment and raising costs while adding little
value.
Manufacturers and content originators would develop a direct market
relationship with their customers. The resulting intense competition, the decline
of intermediaries, and the lower transaction costs would eliminate products
brands, and along with it, the possibility of monopoly profits based on brands,
geography, or special access to factors of production.
Prices for products and services would fall to the point where prices covered
costs of production plus a fair, „market rate‰ of return on capital, plus additional
small payments for entrepreneurial effort (that would not last long). Unfair
competitive advantages (which occur when one competitor has an advantage
that others cannot purchase) would be eliminated, as would extraordinary
returns on invested capital.
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That vision was called friction-free commerce as explained below.
Friction-free commerce is a vision of commerce in which information is
equally distributed, transaction costs are low, prices can be dynamically
adjusted to reflect actual demand, intermediaries decline and unfair
competitive advantages are eliminated.
For real-world entrepreneurs, their financial backers and marketing professionals
in the Innovation period, the idea of friction-free commerce was far from their
own visions. For these players, e-commerce represented an extraordinary
opportunity to earn far above normal returns on investment, far above the cost of
borrowing capital. The e-commerce market space represented access to millions
of consumers worldwide that used the Internet and a set of marketing
communications technologies (e-mail and web pages) that was universal,
inexpensive and powerful.
These new technologies permit marketers to practise what they have always
done which is segmenting the market into groups with different needs and price
sensitivity, targeting the segments with branding and promotional messages, and
positioning the product and pricing for each group; but with even more
precision.
In this new market space, extraordinary profits would go to first movers. Let us
look at the following to figure out who are first movers.
First movers are firms which were the first to market in a particular area
and which moved quickly to gather market share. First movers could
establish a large customer base quickly, build brand name recognition
early, build an entirely new distribution channel, and then inhibit
competitors (new entrants) by building in switching costs for their
customers through proprietary interface designs and features available
only at one site.
Online businesses using the new technology could create informative,
community-like features unavailable to traditional merchants. The thinking was
that once customers became accustomed to using a companyÊs unique Web
interface and feature set, they could not easily be switched to competitors.
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E-commerce was, after all, a totally new way of shopping that would have to
offer some immediate cost benefits to consumers. Doing business on the Web
was thought to be much more efficient compared to traditional commerce, or
even when compared to direct mail catalogue, the costs of customer acquisition
and retention were also supposed be so much lower, profit would inevitably
materialise out of these efficiencies.
Given that the market share and the number of visitors to the site are dynamic,
revenue became far more important in the earlier stages than earnings or profits.
Entrepreneurs and their financial backers in the Innovation period expected that
extraordinary profitability would come, but only after several years of losses.
Thus, the Innovation period of e-commerce was driven largely by visions of
profiting from new technology, with the emphasis on quickly achieving very
high market visibility. Overall, the Innovation period of e-commerce was
characterised by experimentation, capitalisation and hyper competition.
1.3.2
Consolidation Era (2001-2006)
The crash in stock market values for dot.com companies throughout 2000 is a
convenient mark to the end of that period. There were a number of reasons for
that crash such as:
(a)
Rebuilding the Internal Business Systems
A part of the run-up technology stocks was due to enormous information
technology capital expenditure of large American firms who were
rebuilding their internal business systems to withstand the challenges of
‰the year 2000 problem (Y2K)„. The simple change from year 1999 to 2000
was believed to be a major threat to corporate systems. Once these systems
were rebuilt, this information technology capital expenditure declined,
sending the earnings forecasts of technology companies down.
(b)
Built Excess Capacity in High-Speed Networks
In early 2000, it became clear that the telecommunications industry had
built excess capacity in high-speed fibre optic networks. Price wars were
breaking out in telecommunications markets, and it was clear that earnings
in this sector would fall dramatically, with many smaller firms going
bankrupt and unable to pay debts incurred to build high-speed networks.
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(c)
Less Sales Growth
The 1999 e-commerce Christmas season provided less sales growth than
anticipated, and more importantly, demonstrated that e-commerce was not
easy. Many dot-com retailers could not deliver in time and this hurt the
credibility of B2C e-commerce in general.
(d)
Rise in Valuations of Dot.Com and Technology Companies
The valuations of dot.com and technology companies had risen so high that
even supporters were questioning whether earnings of these companies
could ever grow fast enough to justify the prices of the shares. Some hightech companies had stock values 400 times earnings. And as it turned out,
most dot-com companies especially those specifically devoted to e-commerce
in fact did not have any earnings!
Most, in fact, were losing money while showing revenue growth. Even
supporters of the e-commerce phenomenon began to wonder if the
dot.com companies would ever become profitable. The stock market crash
of dot.com companies led to a sobering reassessment of the prospects for
e-commerce and the methods for achieving business success.
While the Consolidation period continues in an extremely rapid pace of growth
in customers and revenues, it is clear that many of the visions for e-commerce
developed during the Innovation period have not been fulfilled. For instance,
economistsÊ visions of „friction free‰ commerce have not been entirely realised.
Prices are sometimes lower on the Web, but the low prices are primarily a
function of entrepreneurs selling products below their costs.
Consumers are less price sensitive than expected; surprisingly, the websites with
the highest revenue also have the highest prices. There remains considerable
persistent price dispersion on the web, and the concept of one world, one market,
and one price has weakened as entrepreneurs discover new ways to differentiate
their products and services. For instance, prices on books and CDs vary by as
much as 50% and prices for airline tickets as much as 20%.
Brands remain very important in e-commerce as consumers trust some firms
more than others to deliver a high quality product on time. Search costs may
have fallen, but the overall transactions costs of actually completing a transaction
in e-commerce remains very high. About 65% of e-commerce purchases are
terminated in the shopping cart stage because of these consumer uncertainties:
(a)
Will the merchant actually deliver?
(b)
What is the time frame of delivery?
(c)
Does the merchant really have stock on this item?
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In many product areas, it is easier to call a trusted catalogue merchant than order on
a website. Intermediaries may have not disappeared as predicted, and few
manufactures or producers have actually developed a one-to-one sales relationship
with their ultimate customers. If anything, e-commerce has created many new
opportunities for middlemen to aggregate content, products, and services into
portals and thereby introduce themselves as the new intermediaries. Yahoo.com
and Amazon.com are two examples of this kind of new intermediaries.
Nor have the visions of many entrepreneurs and venture capitalists for
e-commerce during the Innovation period materialised exactly as predicted.
First-mover advantage appears to have succeeded only for a small group of
sites. Historically, first movers have been the long-term losers, with the earlyto-market innovators usually being displaced by established „fast follower‰
firms with the financial, marketing, legal and production assets needed to
develop mature markets, and this has proved true for e-commerce as well.
The overall costs of doing business on the Web including the costs of technology,
site design and maintenance, and warehouses for fulfilment are no lower than
the costs faced by the most efficient brick-and-mortar stores. The start-up costs
can be staggering. Attempting to achieve profitability by raising prices has often
led to large customer defections. If you want to know, from the e-commerce
merchantÊs perspective, the „e‰ in e-commerce does not stand for „easy.‰
1.3.3
Reinvention Era (2007-Future)
E-commerce entered the Reinvention period in 2007 which extends through the
present day and into the uncertain future. This is the period of reinvention
involving the extension of Internet technologies, the creation of new business
models based on consumer-generated content, social networking and virtual
online lives, exemplified by the fast moving entrepreneurial firms such as
Facebook, YouTube, MySpace and Twitter. Even though, only a few of the new
models have been profitable from their huge audience, many still have the
potential to be profitable in the future.
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Table 1.8 summarises the differences among the three periods of e-commerce
evolution.
Table 1.8: Evolution of E-commerce
Innovation
Consolidation
Reinvention
(1995-2000)
(2001-2006)
(2007-Future)
x
Technology-driven
x
Business-driven
x
Audience, customer and
community driven
x
Revenue growth
emphasis
x
Earnings and profits
emphasis
x
Audience and society
network growth
emphasis
x
Venture capital
financing
x
Traditional financing
x
Smaller venture capital
financing, early small
firms buyouts by large
online players
x
Ungoverned
x
Stronger regulation and
governance
x
Extensive government
surveillance
x
Entrepreneurial
x
Large traditional firms
x
Large pure web-based
firms
x
Disintermediation
x
Strengthening
intermediaries
x
Proliferation of small
online intermediaries
renting business
processes of larger firms
x
Perfect markets
x
Imperfect markets,
brands and network
effects
x
Online market
imperfections
x
Pure online strategies
x
Mixed „bricks and
clicks‰ strategies
x
Return of pure online
strategies in new markets;
extension of mixed
bricks- and -clicks in
traditional retail markets
x
First mover
advantages
x
Strategic follower
strength
x
First-mover advantages
return in new markets as
traditional web players
catch up
x
Low complexity retail
products
x
High complexity retail
products
x
Services
Source: Laudon, K. C., & Traver, C. G. (2010).
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Predictions for the Future
The future of e-commerce is now clearer, although not certain. There are six main
factors that will help define the future of e-commerce and they are:
(a)
Rise on Overall Revenues, Technology Products, and Customers
There is little doubt that the technology of e-commerce, the Internet, the
Web, and the growing number of wireless Internet appliances will continue
to propagate through all commercial activities. The overall revenues from
e-commerce will continue to rise on a very steep growth path, most likely in
the range 12% to 18% per year through 2012.
The number of products and services sold on the web and the size of
average purchase order are both growing at double-digit rates. There has
been a significant broadening of online product mix compared to the earlier
years when books, computer software and hardware are the main products
sold online. The faster growing e-commerce categories include home
products, office supplies, sporting goods and apparel/accessories.
(b)
Rise in the e-commerce Prices
E-commerce prices will rise to cover the real costs of doing business on the
web and to pay investors a reasonable rate of return on their capital. When
a company or a business model managed to attract consumers towards it,
costs such as tax, governmentÊs regulation and other additional costs will
be imposed to it. Thus, the increase in price will cover the imposed costs
and make it possible to cover the costs of conducting the business.
(c)
Rise in the e-commerce Margins and Profits
E-commerce margins (the difference between the revenues from sales and
the costs of goods) and profits will rise to levels more typical of all retailers.
However, there is a possibility that the profit margin will reduce in the case
of tight competition with other online businesses.
(d)
Radical Change in the Cast of Players
The cast of players will change radically. In the B2C and B2B market spaces,
traditional well-endowed, experienced online companies such as AirAsia
will continue to play a growing and dominant role in e-commerce while
new start-up ventures will gain large online audiences for new products
and services not dominated by large players.
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TOPIC 1 INTRODUCTION TO E-COMMERCE
Large Number of Successful Integrated Firms
The number of successful pure online companies will remain smaller than
integrated firms that adopt mixed click-and-brick strategies, combining
traditional sales channels and online efforts. Examples of integrated firms are
as follows:
(i)
Amazon.com will increasingly use printed catalogues;
(ii)
Procter & Gamble will continue to develop informative websites such
as Tide.com; and
(iii)
Major automotive companies will continue to improve the content and
value of their websites even if they do not enter into direct sales
relationships with consumers but instead use the web to assists sales
through dealers which thereby strengthens the traditional intermediaries
and channels.
In summary, the future of e-commerce will be a mixture of traditional retail
extending their brands to online markets. E-commerce firms in the earlier period
such as Amazon and eBay will strengthen their financial results and dominant
positions. New entrepreneurs and venture capitalist in e-commerce firms have
the potential to be in the prominent position by developing new audiences from
the growth of social network and community based activities.
To get more information on history and growth of e-commerce, please check
the following websites:
http://www.internetworldstats.com/
http://www.ecommerceland.com/history_ecommerce.html
SELF-CHECK 1.4
What is the difference between market space and marketplace?
EXERCISE 1.3
1.
Discuss the ways in which the e-commerce era can be considered
both a success and a failure.
2.
What factors will help define the future of e-commerce over the
next four to five years?
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UNDERSTANDING E-COMMERCE:
ORGANISING THEMES
E-commerce as shown in Figure 1.8 involves three broad interrelated themes as
follows:
(a)
Technology;
(b)
Business; and
(c)
Society.
Figure 1.8: E-commerce three broad interrelated themes
Technologies were the first to be developed. Then these developments were
exploited commercially. Once commercial exploitation of these technology
become widespread, a host of social, cultural and political issues arise. In the
following sections, we will explore more on the three themes in e-commerce.
1.4.1
Technology
The development and mastery of digital computing and communications
technology is at the heart of the newly emerging global digital economy
known as e-commerce. To understand the likely future of e-commerce, you
need a basic understanding of the information technologies upon which it is
built. E-commerce is a technologically driven phenomenon that relies on a
host of information technologies as well as fundamental concepts from
computer science developed over a 50 year period.
At the core of e-commerce are the Internet and the World Wide Web (WWW).
Behind these technologies, there are a host of complementary technologies,
personal computers, local area networks, relational databases, client/server
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computing and fibre optic switches, to name just a few. These technologies lie at
the heart of sophisticated business computing applications such as enterprisewide computing systems, supply chain management systems and customer
relationship management systems.
E-commerce relies on all these basic technologies and not just on the Internet. The
Internet, while representing a sharp break from prior corporate computing and
communications technologies, is nevertheless just the latest development in the
evolution of corporate computing and part of the continuing chain of computerbased innovations in business.
To truly understand e-commerce, you need to know something about
client/server computing, packet-switched communications, and protocols such
as TCP/IP, Web servers and HTML. All of these topics are described fully in
Topic 3.
1.4.2
Business
While the technology provides the infrastructure, it is the business applications
that provide the potential for the extraordinary returns on investment that create
the interest and excitement in e-commerce. New technologies present new ways
of organising production and business transaction. It change the strategies of
existing firms: Old strategies were made obsolete and new ones need to be
invented. New technologies are the birthing grounds for thousands of new
companies to offer new products and services.
To truly understand e-commerce, you will need to be familiar with some key
business concepts, such as the nature of electronic markets, information goods,
business models, firms and industry value chains, industry structure and
consumer behaviour in electronic markets.
1.4.3
Society
E-commerce is increasingly subject to the laws of nations and global entities. In
order to conduct successful e-commerce business, we need to understand the
pressures that global e-commerce places on contemporary society. Among the
common issues are intellectual property, individual privacy and public policy.
The cost of distributing digital copies of copyrighted or intellectual property
tangible works of minds such as music, books and videos are nearly zero on the
Internet. This caused e-commerce to present special challenges to the various
methods societies have used to protect intellectual property rights in the past.
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Since the Internet and the Web are exceptionally proficient at tracking the
identity and behaviour of individuals online, e-commerce raises difficulties for
preserving privacy, or the ability of individuals to place limits on the type and
amount of information collected about them, and to control the uses of their
personal information.
The global nature of e-commerce also poses public policy issues of equity, equal
access, content regulation, and taxation. If some societies choose to ban selected
images, selected commercial activity (i.e., online sports betting) or political
messages from their public media, then how can that society exercise content and
activity control over a global e-commerce site? What rights do nation-states and
their citizens have with respect to the Internet, the web, and e-commerce?
ACTIVITY 1.5
Is it ethical and legal to download copyrighted music to your computer
for personal use? Give reasons for your answer.
To get more information on computer and society, visit these websites:
http://www.copyright.gov/
http://www.myipo.gov.my/
http://www.uspto.gov/trademarks/index.jsp
http://www.privacy.org/
http://www.sigcas.org/
EXERCISE 1.4
List and briefly explain the major themes underlying the study of
e-commerce.
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x
Commerce, the negotiated exchange of goods and services, has been
practised in traditional ways for thousands of years.
x
E-commerce is the application of new technologies; particularly Internet and
web technologies, to help individuals, business and other organisations to
better conduct business.
x
The four main attributes of e-commerce are:
x
x
x
Intra and inter-organisational activities that support the exchange;
Technology-enabled;
Technology-mediated; and
Exchange of digitised information between.
The eight elements of e-commerce are:
Core strategic decisions are technology-based;
Ubiquitousness;
Real-time competitive responsiveness;
Technology-based customer interface;
Customer controlled interaction;
Knowledge of customer behaviour;
Permit personalisation and customisation; and
Global reach.
The four major categories of e-commerce are:
Business-to-consumer;
Business-to-business;
Consumer-to-business; and
Consumer-to-consumer.
The advantages of e-commerce include easy-to-access target market, cost
effectiveness, great variety, fast access, safe and avaibility.
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x
W
However, the disadvantages are include:
Difficulty in examining and selecting;
Difficulty in calculating the cost;
Difficulty in recruiting and retaining employees;
Difficulty in integrating existing databases and software; and
Difficulty in terms of cultural and legal aspects.
Three major themes in e-commerce are technology, business and society.