CHAPTER 1

Introduction to
Electronic
Commerce

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 Learning Objectives

In this chapter, you will learn:

• What electronic commerce is and how it has evolved
in three waves of development
• Why companies concentrate on revenue models
and the analysis of business processes instead of
business models when they undertake electronic
commerce initiatives
• How to identify opportunities for and barriers to
electronic commerce initiatives

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 Learning Objectives (cont’d.)

• How economic forces have led to the development

and continued growth of electronic commerce
• How businesses use value chains and SWOT
analysis to identify electronic commerce
opportunities
• How the international nature of electronic commerce
affects its growth and development

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 Introduction

• Electronic commerce began in the United States

– China the leader in online retail sales since 2013
– More and more sales being made on smartphones
• China is the world’s largest potential online market
– Active Internet users and upward economic growth
– Buyers use U.S. and domestic sites and are
influenced by online reviews and discussions
– Has led to online review sites and seller participation
in Chinese chat and messaging sites

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 Introduction (cont’d.)

• Sellers in China must account for regional

differences within a diverse country
– Distribution and delivery difficult without well-
developed roads and standardized shipping practices
– Some sellers have created their own distribution
systems
• Chapter addresses how online businesses have
emerged and grown to accommodate various
cultures and infrastructure challenges around the
world

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 The Evolution of Electronic Commerce

• Electronic commerce history

– Rapid growth from mid-1990s to 2000
– “Dot-com boom” followed by “dot-com bust”
– 2000 to 2003: Overly gloomy news reports
– 2003: Signs of profound rebirth
• Sales and profit growth returned
• Electronic commerce grew faster than overall economy
and became a larger part of the total economy

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 The Evolution of Electronic Commerce

• Electronic commerce history (cont’d.)

– 2008 general recession
• Electronic commerce suffered far less than most of
economy
– From 2003 to the present
• Electronic commerce has expanded more in good
times and contracted less in bad times than other
economic sectors

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 Electronic Commerce and Electronic
Business
• Electronic commerce
– Shopping on the Web
– Businesses trading with other businesses
– Internal company processes
– Broader term: electronic business (e-business)
– Includes all business activities using Internet
technologies
• Internet and World Wide Web (Web)
• Wireless transmissions on mobile telephone networks
• Dot-com (pure dot-com)
– Businesses operating only online
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 Categories of Electronic Commerce

• Business-to-consumer (B2C)
– Consumer shopping on the Web
• Business-to-business (B2B): e-procurement
– Transactions conducted between Web businesses
– Supply management (procurement) departments
• Negotiate purchase transactions with suppliers
• Business processes
– Use of Internet technologies within the business

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 Business Processes

• Business activity is a task ask performed by a

worker doing his or her job
– May or may not be related to a transaction
• Transaction is an exchange of value
– Purchase, sale, or conversion of raw materials into
finished product
– Involves at least one business activity
• Business processes are groups of logical, related,
sequential activities and transactions
• Web helps people work more effectively

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 Relative Size of Electronic Commerce
Elements
• Rough approximation shown in Figure 1-1
• Dollar volume and number of transactions
– B2B much greater than B2C
• Number of transactions
– Supporting business processes greater than B2C and
B2B combined

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 © Cengage Learning 2017
FIGURE 1-1 Elements of electronic commerce

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 Relative Size of Electronic Commerce
Elements (cont’d.)
• Consumer-to-consumer (C2C)
– Individuals buying and selling among themselves
• Web auction site
– C2C sales included in B2C category
• Seller acts as a business (for transaction purposes)
• Business-to-government (B2G)
– Business transactions with government agencies
• Paying taxes, filing required reports
– B2G transactions included in B2B discussions

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 © Cengage Learning 2017
FIGURE 1-2 Electronic commerce categories

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 Early Electronic Commerce

• Electronic Funds Transfers (EFTs)

– Wire transfers
– Electronic transmissions of account exchange
information over private communications networks
• Electronic Data Interchange (EDI)
– Business-to-business transmission of computer-
readable data in standard format
– Standard transmitting formats benefits
• Reduces errors, avoids printing and mailing costs and
eliminates need to reenter data

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 Early Electronic Commerce (cont’d.)

• Trading partners
– Businesses engaging in EDI with each other
– EDI pioneers (example: Walmart) improved
purchasing processes and supplier relationships
– Pioneers faced high implementation costs
• Value-added network (VAN)
– Independent firm offering EDI connection and
transaction-forwarding services
• EDI continues to be a large portion of B2B electronic
commerce

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The First Wave of Electronic Commerce,
1995-2003
• 1997 to 2000
– More than 12,000 Internet businesses were started
• 2000 to 2003
– More than 5,000 start-ups went out of business
– Extensive coverage of “dot.com bust”
– $200 billion spent on bailing out and starting
businesses
• Set the stage for significant future growth

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The Second Wave of Electronic Commerce,
2004-2009
• Expanding international scope
• Established companies used own funds to finance
gradual expansion
• Faster, less expensive Internet technologies
available
– Increase in broadband connections a key element of
the B2C component of this wave
• E-mail became an integral part of marketing and
customer contact
• Renewed interest in Internet advertising

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The Second Wave of Electronic Commerce,
2004-2009 (cont’d.)
• Promise of available technologies fulfilled
– Legal distribution of music, video, and other digital
products
• Web 2.0 technologies
– Users participate in creating and modifying content on
third party Web sites
• Shift in online business strategy
– Away from the first-mover advantage which is
expensive and not always successful to a smart-
follower strategy
• “Second mouse gets the cheese”
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The Third Wave of Electronic Commerce,
2010 - Present
• Factors in the third wave
– Critical mass of mobile users with powerful devices
• Increased availability of smartphones and tablets
• Mobile apps used for over 40% of online sales
– Increase in electronic commerce activity
• Growing number of people using handheld devices to
access the Internet
– Widespread participation in social networking
• Businesses can use social commerce to advertise,
promote or suggest specific products and services

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The Third Wave of Electronic Commerce,
2010 - Present
• Factors in the third wave (cont’d)
– Increased online participation by smaller businesses
in sales, purchasing, and capital-raising activities
• Crowdsourcing
– Sophisticated analysis of data companies collect
about online customers
• Big data and data analytics
– Increased integration of tracking technologies into
B2B electronic commerce and the management of
business processes within companies
• RFID devices and biometric technologies

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 © Cengage Learning 2017
FIGURE 1-3 Key characteristics of the first three waves of
electronic commerce

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Business Models, Revenue Models, and
Business Processes
• Business model
– Set of processes combined to achieve company goal
• In the first wave of electronic commerce, investors
sought Internet-driven business models
– Expectations of rapid sales growth, market
dominance
– Successful “dot-com” business models emulated
– Led to many business failures
– Michael Porter argued business models did not exist

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Business Models, Revenue Models, and
Business Processes (cont’d.)
• Instead of copying model, companies should
examine their business elements
– Streamline, enhance, or replace with Internet
technology driven processes
• Revenue model
– Specific collection of business processes used to
identify, market and make sales to customers
– Classifies revenue-generating activities for
communication and analysis purposes

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 Focus on Specific Business Processes

• Examples of business processes

– Purchasing raw materials or goods for resale
– Converting materials and labor into finished goods
– Managing transportation and logistics
– Hiring and training employees
– Managing business finances
• Identify processes that benefit from ecommerce
technologies
– Not all processes can be improved with technology
– Firms can use it to help them adapt to change

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 Role of Merchandising

• Combination of store design, layout, and product

display knowledge
• Salespeople have skills to identify customer needs
and meet them
• Merchandising and personal selling skills can be
difficult to practice remotely
– Companies must be able to transfer these skills to
have Web site success
– Some products are easier to sell on the Internet than
others

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 Product/Process Suitability to Electronic
Commerce
• Some products good candidates for electronic
commerce
– Customers do not need to experience physical
characteristics before purchase
– Technology has made more processes suitable for
electronic commerce
• Commodity items are standardized, well-known
products only differentiated by price
– Must have attractive shipping profile to sell online
– Includes books, clothing, shoes, kitchen accessories
and other small household items
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FIGURE 1-5 Business process suitability to type of commerce

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 Product/Process Suitability to Electronic
Commerce (cont’d.)
• Easier-to-sell products have:
– Strong brand reputation
– Appeal to small but geographically diverse groups
• Traditional commerce better for:
– Products relying on personal selling skills
– Transactions involving large amounts of money
• Combination of electronic and traditional commerce
strategies best when:
– Business process includes both commodity and
personal inspection aspects

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 Opportunities for Electronic Commerce

• Electronic commerce can help increase profits and

sales and decrease business costs
• Virtual community
– Gathering of people sharing a common interest
• E-commerce purchasing opportunities
– Identify new suppliers and business partners
– Efficiently obtain competitive bid information
– Increase speed, information exchange accuracy
– Wider range of choices available 24 hours a day

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 Opportunities for Electronic Commerce
(cont’d.)
• Benefits extend to general society
– Lower costs to issue and secure
• Electronic payments of tax refunds
• Public retirement
• Welfare support
– Provides faster transmission
– Provides fraud, theft loss protection
• Electronic payments easier to audit and monitor
– Telecommuting reduces traffic, pollution
– Products and services available in remote areas

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 Electronic Commerce: Current Barriers

• Poor choices for electronic commerce

– Perishable foods and high-cost, unique items
• Four barriers
– Need for critical mass of customers with appropriate
technology
– Unpredictability in costs and revenues
– Insufficient tools for hardware and software
integration
– Cultural and legal barriers

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Economic Forces and Electronic Commerce

• Economics
– Study how people allocate scarce resources
• Markets
– Potential sellers come into contact with buyers
– Medium of exchange available (currency or barter)
• Hierarchical business organizations
– Firms or companies
• Transaction costs
– Motivation for moving economic activity to
hierarchically structured firms
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 Transaction Costs

• Total costs a buyer and seller incur while gathering

information and negotiating purchase-and-sale
transaction
• Costs include:
– Brokerage fees and sales commissions
– Cost of information search and acquisition
• Sweater dealer example (Figure 1-6)

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 © Cengage Learning 2017
FIGURE 1-6 Market form of economic organization

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 Markets and Hierarchies

• Coase’s analysis of high transaction costs

– Hierarchical organizations replace market-negotiated
transactions
– Supervision and worker-monitoring elements
– Vertical integration sweater example (Figure 1-7)
• Oliver Williamson (extended Coase’s analysis)
– Complex manufacturing, assembly operations
• Hierarchically organized, vertically integrated
– Manufacturing innovations increased monitoring
activities’ efficiency and effectiveness

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FIGURE 1-7 Hierarchical form of economic organization

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 Markets and Hierarchies (cont’d.)

• Strategic business unit (business unit)

– Part of a company large enough to manage itself
– Small enough to quickly respond to business
environment changes
• Exception to hierarchy trend
– Commodities

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 Using Electronic Commerce to Reduce
Transaction Costs
• Electronic commerce can
– Improve flow of information
– Increase coordination of actions
– Change attractiveness of vertical integration
• Example: employment transaction
– Telecommuting reduces or eliminates transaction
costs

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 Network Economic Structures

• Neither market nor hierarchy

• Strategic alliances (strategic partnerships)
– Coordinate strategies, resources, skill sets by forming
long-term relationships based on shared purposes
– Strategic partners come together for specific projects
• Network organizations well suited to information-
intensive technology industries
– Electronic commerce makes networks easier to
construct and maintain
– Castells predicts economic networks will become the
organizing structure for social interactions
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FIGURE 1-8 Network form of economic organization

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 Network Effects

• Law of diminishing returns

– Activities yield less value as consumption amount
increases
• Example: hamburger consumption
• Network effect
– Exception to law of diminishing returns
– As more people or organizations participate in
network, the value to each participant increases
– Examples: Landline phones, e-mail

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 Identifying Electronic Commerce
Opportunities
• Focus on specific business processes
– Break business down
– Series of value-adding activities that combine to meet
firm’s goals
• Business activities conducted by firms of all sizes
• Firm
– Multiple business units owned by a common set of
shareholders
• Industry
– Multiple firms selling similar products to similar
customers
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 Strategic Business Unit Value Chains

• Value chain
– Organizing strategic business unit activities to design,
produce, promote, market, deliver, and support the
products or services
– Michael Porter includes supporting activities such as
human resource management and purchasing
• Strategic business unit primary activities
– Design, identify customers, purchase materials and
supplies, manufacture product or create service,
market and sell, deliver, provide after-sale service
and support
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 Strategic Business Unit Value Chains
(cont’d.)
• Importance of primary activities depends on:
– Product or service
– Customers
• Central corporate organization support activities
– Finance and administration
– Human resource
– Technology development

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FIGURE 1-9 Value chain for a strategic business unit

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 Industry Value Chains

• Examine where strategic business unit fits within

industry
• Porter’s value system
– Describes larger activities stream into which particular
business unit’s value chain is embedded
– Industry value chain refers to value systems
• Awareness of businesses value chain activities
– Allows identification of new opportunities
– Useful way to think about general business strategy

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FIGURE 1-10 Industry value chain for a strategic business unit

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SWOT Analysis: Evaluating Business Unit
Opportunities
• Define SWOT (strengths, weaknesses,
opportunities, and threats)
• First look into business unit
– Identify strengths and weaknesses
• Then review operating environment
– Identify opportunities and threats presented
• Take advantage of opportunities
– Build on strengths
– Avoid threats
– Compensate for weaknesses
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FIGURE 1-11 SWOT analysis questions

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FIGURE 1-12 Results of Dell’s SWOT analysis

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 International Nature of Electronic
Commerce
• Internet connects computers worldwide
• When companies use Web to improve business
process they automatically operate in global
environment
• Third wave
– Rapidly increasing proportion outside US
– China, India, and Brazil have seen enormous recent
growth
• Key issues in international commerce include trust,
culture, language, government and infrastructure

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FIGURE 1-13 Proportion of online B2C sales by geographic region, 2014

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 Trust Issues on the Web

• Important for all businesses to establish trusting

relationships with customers
• Companies can rely on established brand names
• Challenging for new companies because anonymity
exists when trying to establish a Web presence
– Plan for establishing credibility is essential
– Sellers cannot assume site visitors will know they are
trustworthy
• Business must overcome distrust in Web “strangers”

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 Language Issues

• Business must adapt to local cultures

– “Think globally, act locally”
– Provide local language versions of Web site as
customers are more likely to buy from sites in own
language
• Websites available in English only have declined
dramatically to about 25% of total sites
• Languages may require multiple translations for
separate dialects
– Localization means a translation considers multiple
elements of the local environment
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 Cultural Issues

• Important element of business trust is anticipating

how the other party to a transaction will act in
specific circumstances
• Culture is the combination of language and customs
– Varies across national boundaries, regions within
nations
• Care must be taken in choosing packaging, product
names, icons used to represent common actions
and even colors
• Japanese shoppers resisted US sites for years
because of their resistance to use of credit cards
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 Culture and Government

• Some areas have cultural environments inhospitable

to online discussions that occur on the Internet
– May lead to government controls that limit electronic
commerce development
– Many countries filter available Web content and some
have denounced the Internet
• Countries such as the People’s Republic of China
and Singapore traditionally control access to
information but want to reap the benefits of
electronic commerce
– Result has been many regulations and requirements
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use 57
 Infrastructure Issues

• Computers and software connected to Internet and

the related communications networks
• Outside the U.S. the telecommunications industry is
either government owned or regulated
– Inhibits development or limits expansion
• High local telephone connection costs affect online
behavior
• Over half of all Websites turn away international
orders because of no process to handle them
– Problem is increasing globally

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use 58
 Infrastructure Issues (cont’d.)

• Freight forwarder arranges international

transactions’ shipping and insurance
• Customs broker arranges tariff payment and
compliance with international shipping laws
• Bonded warehouse is a secure location that holds
international shipments until customs requirements
or payments satisfied
• Handling international transactions paperwork has
an annual cost of $700 billion
– Software automates some paperwork

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use 59
 © Cengage Learning 2017
FIGURE 1-14 Parties involved in a typical international
trade transaction
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use 60