The Digital Firm: Electronic Business
and Electronic Commerce
Chapter 4 (9th Ed.)
Chapter 4 and Our Questions
• What is the role of the Internet and networking
technology in modern organizations?
– Distinguish among internets, intranets, extranets
– Describe the evolution of e-business and how ebusiness is transforming organizations and
markets
– Explain organizational implications of the
pervasiveness of the Internet
Outline of Ch 4
I. Big ideas
A. E-business & e-commerce
B. Impact of Internet
C. Changes resulting from the
Internet
II. Internet business models
III. Categories of e-commerce
A. B2C & B2B
B. Other classifications
IV. B2C environment
A. Uniqueness
B. Benefits
V. B2B environment
A. Buying & selling (sourcing and
procurement)
B. Transaction types
C. Auctions & exchanges
D. Supporting technologies
1. EDI
2. Electronic payments
3. Digital signature/certif.
VI. Electronic business
A. Collaborative commerce
B. Extranets
C. Intranets
VII Management challenges
A. Unproven business models
B. Organizational change
C. Trust, security, and privacy
D. Examples
E-Business and E-Commerce
• E-commerce concerns the processes for buying and
selling goods and services electronically
• E-business is the use of the Internet and IT to
execute all of the business processes for the firm.
E-business includes e-commerce, all internal
processes, and coordination with business partners
such as customers and suppliers
The Internet and the Digital Firm
• The Internet is the key enabling technology required
to build a digital firm
• Internet technologies are becoming the
infrastructure of choice for most firms
– Firms adopt Internet protocols for all networking
activity
– The browser becomes the front-end for all
applications and access to internal databases
• Internet enables seamless integration of information
– Within the firm and
– Between the firm and its business partners
Changes Resulting from the Internet
• Unbundling of information about products from the
products physical location
– Retailing (e.g., books)
– Financial services
• Economics of information search costs
– For customers; for merchants
– Information asymmetry
• Richness and reach
– Richness is the depth and detail of information
– Reach is how many people you can connect with
– Pre-Internet a business would have to choose one
• New business models
Internet Business Models
• Virtual storefront: Sells goods or services online
(Amazon.com)
• Information broker: Provides information on
products or services (Edmunds.com)
• Transaction broker: Provides online transaction
facility (eTrade.com, Expedia.com)
• Online marketplace: Provides a trading platform for
individuals and firms (eBay.com, alibaba.com)
More Internet Business Models
• Content provider: Creates revenue by providing
content (WSJ.com, TheStreet.com, mp3.com)
• Online service provider: Provides online services,
including search service. (Google.com, Xdrive.com)
• Virtual community: Provides an online community to
focused groups (Friendster.com, iVillage.com)
• Portal: Provides initial point of entry to Web,
specialized content, services (Yahoo.com, MSN.com)
Categories of E-Commerce
• Business-to-customer (B2C): Retailing of products
and services directly to individual customers
(Wal-Mart.com)
• Business-to-business (B2B): Sales of goods and
services to other businesses (Grainger.com,
Ariba.com)
• Consumer-to-consumer (C2C): Individuals using the
Web for private sales or exchange (eBay.com
• Consumer-to-government, business-to-government,
government-to-government
Other Way to Classify Businesses
• Pure play
– What happens when a pure player enters existing
markets?
• Clicks and bricks
– Do Internet sales reduce conventional sales?
– How do you segment your product line?
– Should everyone sell directly to their customers?
• Bricks and mortar alone
• Catalog
– Where do catalog sales come in?
– Victoria Secret, LandsEnd, LL Bean
Uniqueness of the B2C Environment
• Direct sales via the Web (a new channel)
– Eliminate intermediaries (disintermediation)
– New roles for intermediaries (reintermediation);
information brokers (edmunds.com)
• Interactive marketing and personalization
– Richness of information at the Web site
– Ability to capture customers’ web behavior at low
cost (clickstream tracking)
– Ability to customize/personalize for each
customer (Amazon and Dell)
– Collaborative filtering
– Corporate blogs
– Customer survey and focus groups
Uniqueness of the B2C Environment
(continued)
• Customer self-service
– Find information
– Ask questions
– Review transactions
– Track shipments
– Push to talk links
– Online chats with tech support
• Using email
– Establish continuing relationships with customers
– Encouraging purchases
Benefits of B2C to Consumers
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•
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Convenience (shop 24/7 from any location)
Time savings
Comparison shopping
More choices
Less expensive products due to more choices and
competition
• Faster delivery for digital products
• Participate in virtual auctions
• Interact with other customers in virtual communities
Characterizing the B2B Environment
• B2B includes transactions between business conducted
electronically over the Internet, extranets, intranets, or private
networks
• In the B2B environment businesses are both buyers and sellers
• B2B activity is often called
– Sourcing – the process of identifying, conducting
negotiations with, and forming supply agreements with
vendors of goods and services
– Procurement – involves not only purchasing goods and
services but also sourcing, negotiating with suppliers,
paying for goods, and making delivery arrangements
• B2B activity takes place along the entire supply chain of a firm
• Size
– By 2004 market may reach $10 trillion; much larger than
B2C market
– About 10% of non-Internet B2B market by 2005
Characteristics of the B2B Transactions
• Parties to the transaction
– direct between buyer and seller
– online intermediary that brokers the transaction
• Types of transactions
– spot sourcing where goods and services are
purchased as needed at prevailing market prices
– systematic sourcing where purchases are made in
long-term supplier-buyer relationships negotiated
in private
More Transaction Characteristics
• Types of materials or services
– direct materials used in making a product (steel in
a car)
– indirect materials such as office supplies or used
in maintenance, repair, and operations (MRO).
• Direction of trade
– Vertical marketplaces involve one industry or
segment; examples include electronics, cares
steel, or chemical
– Horizontal marketplaces concentrate on a service
or product used by many industries (office
supplies, PCs, or travel services)
Auctions and Exchanges
• An exchange is a public electronic market with one
or many buyers and one or many sellers; there may
or may not be dynamic pricing
• Auction – a market mechanism by which a seller
places an offer to sell a product and buyers make
bids sequentially and competitively until a final price
is reached (dynamic pricing)
• A reverse auction is when sellers are invited to bid
on the fulfillment of an order to provide a product or
service: the lowest bid wins (e.g., Priceline is a B2C
reverse auction)
Exchange Types
• Types
– Sell-side with one seller to many buyers (private)
– Buy-side with one buyer from many sellers
(private industrial exchange)
– Exchanges where there are many sellers and
many buyers (public)
•
•
•
•
Alibaba.com
Ariba.com
Converge.com (spot market)
Globalsources.com
Sell-Side with One Seller
• Sellers may be click-and-mortar manufacturer or
intermediaries (wholesalers like avnetcom);
intermediaries may be pure-play (bigboxx.com)
• Use the Internet to sell through electronic catalogs
– Cisco, Dell, Staples
– Separate pages and catalogs for major buyers
• Another type is a forward auction to dispose of
capital assets (GM does this)
• Boeing sponsors a website for which airlines can
find maintenance and parts
Buy-Side with One Buyer
• This model arises from the procurement needs of
firms where procurement involves the purchase of
goods and services needed to accomplish the
mission of the business
• In this model a buyer opens an electronic market on
its own server and invites potential suppliers to bid
on the items the buyer needs. The invitation is
called a request for quote (RFQ). This process is
called the reverse auction of bidding mode.
• GE was one of the first to do this
• Online directories exist for suppliers that list open
RFQs
Exchanges with Many Buyers and Sellers
(Net Market Places or E-Hubs)
• A way to classify these exchanges is by (a) the type
of materials traded (direct or indirect) and (b) the
sourcing (systematic or spot)
– Spot sourcing of direct materials occurs in a
vertical exchange (chemconnect.com)
– Spot sourcing of indirect materials occurs in a
horizontal exchange (EmployEase.com)
– Systematic sourcing of direct materials is often
done with an intermediary (plastics.com)
– Systematic sourcing of indirect materials
(MRO.com)
Ownership of Exchanges
• Industry giant
– IBM established an exchange for selling patents
(www.delphion.com)
• Neutral entrepreneur
– ChemConnect.com
• The consortia or co-op
– Covisint (automobile)
– Orbitz (airlines)
Services Provided by Intermediaries in
an Exchange
• Services for buyers
– Automate buying, contract management,
purchase orders, requisitions, business rules
enforcement, and payment
• Services for sellers
– Catalog creation and content management, order
management, invoicing, and settlement
Perspective on Exchanges
• Private exchanges are the fastest growing type of
B2B commerce
• Early exchanges failed because suppliers were
reluctant to participate fearing competitive bidding in
spot buying would reduce prices. Suppliers are
much more willing to reduce prices in systematic
sourcing
• There is only room for 2 to 3 exchanges at most in a
given industry
Technologies that Support B2B
• Electronic data interchange
– Proprietary
– Web-enabled
• Electronic payment systems
– Electronic funds transfer
– New methods of electronic payment
• Digital signatures and digital certificates
Electronic Data Interchange
• What is EDI?
– Exchange of standard business documents
electronic data using interorganizational
information systems
– Shipping data, payment data,
production/inventory requirements
– Set of hardware, software, and standards that
accommodate the EDI process
• Forms of EDI
– Earliest was through a VAN (since 80’s)
– Newest is through the Web
Electronic Data Exchange
• How does EDI work?
– Supplier’s proposal sent electronically to buyer
organization.
– Electronic contract approved over network.
– Supplier manufactures and packages goods,
attaching shipping data recorded on a bar code.
– Quantities shipped and prices entered in system
and flow to invoicing program; shipping data and
invoices are transmitted electronically to buyer
organization.
Electronic Data Exchange
(How does it work?)
• Supplier ships the order.
• Buyer organization receives packages, scans
bar code, and compares data to invoices actual
items received.
• Payment approval transferred electronically
from the buyer’s accounts payable dept. to
buyer’s bank .
• Bank transfers funds from buyer to supplier’s
account using electronic fund transfer (EFT).
Electronic Data Interchange
Figure 11.5
How EDI works
Electronic Data Interchange
Standards
• EDI requires companies to agree on
• Compatible hardware and software
• Electronic form format
• Established EDI standards
• X.12 de facto umbrella standard in
U.S. and Canada
• EDI for Administration, Commerce,
and Trade (EDIFACT) umbrella of
standards in Europe
EDI Implementation
• VAN suppliers
– GE Information Services, Sprint, WorldCom,
Sterling Commerce
– Majority of EDI transaction take place with VAN
• Web EDI
– Rapidly overtaking VAN EDI
– Use Web technologies
– Accessible to businesses of all sizes
– Success attributed to XML
• Complements HTML by allowing users to put
tags around an element that tells the browsers
about the data content of an element
• Businesses can create their own tags
Web Enabled EDI
• Advantages of Web EDI
• Lower cost
• More familiar software
• Worldwide connectivity
• Fast communication
• Real time information exchange
• Disadvantages of Web EDI
• Unpredictable speeds
• Security is not always up to VAN EDI
Electronic Payment Systems
• Electronic funds transfer (EFT)
– Electronic checks
– Automated bill paying
• Digital wallet stores credit card and owner id
information and provides that information at
checkout
• Digital cash (e-cash) – in exchange for cash you get
electronic files that represent various denomination;
you send files to merchant as payment; merchant
exchanges files for cash
• Smart card (or electronic purse)
– Special card reader required
– Recharging
Electronic Commerce Payment
Systems
PAYMENT SYSTEM
DESCRIPTION
DIGITAL CREDIT CARD
PAYMENT
SECURE SERVICES FOR CREDIT CARD PAYMENTS
ON INTERNET
DIGITAL WALLET
SOFTWARE STORES CREDIT CARD AND OTHER
INFORMATION
ACCUMULATED BALANCE
PAYMENT SYSTEM
ACCUMULATES MICROPAYMENT PURCHASES AS
DEBIT BALANCE TO BE PAID PERIODICALLY
STORED VALUE PAYMENT
SYSTEMS
ENABLES CONSUMERS TO MAKE INSTANT PAYMENTS
BASED ON VALUE STORED IN DIGITAL ACCOUNT
DIGITAL CASH
DIGITAL CURRENCY USED FOR MICROPAYMENTS OR
LARGER PURCHASES
PEER-TO-PEER PAYMENT
SYSTEMS
SENDS MONEY VIA WEB TO PERSONS OR VENDORS
NOT SET UP TO ACCEPT CREDIT CARD PAYMENTS
DIGITAL CHECKING
PROVIDES ELECTRONIC CHECK WITH SECURE
DIGITAL SIGNATURE
ELECTRONIC BILLING
PRESENTMENT &
PAYMENT
SUPPORTS ELECTRONIC PAYMENT FOR ONLINE AND
PHYSICAL STORE PURCHASES
Digital Signatures and Digital Certificates
• A digital signature is a digital code attached to an
electronically transmitted message (e.g., an EDI
document) that is used to verify the origin and
contents of the message. It provides a way to
associate a message with a sender similar to a
written signature.
• Digital certificates verify (off line) that the holder of a
digital signature is who he/she claims to be. Third
parties called certificate authorities issue digital
certificates. One company that does this is VeriSign.
Major Benefits of B2B to Business
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Reduction of paper and administrative costs
Reduces cycle time (time compression)
Reduces search costs/time for buyers and sellers
Reduces inventory levels and costs
Reduction in errors and/or improved quality of
service
• Enables JIT and production flexibility
• Enables mass customization
• Expands the marketplace
Electronic Business and the Digital Firm
• Collaborative commerce
• Intranets are internal networks based on Internet and
WWW standards that enable employees to exchange
ideas, share information, and work together
– Specific intranet applications for functional areas
– Coordination of cross functional supply
processes: order processing, accounting,
shipping, inventory, procurement, production,
planning (ERP with Internet technologies);
internal processes
• Provide external entities (customers, suppliers,
shippers) with access to the intranet – extranet
concept
Collaborative Commerce
• Collaborative commerce concerns the use of digital
technologies to improve planning, production, and
distribution of goods and services
• Aspects of interaction other than buying/selling
– Coordination in product design
– Sharing of information along the supply chain
– Sharing shipping costs
• Closely related to the extranet concept
Information Most Frequently Found in
Corporate Intranets
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Customer databases
Corporate policies and procedures (Winthrop)
Corporate phone directories
Human resource forms (Winthrop)
Training programs
Product catalogs and manuals (Winthrop)
Data warehouse and decision support access
Internal purchase orders (Winthrop)
Travel reservations
Functional Applications of
the Intranet Idea
The Extranet Concept
• An extranet is created when authorized users from
outside the firm have access to the firm’s intranet
• Extranets enable the external entities to coordinate
their business processes with the internal processes
of a given firm
• The extranet may or may not be involved with direct
sales.
Specific Extranet Examples
• AMP is an electronic-connectors distribution
company; customers use AMP Connect to access an
electronic catalog with product descriptions, 3-D
models, and comparative charts for all products;
customers can place orders
– Receives 100,000 hits daily from 15,000 business
customers worldwide
• CSX (railroad) developed an extranet that allows CSX
customers to trace shipments, initiate work orders,
and view pricing data over the Internet
Management Challenges
• Unproven business models
– Making money via e-commerce is not easy
– Need for clear strategies
• Organizational changes
– Direct sales impact on distributors/retailers
– Inexperience with direct sales
– Impact on sales force
– Change in business processes
• Trust, security, and privacy
– Sharing information with business partners
requires considerable trust and confidence about
security
– Privacy regarding collection of customer
information is an on-going issue
An Example of Process Changes
• Winthrop University processes
– Online applications
– Online course registration
– Online payments
– Online grade reporting
– Online transcript access
• Impact of process changes at Winthrop University
– Role of traditional print media and web site
– Need for managing consistency
– Increased security for online grading
More on the Privacy Challenge:
Consumer Privacy
• Consumer information has great value and is
inexpensive to gather
• Puts pressure on firms to use information
irresponsibly
• No comprehensive consumer protection laws in US
• Example of legal consumer rights for EU citizens
– Know the marketer’s source of information
– Check information for accuracy
– Correct any incorrect information
– Specify that information cannot be transferred to a
third party without consent
– Know the purpose for which the information is
being collected