Electronic Commerce

COMP3210

Session 1: An Introduction to Electronic Commerce

Dr. Paul Walcott

Department of Computer Science, Mathematics and Physics
University of the West Indies, Cave Hill Campus
Barbados
2007 Dr. Paul Walcott
The Department of Computer Science Mathematics and Physics, University of the West Indies, Cave Hill Campus, Barbados

Session Objectives

Define e-commerce?
Compare and contrast the advantages and
disadvantages of e-commerce
Compare and contrast the 1st and 2nd waves
of e-commerce
Comprehend the categories of ecommerce?

Session Objectives Contd

Discuss the following:

Markets
Value chains
Transaction cost

Evaluate international electronic commerce

issues

What is Commerce?

Traditional commerce may be defined as:

From Webster's Revised Unabridged

Dictionary
Commerce : \Com"merce\, noun.
The exchange or buying and selling of commodities;
esp. the exchange of merchandise, on a large scale,
between different places or communities; extended
trade or traffic.

What is E-Commerce?
Electronic commerce (e-commerce) is a general
term for any type of business, or commercial
transaction that involves the transfer of
information across the Internet. This covers a
range of different types of businesses from
consumer-based retail sites, like Amazon.com,
through auction and music sites like eBay or
MP3.com, to business exchanges trading goods
or services between corporations.

What is E-Commerce Contd?

Electronic commerce is the use of
electronic communication to do business.
E-commerce is not about technology. It is
not a new business. E-commerce is a
method for companies to create and
operate their business in new and efficient
ways.1

What is E-Commerce Contd?

Most fundamentally, e-commerce
represents the realization of digital, as
opposed to paper-based, commercial
transactions between businesses, between a
business and its consumers, or between a
government and its citizens or constituent
business.2

What is E-Commerce Contd?

In summary, e-commerce is the

use of electronic communication to do business

Specifically, the transfer of information (transactions), over

the Internet

Some people use the term e-business to refer to

all the categories of e-commerce

E.g. IBM defines e-business as:

The transformation of key business processes through the

use of Internet technologies

From Traditional Commerce to

E-commerce3
Sailing ships

Printing press

Steam engine

Telephone

Opened avenues for

trade between buyers
and sellers. Ancient
times (thousands of
years ago)

From Traditional Commerce to

E-commerce Contd
Electronic Funds Transfer (EFTs)

Electronic Data Interchange (EDI)

Internet

Wire transfers - used

by banks
Businesses transfer
electronic data
- data not re-keyed
- high implementation
cost, thus excluded
small businesses
On-line shopping

Business Processes Suited to

Certain Type of Commerce3

E-commerce

Sale/purchase of books & CDs, travel

services, investments and insurance services
Online delivery of software
Online shipment tracking

Business Processes Suited to

Certain Type of Commerce Contd

A combination of E-commerce and

Traditional Commerce

Sale/purchase of automobiles and residential

real estate (e.g. do research online then buy
from a dealer or real estate agent)
Online banking
Roommate matching service

Business Processes Suited to

Certain Type of Commerce Contd

Traditional Commerce

Sale/purchase of impulse items for immediate

use, high fashion jewelry and antiques
(personal inspection required; prefer to touch,
smell or examine closely)
Small denomination purchases and sales
(since there is not yet a standard for
transferring small amounts of money)

What are the Advantages of Ecommerce?3

Increases sales, decreases cost

Allows small businesses to have global customer

base
Reduced cost through electronic sales enquires, price
quotes and order taking

Provides purchasing opportunities for buyers

(businesses can identify new suppliers and
partners)
Increases the speed and accuracy of exchanged
information, thus reduces cost

What are the Advantages of Ecommerce Contd?

Business can be transacted 24 hours a day

The level of detail of purchase information is
selected by user
Digital products can be delivered instantly
Tax refunds, public retirement and welfare
support costs less when distributed over the
Internet
Allows products and services to be available in
remote areas, e.g. remote learning

What are the Disadvantages of Ecommerce?3

Inability to sell certain products (e.g. high cost jewelry

and perishable foods; although supermarkets such as
www.Tesco.com deliver perishable food items to your
home)
The newness and evolution of the current technology
Many products require large sales volumes in order to be
viable

This is a challenge for small island economies; in the Caribbean

the CARICOM Single Market and Economy (CSME) might
provide opportunities since it comprises some 14 million people
(if Haiti is included only 6 million if it is not)

http://www.ab.gov.ag/gov_v2/government/docs/csme/aboutcsme/ba
ckground_info.html

What are the Disadvantages of Ecommerce Contd?

A large capital investment is required to startup and run e-commerce

initiatives
Difficulty in integrating current databases and transaction processing
systems (legacy systems) into e-commerce solutions
Cultural and legal obstacles

Transmission of credit card information

Some consumers resistance to change
E-commerce legislation is not well developed and is often unclear

Shipping profile

Products with a low value-to-weight ratio that can not be efficiently

packed and shipped are unsuitable for e-commerce (use traditional
commerce)

The 1st Wave of E-commerce3

The 1st wave was from the mid

1990s to 2003
During the dot-com boom over
$100 billion was invested and
a rapid growth of e-commerce
was seen (mid-1990s 2000)
The dot-com bust occurred in
2000
This was followed by the
gloom years, 2000 2003
(however, during this time
over $200 billion was invested
in e-commerce)

Characteristics of the 1st Wave

It was primarily a U.S. phenomenon

Web pages were in English
Internet technologies were slow and inexpensive
(e.g. dial-up lines)
Bar codes and scanners used to track parts (B2B
and Business processes)
Email, tool for unstructured communication
On-line advertising main revenue source

The 2nd Wave of E-commerce

Beginning in 2003 ecommerce showed new

signs of life
Companies like
Amazon.com (books),
and eBay.com (auctions)
who survived the
downturn were beginning
to show profits
Continuous growth of
B2C sales: 20-30% each
year since 2000

Characteristics of the 2nd Wave

International scope - sellers do business in many

countries and languages
Faster connections (x20 faster), broadband at
home (although more expensive)
Radio frequency ID devices (are used to track
packages) and smart cards
Fingerprint readers and retina scanners (biometric
technologies) used for tracking (physical
security)
Email is now an integral part of marketing

Characteristics of the 2nd Wave

Contd

E-commerce is an integral part of

marketing and customer contact strategy
Some categories of on-line advertising, e.g.
employment services (job want ads) have
replaced traditional advertising outlets
Some problems however include:

Language conversions
Currency conversions

E-commerce Categories3

There are five general e-commerce categories:

Business to Consumer (or B2C) e-commerce

Business to Business (or B2B) e-commerce
(sometimes called e-procurement)
Business processes that support buying and selling
activities
Consumer-to-consumer (or C2C) e-commerce
Business-to-government (or B2G) e-commerce

B2C e-commerce

Description

Example

Businesses sell products or services to

individual customers (consumers)
Walmart.com sells merchandise to consumers
through its Web site

Web site

www.walmart.com

B2B e-commerce

Description

Example

Businesses sell products or services to other

businesses
Grainger.com sells industrial supplies to large
and small businesses through its Web site

Web site

www.grainger.com

Business Processes that Support

Buy/Sell Activities

Description

Businesses and other organisations maintain and use

information to identify and evaluate customers,
suppliers and employees (and to support buying,
selling hiring, planning and other activities). More
and more of this information is being shared

Example

Dell Computer uses secure internet connections to

share current sales and forecasts information with
suppliers who use it to plan their production.

As a result they deliver the right quantities of components at

the right time

C2C e-commerce

Description

Example

Participants in an online marketplace can buy and sell

goods from each other
Consumers and businesses trade with each other on
eBay.com

Web site

www.ebay.com

B2G e-commerce

Description

Example

Business sell goods or services to

governments and government agencies
Cal-Buy portal for businesses that want to
sell online to the State of California

Web site

www.pd.dgs.ca.gov/calbuy/default.htm

E-commerce Categories Example

You are a computer manufacturing company who

performs the following activities on the Internet:

Sells computers to individuals (B2C)

Purchases parts (e.g. hard drives, power supplies etc.)
from a supplier (B2B)
Hires staff, manage customer accounts, advertise, etc.
(Business processes)
Sells computers to the Government to be used in
schools (B2G)
On eBay.com individuals buy and sell this brand of
computers (C2C)

Relative Sizes of E-commerce

Categories3

Business processes
that support buy/sell
activities
B2C e-commerce

B2B e-commerce

Relative Sizes of E-commerce

Categories Contd
Year

B2C Sales
B2B Sales
($Billions) in the US ($Billions) in the US

2007

240 (estimate)

6800 (estimate)

2006
2005
2004
2003
2000

190 (estimate)
150
130
100
50

5300 (estimate)
4100
2800
1600
60

Relative Sizes of E-commerce

Categories Contd

At the end of 2006 actual B2C sales revenue in

the US was US$219 billion4
However, in the same period the B2C sales
revenue in Europe was US$133 billion5

E-Commerce in Europe is currently dominated by the

UK, Germany and France (72% total online sales)
Annual growth of 25% is expected over the next 4
years5

Economic Forces

Economics is the
study of how people
allocate scare
resources
Resources are
allocated through:

Commerce
(markets)
Government actions
(e.g. taxes)

Markets

A market is a place where sellers can come into

contact with buyers and a medium of exchange
(e.g. currency) is available (e.g. the stock market)
Some hierarchal organisations (companies)
however, due to high transaction cost, choose to
replace supplier markets with its own hierarchal
structure for creating the product. This is called
vertical integration

E.g. Thomson Financial, a financial software

provider, purchased the financial data supplier
Datastream ICV

Hierarchical Organisations
(Firms)
F ir m s p a r tic ip a te in m a r k e ts to p u r c h a s e r a w
m a te r ia ls a n d s e ll fin is h p r o d u c ts .
C h ie f O p e r a t in g O f f ic e r
E x e c u tiv e 1

E x e c u tiv e 2

E x e c u tiv e 3

M a n a g e rA

M a n a g e rB

M a n a g e rE

M a n a g e rF

M a n a g e rJ

M a n a g e rK

W o rk e rA

W o rk e rB

W o rk e rE

W o rk e rF

W o rk e rJ

W o rk e rK

Transaction Costs

Transaction costs are the total costs that a buyer

and seller incur as they gather information and
negotiate a purchase/sale transaction
Transaction costs are the main reason for vertical
integration (Ronald Coase)
Businesses can use e-commerce to reduce
transaction costs (e.g. telecommuting rather than
physical commuting to allow global employment
opportunities)

Transaction Costs Example

Transaction costs incurred by a sweater

dealer when purchasing from independent
sweater knitters:

Cost of identifying independent knitters

Cost of site visit to negotiate purchase price,
arrange delivery and inspection of sweaters
Costs incurred by knitters:

Knitting tools and yarn purchase

Network Economic Structures

Many businesses operate in an economic

structure that is neither market or hierarchical
These businesses form, long-term, strategic
alliances with other companies who share
common goals and strategies
These alliances may occur over the Internet
which are called virtual companies

Teams complete a project or activity then dissolve

New teams are creating as required

Value Chains

A value chain is a way to organise the

activities that a business undertakes to
design, produce, promote, market, deliver
and support the products or services it sells
There are several types of value chains
including:

Business unit value chains

Industry value chains

Strategic Business Unit Value

Chains

A strategic business unit is a particular

combination of product, distribution channel and
customer type (large firms often break down their
business into these units)
The value chain for a strategic business unit
includes:

Primary activities (the activities that the strategic

business unit undertakes
Support activities (such as human resource
management and purchasing)

Manufacturer Value Chain

Primary activities
Design

Identify
customers

Finance
& admin

Manufacture
product or create
service

deliver

Market & sell

HR

Technology
development

After sales
service & support

Purchase materials
and supplies

Support activities

Primary Activities

Identify new customers, and sell new services to

existing customers (research & surveys)
Design from concept to manufacturing
Purchase materials and supplies includes
contracts, vendor selection, monitoring quality
and delivery timeliness
Manufacture product or create service transform
materials and labour into finished products

Primary Activities Contd

Market and sell advertising, promoting,

managing sales staff, pricing and monitoring sales
Deliver store, deliver distribute and ship final
product warehousing, consolidating freight,
selecting shippers and monitoring delivery
timeliness
Provide after-sale service and support promote
relationship with customer, e.g. installing,
maintaining, testing, repairing, and warranties

Primary Activities Contd

If a strategic business unit provides a

service then the value chain will include a
Provide service activity instead of
Manufacture activity

Support Activities

Each business unit must also undertake support

activities that provide the infrastructure for the
primary activities:

Finance and administration accounting, paying bills,

borrowing, compliance with laws
Human resources recruiting, hiring, training,
compensation and benefits
Technology development improves the product or
service, including basic and applied research and
development, process improvement and field tests of
maintenance procedures

Industry Value Chains

Industry value chains describes the larger stream

of activities into which a particular business units
value chain is embedded
When a business unit delivers a product to a
customer the customer might use the product as
purchased materials in its value chain
By examining how other business units in the
industry value chain conduct their business, cost
reduction and product improvement may result

Industry Value Chain Example

A value chain for a wooden chair:

Logger cuts down tree

Sawmill converts logs to lumber
Lumberyard provides selection of lumber
Chair manufacture assembles chair
Furniture retailer markets and sells chair
Consumer purchases and uses chair
Landfill or recycler disposes of chair

SWOT Analysis3

SWOT analysis is used to analyse and

evaluate business opportunities
SWOT is an acronym for:

Strengths
Weaknesses
Opportunities
Threats

SWOT Analysis Contd

An analyst examines the business unit to

determine strengths and weaknesses
Then examines the business environment
to identify opportunities and threats

SWOT Analysis Contd

Questions asked during SWOT analysis:
Strengths

What does the company do well?

Is the company strong in its market?
Does the company have a strong sense of purpose
and the culture to support it?

Weaknesses:

What does the company do poorly?

What problems could be avoided?
Does the company have serious financial liabilities?

SWOT Analysis Contd

Opportunities:

Are industry trends moving upwards?

Do new markets exist for the companys products/services?
Are there new technologies that the company can exploit?

Threats:

What are the competitors doing well?

What obstacles does the company face?
Are there troubling changes in the companys business
environment (technologies, law and regulations)?

SWOT Analysis Contd

In the mid-1990s DELL Computer did the
following SWOT analysis:
Strengths:

Sell directly to consumers

Keep costs below competitors

Weaknesses:

No strong relationships with computer

retailers

SWOT Analysis Contd

Opportunities:

Consumers desire for one-stop shopping

Consumers know what they want to buy
Internet could be a powerful marketing tool

Threats:

Competitors have stronger brand names

Competitors have strong relationships with
computer retailers

International Issues3

Trust issues
Language issues
Culture issues
Infrastructure issues

Trust Issues

Anyone can create a website

These individuals or businesses can easily remain
anonymous
Without an established brand, consumers find it
difficult to trusts on-line businesses:

especially with personal information and credit card

numbers

The key is to develop methods which would allow

legitimate businesses to establish trust relationships
quickly with consumers

Language Issues (localisation)

Global impact requires local language Web sites

customers prefer to buy from sites in native language

60% of web content today is in English; but more

than 50% of the current users do not read English
Multiple translations may be required for
different dialects, e.g. Spanish- Mexico and Spain

Language Issues (localisation)

Translating entire websites is expensive

25-90 cents per word for human translators (400-600

words per hour)
Automated software translation (machine translation)
is cheaper (400,000 word per hour) but less accurate

The home page should be translated to all

supported languages, as well as marketing and
product pages

Culture Issues

Culture is the combination of language and

customs
Culture varies across national boundaries
and in many cases regions within nations
Example:

General Motors Chevrolet Nova automobile

amused people in Latin America since no va
means it will not go

Culture Issues Contd

Choice of icons on Web pages becomes

problematic on international Web sites:

In the US a shopping cart is useful, in the UK

a shopping basket is more appropriate,
Australians call shopping carts, shopping
trolleys
In many places the hand gesture where the
index finger touches the thumb means okay;
while in Brazil it is an obscene gesture

Culture Issues Contd

In some cases unrestricted access to the

Internet is not permitted, for example in the
Middle East and North Africa

This limits the growth of e-commerce

In France any advertisement for a product

or service must in in French by law

This means that French companies must

provide websites in at least two languages if
they want to sell goods outside of France

Infrastructure Issues

Limited telecommunication infrastructure

may lead to unreliable Internet access
Internet connection cost might be high

Reduces time businesses might spend surfing

for new suppliers or products
Flat-rate access to the Internet is required

These are major issue in developing

countries, including Barbados

Conclusion

In this session:

It was made clear that e-commerce was not a new

business, rather a new way of doing business
The advantages and disadvantages of e-commerce
were discussed
The characteristics of the first and second waves
were compared and contrast
The five e-commerce categories were presented

Conclusion Contd

The importance of reducing transaction costs

was considered
The importance of SWOT analysis was
demonstrated through a useful example
Issues involved in international commerce
were also considered

Definitions

A commodity item is a product or service that is hard to

distinguish from the same products or services provided
by other sellers (e.g. gasoline, office suppliers, soap and
computers)
A transaction is an exchange of value, such as a purchase
or sale, or the conversion of raw materials into finished
products (a transaction has one or more associated
activity)
A business process is the set of logically related and
sequential activities and transactions in which businesses
engage

Definitions Contd

Merchandising is a combination of store

design, layout and product display
knowledge
A shipping profile is the collection of
attributes that affect how easily that product
can be packaged and delivered (e.g. airline
tickets have a high value-to-weight ratio)

Definitions Contd

The definition of a market satisfies two

conditions:

Potential seller of a good (product) comes

into contact with buyers
A medium of exchange is available (e.g.
currency or barter (to exchange goods or
services directly without the use
of money))

Definitions Contd

Transaction costs are the total costs that a

buyer and seller incur as they gather
information and negotiate a purchase/sale
transaction. These costs include:

Brokerage fees and sales commissions

Cost of information search and acquisition
Sellers investment in equipment or hire of
skilled employees

References
[1] NSW Department of State and Regional Development, Brief on Electronic Commerce,
http://www.smallbiz.nsw.gov.au/textonly/issues/technology/brief/index.html
[2] Ford, Warwick, Secure Electronic Commerce: Building the Infrastructure for Digital Signatures and
Encryption (2nd Edition), pp. 1, 2000
[3] Schneider, Gary, P., Electronic Commerce, Thomson Course Technology, Seventh Annual Edition,
2007
[4] Gourmet Retailer, Online Sales of Food/Beverage/Grocery Down, May 2007. Available online at
http://www.gourmetretailer.com/gourmetretailer/headlines/article_display.jsp?vnu_content_id=10
03585259
[5] Cheap Web Hosting Directory, E-Commerce Report, Details $133 Billion Online B2C Sales, August
21, 2007. Available online at
http://www.cheaphostingdirectory.com/news-e-commerce-report-details-133-billion-online-b2c-sal
es-3304.html