Information Systems Creating Business Value by Mark Huber

Information Systems: Creating Business Value by Mark Huber, Craig Piercy, and Patrick Mc. Keown Chapter 7: E-Commerce for Consumers and Organizations

What We Will Cover: n E-Commerce: An Overview n The E-Commerce Difference n E-Commerce for Consumers n E-Commerce Between Organizations

Student ROI (Return on Investment) Your investment of time and effort in this course will result in your being able to answer these questions: 1. What is e-commerce and how is it a part of today’s economy? 2. How does e-commerce make a difference to businesses and consumers? 3. How does e-commerce allow businesses to create value for their consumers? 4. How do businesses use e-commerce to enhance the products and services that they trade with business partners, as well as to improve their supply chain efficiency?

What is e-commerce? n E-commerce is the use of information systems, technologies, and computer networks to carry out transactions in order to create or support the creation of business value. n Note that we do not say “to buy and sell over the Internet” in our definition; n do not want to restrict ourselves to just the Internet n want to make our definition as general as possible, so we concentrate on transactions which we discussed in Chapter 4 and 5 and computer networks which we discussed in Chapter 2 and Field Guide C. n E-Commerce includes all types of computer networks and all types of transactions including electronic funds transfers and EDI over private networks as well as retail sales and wholesale exchanges over public networks like the Internet

E-commerce (cont. ) n Uneven penetration into areas of commerce n Travel Industry versus Retail Clothing Industry (clothing is trending upward) n Most people think of e-commerce as electronic shopping over the WWW or Business to Consumer e-commerce (B 2 C - transactions in hundreds of millions of dollars) n However, Business to Business e-commerce (B 2 B) transactions are valued in trillions of dollars!

Types of E-Commerce Transactions Transaction Description Example Web sites Business-to-consumer (B 2 C) Online equivalent of retail store as well as other services www. landsend. com, www. overstock. com, www. amazon. com Business-to-business (B 2 B) Electronic exchanges between companies www. manheim. com, www. boeing. com Business-togovernment (B 2 G) Online sales to government agencies as well as online payment of taxes www. irs. gov, www. fedbizopps. gov, App. mt. gov/bustax Consumer-togovernment (B 2 G) Electronic payment of taxes as well purchasing licenses www. irs. gov/individuals, express. hsmv. state. fl. us Consumer-to-consumer Use of online auctions like e. Bay www. ebay. com, (C 2 G) or Yahoo! Auctions auctions. yahoo. com

E-Commerce and Products: Physical and Electronic n Products can be divided into two primary categories: physical n n and electronic. Physical products include anything that requires an actual shipment of a package to the buyer, eg, computer hardware. Electronic products can be received directly over the Internet or other computer network, eg, computer software. E-commerce companies must have back-office elements to handle order fulfillment and to handle returns for physical goods, Companies experienced in order fulfillment and returns have tended to be successful in dealing with physical goods using Ecommerce.

Types of E-Commerce Transactions and Associated Goods Transaction Example Physical Goods Example Electronic Goods B 2 C CD, DVD i. Tunes song, ring tones B 2 B Office furniture Virus protection software, databases B 2 G Technical manuals, regulations, and other printed information Document conversion from hardcopy to XML/Web-based documents C 2 G Printed and mailed income tax return or license application Electronically filed income tax return or license application C 2 C Elvis Pez. TM, comic books Shareware program, self-published e-book

Purchase of Physical Goods

Purchase of Electronic Products

The “E-Commerce Difference” n The use of computer networks, especially the Internet, to carry out transactions between a variety of buyers and sellers is creating a tangible “e-commerce difference” in our economy, especially with regard to n n n Technology Competition Strategy n Over 1 billion potential customers around the world in the marketspace due to increasing Internet access. n Universal standards make it work the same way no matter where in the world you might be.

Impact of E-commerce Technologies on Business

E-Commerce Differences n Innovative uses of the Internet have produced global competition with sellers being able to reach any potential buyer in the world. n This is true for both the large retailers and for those selling in niche market. n Technology has increased information density—the quality and quantity of information about products and services. n Customers can obtain product guides, reviews, and prices from a myriad of Web sites creating business challenges.

Mass Customization and Personalization n One response to information density is to create business value based on a customization-oriented approach to e-commerce. n Two approaches to customization are: mass customization and personalization. n Mass customization is the ability to create custom products or services on-demand, eg, Dell customers can customize their PC. n Personalization is a marketing message that a business personalizes for each potential customer’s interests based on searching, browsing, or buying habits, eg, Amazon. com.

E-commerce and Competition n E-commerce is having a dramatic effect on competition between organizations in a number of ways including: Reducing barriers to entry n No one firm or person “owns” the entire market n Enhanced collaboration/alliances n Market niches multiply n Changed marketplace drivers (forces that make things happen in the market, e. g. , consumer preferences, number of suppliers a business can choose from) n

Business and E-commerce Strategy n. E-commerce has changed business strategy. n. A strategy is a broad-based formula for how a business is going to compete, what its goals should be, and what plans and policies will be needed to carry out those goals. 1 1 Michael Porter “What is Strategy”, Harvard Business Review, November 1996, pp. 69 -84.

E-commerce Strategy n An e-commerce strategy is a general formula for how a business is n n going to use computer networks and information systems to compete in a global marketplace. To build an e-commerce strategy requires two views of an organization’s strategy: what is wants to do (conceptual) and how it will do it (technology strategy). One strategy being used by many companies is customer relationship management which enables them to create one-to-one marketing experiences for their customers. Other e-commerce strategies include virtual showrooms, increased channel choices, wider component choice, and use of mobile technology. Mobile commerce is the use of laptops, mobile telephones, and personal digital assistants to connect to the Internet and Web to conduct many of the activities associated with e-commerce.

Benefits and Limitations of B 2 C E-commerce for Consumers 1 Benefits Limitations n. Lower prices n. Delay in receiving physical products, plus n. Shop 24/7 shipping n. Greater searchability n. In areas without high-speed Internet service, n. Shorter delivery times for digital slow download speeds. products n. Sharing of information with other consumers n. Improved customer service n. Security and privacy concerns, especially with rise of phishing. n. Inability to touch, feel, or even smell products prior to the purchase. n. Unavailability of micropayments for purchase of small-cost products. 1 Some but not all of these were taken from E. Turban, et. al. , Electronic Prentice-Hall: Upper Saddle River, NJ, pp. 26 -28. Commerce: A Managerial Prospective 2002,

Benefits and Limitations of B 2 C E-commerce for Businesses 1 Benefits Limitations n. Expansion of marketplace to global n Increased competition due to global proportions. n. Cheaper electronic transactions. n. Greater customer loyalty through customized Web pages and 1 -to-1 marketing. n. Expansion of niche marketing opportunities. n. Direct communications with customers through Web site, resulting in better customer service. marketplace. n. Ease of comparison between competing products drives prices down. n. Customers want specific choices and will not accept substitutes. n. Customers control flow of information instead of companies.

E-commerce Business Models n A business model defines how a company will meet the needs of its customers while making a profit. n An e-commerce business model is a business model appropriate for conducting business via electronic networks. n The next three slides list and give examples of ecommerce business models (Source: adapted from Michael Rappa, http: //digitalenterprise. org/models. html.

E-commerce Business Models (cont. )1 Business Model Description Examples Comments Brokerage Brokers bring buyers and sellers together for a fee. e. Bay, Priceline, Pay. Pal There are many types of brokerage models in all types of e-commerce. Advertising An extension of the traditional media broadcasting model in which ads appear on Web sites. Yahoo!, Netscape, CNN. com, Google There are many different types of advertising, but all depend on a large volume of viewer traffic. Merchant Sell products, both Amazon. com, physical and electronic, Lands. End. com, to consumers Walmart. com, i. Tunes, and many others Commonly referred to as etailers, merchants can use pure e-commerce or a combination (click and mortar). 1 Adapted from Micheal Rappa, http: //digitalenterprise. org/models. html.

E-commerce Business Models (cont. )1 Business Model Description Examples Comments Manufacturer Direct Make and sell products directly to customer Dell, IBM, Microsoft, Mc. Afee (anti-virus products) Products can be purchased (PCs), leased (servers), or licensed (software). Affiliate Web sites Amazon. com fees are paid a fee when to affiliate Web purchases come sites through them. Can also include banner ad exchange between affiliated sites as well as revenue-sharing. Community Based on user loyalty because of high investment of time and emotion. Apple computers, Red Revenue is generated Hat software through sale of ancillary products or voluntary contributions 1 Adapted from Micheal Rappa, http: //digitalenterprise. org/models. html.

E-commerce Business Models (cont. )1 Business Model Description Examples Comments Subscription Users are charged fee to subscribe to service or information source Classmates, Highbeam (articles), Netscape Radio, AOL Subscription may be for premium services; advertising model may be combined with this model Infomediary Provides data on consumers and consumption habits Double. Click, Net. Ratings, Edmunds Usually aimed at helping businesses rather than consumers Coopetitive Enable competitors to cooperate on a Web site Auto. Trader. com, VRBO. com Usually aimed at individuals or small businesses that cannot attract customers to their own Web site. 1 Adapted from Micheal Rappa, http: //digitalenterprise. org/models. html.

E-commerce Web site Purpose n. The purpose of an e-commerce website is another way to understand businesses’ e-commerce business models. n. No matter how good the business model, it will not generate a profit if not associated with a Web site that brings in customers or at least visitors. n. There are eight commonly accepted types of Web sites: portal, search engine, Browse or search and buy, sales support, information service, auction, travel, and special interest or services. n. A number of these match up with multiple business models.

Web Sites Classified By Purpose Web Site Type Purpose Example Business Model Portal A gateway to many other Web sites Netscape. com, Yahoo!, MSN Advertising, Affiliate Search Engine Finds Web sites that contain a word or phrase Google, Yahoo, MSN, Dog. Pile Advertising, Affiliate, Infomediary Browse or search and buy Sell goods and services Dell, Lands. End, i. Tunes Merchant, Infomediary, Manufacturer Direct, Coopetitive Sales Support To provide Microsoft, BMW, information on a Mc. Afee, Cingular product before or after the sale Community, Infomediary

Web Sites Classified By Purpose (Cont. ) Web Site Type Purpose Example Business Model Information Service To provide news, information, commentary, and so on. USAToday, Highbeam, Rivals, Edmunds Subscription, Community, Affiliate Auction Facilitate sales between third parties e. Bay, Priceline, Pay. Pal Brokerage Travel Sell travel tickets and tours Delta, Travelocity, Orbitz, Hot. Wire Special Interest or Services Provide information, product sales and support, and contacts between visitors Merchant, Brokerage, Coopetitive Dog. Vent, Microsoft Community, support groups, Merchant, Google Groups Affiliate, Infomediary, Advertising

B 2 B e-commerce: E-Commerce Between Organizations n Doing business with other organizations (B 2 B) is by far larger than with consumers (B 2 C). n It is also quite different in terms of the scope of the purchases and the complexity involved in them— especially in the decision making required to make a purchase. n For example, while you buy one PC, a company may buy thousands. n Interorganizational systems (IOS) are the information systems that handle the information flow between trading partners.

Comparing B 2 C to B 2 B Process Individual Business Organization Decision to purchase Made based on own needs Made based on the organization’s needs which are a combination of many different departmental and individual needs Decision where to buy Made after own research into market Made through a systematic process that involves considering what each vendor can provide the organization in terms of setup, networking, and so on. Number of Items One Many Actual Purchase Buy computer online or in person with personal credit card Buy computers only after significant negotiations over price and terms with vendor Payment Pay by company check only after assuring that all computers have been delivered and setup by vendor Pay credit card bill with personal check

B 2 B Transactions n B 2 B transactions can be divided into two types: spot n n buying and strategic sourcing. In spot buying, purchases are made at market prices from an unknown seller. Companies often use spot buying to purchase commodities, i. e. , uniform in quality differing only in price like gasoline, paper, and cleaning supplies. In strategic sourcing, prices are set through negotiation in a long-term relationship with a company known to the buyer. A company’s large-scale computer purchases often result from strategic sourcing.

B 2 B Business Models n Strategic sourcing is often carried out through a one-to-one n n business model, but company-centric and exchange models are also used. In the one-to-one business model, two companies form a trading relationship with neither company dominating the relationship. In the company-centric business model, a company is either a seller to many companies (one-to-many) or a buyer from many companies (many-to-one). The single company dominates the market and controls the information systems that supports the transactions. Electronic data interchange (EDI) or an extranet is often used to link trading partners. E-procurement is often the name for B 2 B e-commerce in the many-to-one business model.

Company Centric Business Model

Exchange Model n In the exchange business model, many companies use an exchange to buy and sell from each other through spot-buying transactions.

Types of Exchanges n Exchanges can be cooperative ventures among the companies or it can be run by a larger company that profits from the transactions. n Exchanges can be classified as vertical or horizontal with vertical exchanges meeting the needs of a single industry. n Horizontal exchanges deal with products and services that all companies need. n From an e-commerce point-of-view, exchanges are often Web sites that buyers and sellers post their needs and offerings.

Services in B 2 B E-Commerce § Just as services are an important part of B 2 C e-commerce, they are also an important part of B 2 B e-commerce. Service or Electronic Product Comments Software The ability to buy a site license online and then download one copy, which they then burn on CDs, reduces organizations’ cost and time in procuring software. Leasing Companies can use e-commerce to negotiate the original lease price and to dispose of them at the end of the lease. Travel is a big item with companies that have more than one office or distant customers, so using e-commerce to provide less expensive travel can save money

Services in B 2 B E-Commerce (cont. ) Service or Electronic Product Comments Insurance Companies must insure their buildings, people, vehicles, and so on, and using e-commerce to find better insurance coverage can mean lower costs for the company. Banking As with consumers, businesses must pay their bills. They must also accept payments from customers. Moving banking online reduces the cost of writing and depositing checks as well as making the transfer of funds much easier. Stock trading As a part of their overall financing process, businesses will often buy and sell other stock as well as their own. Online trading makes this possible for much lower transaction fees. Financing Businesses often need to raise capital through debt and a number of services now make it possible to do this online for lower transaction fees.

Using B 2 B e-commerce and IOS to Improve Supply Chain Efficiency n A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. 1 n Procurement is a big part of the supply chain and using e -commerce for e-procurement has resulted in money savings. n To see why, we first need to understand the traditional procurement process. 1 “An Introduction to Supply Chain Management”, Ram Ganeshan Terry P. Harrison, http: //lcm. csa. iisc. ernet. in/scm/supply_chain_intro. html

Traditional Procurement Process n In the traditional procurement process, there are five steps involving three elements—purchase order, invoice, and receipt of goods: 1. 2. 3. 4. 5. Purchase order (PO) to vendor Goods to buyer along with bill of lading (BOL) Upon receipt of goods and BOL, signed copy of BOL returned to vendor and receipt of goods is filed Vendor sends invoice to buyer Buyer’s accounting department compares PO to receipt of goods and invoice. If there is a match, buyer pays the vendor.

Traditional Procurement Process

Interorganizational Systems (IOS) n An interorganizational system (IOS) is a networked information system used by two or more separate organizations to perform a joint business function. 1 n EDI n Extranets 1 Cash, J. I. Jr. , F. W. Mc. Farlan, J. L. Mc. Kenney, and L. M. Applegate. 1994. Corporate information systems management: text and cases. 4 th ed. Homewood, IL: Irwin, p. 339.

Using E-commerce to Improve the Procurement Process n An interorganizational system (IOS) is a networked n n information system used by two or more separate organizations to perform a joint business function. 1 EDI: uses private networks to allow the exchange of structured information between two computer applications with a minimum of human involvement. Even though often overshadowed by newer technology, EDI remains the engine behind the majority of e-commerce transactions worldwide. It is, however, too expensive for most small businesses. Extranets: collaborative networks that use Internet technology to link businesses with their customers. Security measures keep data secure and XML is used to transfer the data. An extranet can be thought of as two connected intranets.

Extranets

Comparing EDI and Extranets EDI Extranet Security More secure due to use of Less secure then EDI private network due to use of Internet Cost More costly due to use of Less costly because it proprietary software and uses existing networks private networks and Internet apps Flexibility Less flexible—proprietary More flexible because software limits use based on Internet; greater customization Trend Gradually being replaced Gaining wider by extranet-based apps acceptance due to lower costs

Copyright 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.