Chapter 13: Electronic
Commerce
Prepared by: Ms Melinda Chung
Objectives

Visit Web sites that conduct electronic commerce.

Understand the basics of electronic commerce.

Learn how companies generate revenues.

Learn how companies reduce costs and improve
operational efficiency using Web technologies
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Objectives

Learn about new ways of doing business on
the Web, such as online auctions.

Learn about consumer concerns regarding
purchasing items online.

Understand why international, legal, and
ethical concerns are important in electronic
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commerce.
What is Electronic Commerce?

Electronic business/ electronic commerce:
business process, or collection of business
processes, conducted using Internet
technologies.

Business processes include all the
processes and requirements that companies
do to achieve their objectives.
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Electronic Commerce
Classification Schemes
Participant-based
Classifications
Business-to-consumer (B2C)
Activity-based
Classifications
Revenue Processes
Business-to-business (B2B)
Operations Processes
Business-to-government (B2G)
Consumer-to-consumer (C2C)
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Participant-Based Classification

A participant-based electronic commerce: based on
the types of participants in the process.

Participants might be businesses, consumers, or
government entities.

Business-to-consumer (B2C) electronic
commerce: a process undertaken by a company to
sell goods or services to individuals.
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Participant-Based Classification

Business-to-business (B2B) electronic
commerce: process processes selling goods or
services to other business firms.

Business-to-government (B2G): processes of
dealing with government agencies.

Consumer-to-consumer (C2C): processes use by
individuals who are not operating formal businesses
to conduct transactions.
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Activity-Based Classification

Activity-based electronic commerce
classification scheme is organized by what the
business activities are designed to accomplish.

business model: includes the way a company
does business, the sum of its business activities
and processes.

Revenue model: the business processes that a
company uses to find new customers, make sales,
and deliver the goods or services that it sells.
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Activity-Based Classification

Operations model: the other business
processes in a company, such as purchasing,
hiring, receiving, and manufacturing.

Electronic commerce activities are designed
to improve a company’s revenue processes;
to reduce the cost or increase the efficiency
of its operation processes.
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Competitive Advantage and
Transaction Cost Reduction

Competitive advantage: a way of generating more
revenues, incurring lower costs, or performing tasks more
efficiently than other companies in the same business. A
must for a company to stay in business.

Transaction costs: the total costs that a buyer and a
seller incur in a purchase-sale transaction.

Transaction costs: include brokerage fees, sales
commissions, the costs of information search and
acquisition.
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Revenue Models for
Electronic Commerce

Approaches for businesses to generating
revenue on the Web:

Online catalog revenue model

Advertising and Subscription Revenue Models

Direct Fee Model
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Online Catalog Revenue Model

Web catalogs: replace/supplement a co’s
distribution & printed catalogs.

Customer orders through the Web site, by
telephone or by mail.

3 types of company using this model:
sell only on the Web,
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 sell through print catalogs and the Web,
 have physical stores and also sell on the Web.

Online Catalog Revenue Model

Channel conflict: the threat of losing sales
from existing stores to the new online catalog.

Cannibalization: when Web site’s sales
replace sales that would have otherwise
occurred in the company’s retail stores.

Web is used by established companies to
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extend their existing businesses.
Advertising and Subscription
Revenue Models

Some businesses (e.g. television networks) rely on
advertising as their sole source of revenue.

Some businesses derive their revenue only from
subscription fees (magazines that carry no
advertising).

Most magazines charge a subscription and also
carry advertising.

Many Web sites use mixed advertising-subscription
revenue models.
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Advertising and Subscription
Revenue Models

Major problems of Web advertising:
1.
No consensus has emerged on how to measure
and charge for advertising on the Web.
2.
Very few Web sites have enough visitors to
interest large advertisers.
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Advertising and Subscription
Revenue Models

A Web portal (or portal): a doorway to the
Web.

Web Portals include general interest
information and can help users to find just
about anything on the Web.

Portals earn most of their revenue by selling
advertising.
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Advertising and Subscription
Revenue Models

Characteristics of Web portals :
Free e-mail
 Links to search engines
 Web directories
 Membership services
 News headlines and articles
 Discussion groups
 Chat rooms
 Links to virtual shopping malls
 Calendars and address books

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Advertising and Subscription
Revenue Models

One way to increase advertising revenue is to sell
target marketing opportunities to advertisers
through use of its search engine.

Newspaper and magazine publishers have not been
successful in using the advertising supported model
for their sites.

Target marketing: delivering ads to site visitors
with specific demographic characteristics.
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Business Week Online
Home Page
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Advertising and Subscription
Revenue Models

Web sites that offer classified advertising
have been more successful than magazines
and newspaper publishers.

Some sites specialize in employment
advertising, while others offer classified ads
for autos, boats, motorcycles, houses, etc.
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Direct Fee Revenue Model

Direct fee revenue model: services are
offered for a fee.

Customer service: provide personal services
or give Web site visitors the information they
need about the transaction on the Web site.

The cost of providing personal service is
lower on the Web than in physical store
locations.
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Direct Fee Revenue Model

Services: such as online games, tax-planning
advices, streaming video of concerts and
films to paying subscribers.

Web entertainment sites charge a monthly
fee to cover the additional bandwidth costs in
order to make a profit.
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Direct Fee Revenue Model

Sties that charge fees are:
Prepare tax returns online (H&R Block or
TurboTax)
 Legal services (PrePaidLegal.com)
 Services of attorneys who will review your case
online (Law Office Live)
 Resume preparation (Resume.com)
 Travel agencies
 Ticket agencies
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 Banks and insurance brokers

Reduce Operational Costs and
Increase Efficiency
Companies aim:
 To earn more money by either increasing
revenue or reducing costs.


To increase efficiency (makes the amount
spent on a particular cost do more work).

The real challenge is using the Internet to
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achieve the above.
Business Cost Reductions Using
Electronic Technologies

Electronic funds transfers (EFTs or wire
transfers): electronic transmissions of account
exchange information over private networks.

Electronic data interchange (EDI): a business
transmits computer-readable data in a standard
format to another business.

To use EDI: both parties must have compatible
computer systems, and follow the same set
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of EDI standards.
Business Cost Reductions Using
Electronic Technologies

When two businesses meet the three criteria, they
are called trading partners.

EDI replaces the paper purchase order and invoice
with electronic messages, thus creating a paperless
environment.

Reduce human errors.

Financial EDI includes payment information.
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Business Cost Reductions Using
Electronic Technologies

Banks use automated clearinghouses (ACHs) –
electronic inter-bank account clearance systems
to settle their customers’ business transactions.

Value-added networks (VANs) were created to
meet the demands imposed by EDI.

A VAN is a third party that can offer assurances
and dispute-resolution services to both EDI
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trading partners.
Traditional vs EDI of SalePurchase Transactions
Traditional Sale-Purchase Transaction
purchase order
buyer
seller
invoiceTransaction
EDI SalePurchase
purchase order data
invoice
buyer
seller
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Improve Operational Efficiency
Using Intranets and Extranets:

Intranet - A network of Web sites that is accessible
only to employees of a company.

Extranet - When an intranet is made available to
users outside the company.

Many companies use Intranets to reduce
operational costs and create efficiency.
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Using Intranets and Extranets

Many companies use intranets and extranets
to coordinate employee, supplier, and
customer activities.

Smaller companies that cannot afford to
create a dedicated intranet or extranet can
use the services of a Web portal.
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Using Automated E-Mail
Messaging

E-mail: a good way to stay in contact with
existing customers —but only if they agree to
receive it.

Marketing experts recommend that
automatically generated e-mail messages
with announcements should not be sent > 1
a week to clients.
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Consumer Concerns

Participants in electronic commerce have two
major concerns:
1.
2.

Transaction security
Non violation of their privacy
An assurance/certificate provider is a third party
that, (for a fee), certifies the site meets some
criteria for conducting business in a secure and
privacy-preserving manner (eg. Better Business
Bureau, TRUSTe, International Computer Security
Association, VeriSign, and WebTrust).
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Transaction Security and
Privacy

SSL protocol is used to protect sensitive information as
it travels over the Internet.

Hacker or cracker: breaks into a web site’s computer
to steal names, addresses, and credit card information.

By recording a user’s clickstream, the Web server can
gather extensive knowledge about that visitor

A clickstream: a record of pages visited by the user on
a site.
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Transaction Security and
Privacy

No general standards currently exist for maintaining
confidentiality regarding clickstream information.

Many business Web sites include statements of
privacy policy directed at concerned customers.

The Children’s Online Privacy Protection Act of
1998 (USA) makes it illegal for Web sites to collect
identifiable information from children < 13 years old
without first obtaining their parents’ consent.
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Ethical Standards

Companies conduct business on the Web should
try to follow the ethical standards as they were
doing business in the physical world.

High ethical standards can establish a company’s
reputation and increase the level of trust of
customers, suppliers, and employees.

Lack of ethical practices can cause immediate
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damage to a company’s reputation.
International Nature of
E-Commerce: Language Issues

The Internet brings people together from
different countries.

Without the language barrier, e-commerce
can be conducted with consumer, anywhere
in the world.

Language translation that takes into account
the culture and customs of the country is
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called localization.
International Nature of
E-Commerce: Legal Issues

Doing business internationally presents a
number of challenges.

Many of the international issues relate to
legal, tax, and privacy concerns.

A country has the right to pass laws and levy
taxes on businesses that operate within its
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jurisdictions.
International Nature of
E-Commerce: Legal Issues

Many smaller sites list the countries for
merchandise delivery or provision of services.

Terms of service statement: available on a Web
site to protect it from laws and regulations.

Terms of service statement: include rules,
copyright statement for the site design and content,
the types of business that a visitor can conduct with
the site etc.
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Future of Electronic Commerce

Many businesses, organizations and individuals are
interconnected via the Internet.

The Web provides an easy-to-use interface.

The combination of the Web’s interface and the
Internet computer networking opens new
opportunities for e-commerce.

Not all hype, need time to mature.
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Summary

Companies use Web strategies to generate revenues,
increase operational efficiency, and reduce costs.

Emergence of new Web-based business models.

E-commerce companies have taken steps to reassure
consumers of their transaction security and their
privacy.

E-commerce operates in an international, legal and
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ethical environment.
Reference and websites
Schneider, G. & Evans J. (2004), “The
Internet, New Perspectives”, 5th edition,
Course Technology, Tutorial 10.
 www.wilsonweb.com
 www.ecommerce-guide.com
 www.merchandizer.com

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