Electronic Commerce, 12th Edition Class Notes

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Chapter 1Introduction to Electronic CommerceAt a GlanceInstructor’s Manual Table of ContentsIntroductionLearningObjectivesTeaching TipsQuick QuizzesClass Discussion TopicsAdditional ProjectsAdditionalResourcesKey Terms

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Lecture NotesIntroductionElectronic commerce began in the United States and was conducted primarily throughEnglish-language Web sites for many years. This has changed dramatically and since2013, China has been theleader in online retail sales. More and more sales are being madeon smartphones instead of computers.China is the world’s largest potential online market due to their very active Internet usersand overall upward trend in economic growth. Chinese buyers do use U.S. based sites suchas Amazon, but also frequently use domestic sites with well-developed brand awarenesssuch as JD.com and Tmall.Chinese online buyers are highly influenced by and want to consult online reviews muchmore than shoppers elsewhere. They also like to discuss potential purchases online.Thishasled to the development of independent online review sites and sellers such as Nikebecoming active participants in Chinese chat and messaging sites such as Sina Weibo andWeChat.Sellers in China must account for regional differences within a diverse country.Distribution and delivery can be tricky in areas without well-developed roads andstandardized shipping practices, which has led to some sellers creating their owndistribution systems. This chapter addresses how online businesses have emerged andgrown to accommodate various cultures and infrastructure challenges around the world.LearningObjectivesIn thischapter,studentswilllearn:What electronic commerce is and how it has evolvedin three waves of developmentWhy companies concentrate on revenue models and the analysis of business processesinstead of business models when they undertake electronic commerce initiativesHow to identify opportunities for and barriers to electronic commerce initiativesHow economic forces haveled to the development and continued growth ofelectroniccommerceHow businesses use value chains and SWOT analysis to identify electronic commerceopportunitiesHowtheinternational nature of electronic commerceaffects its growth and developmentTeaching TipsThe Evolution ofElectronic Commerce1.In this section,define electronic commerce and describeits evolution froma novelty toits current place as animportant component of globalbusiness activity.Electronic Commerce and Electronic Business

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1.Introduce thetermselectronic commerce(e-commerce),electronic business(e-business), anddot-com/pure dot-com.Categories of Electronic Commerce1.Discussthe five general electronic commerce categories: business-to-consumer(B2C),business-to-business(B2B),transactions andbusiness processes, consumer-to-consumer(C2C), and business-to-government(B2G).2.Introduce the termssupply management/procurementande-procurement.Business Processes1.Introduce the termsbusiness activity,transaction,business processesandtelecommuting(telework).Relative Size of Electronic Commerce Elements1.Use Figure 1-1 to illustratethe three main elements ofelectronic commerce.2.Describetwo additional categories of electronic commerce:consumer-to-consumer(C2C) andbusiness-to-government(B2G).3.Use Figure 1-2 to summarize the five categories of electronic commerce.The Development and Growth of Electronic Commerce1.Note that the Internet has changed the way people buy, sell, hire, and organize businessactivities in more ways and more rapidly than any other technology in the history ofbusiness.Early Electronic Commerce1.Discuss the following topics:Electronic Funds Transfers (EFTs):Explain that,forapproximately50 years,banks have been usingelectronic funds transfers(EFTs, also calledwiretransfers).Electronic Data Interchange (EDI):Introduce the termstrading partnersandvalue-addednetwork (VAN).The First Wave ofElectronic Commerce, 1995–20031.Compare the evolution of electronic commerce to other historic changes in economicorganization, e.g., the Industrial Revolution.2.Explain whythe first wave of electronic commercehas often been characterized byrapidgrowth, often called a“boom,”followed by rapid contraction, often called a“bust.”

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3.Discuss how the injection of financial investment into e-commerce businesses from2000-2003 set the stage for significant growth in online business activities insubsequent years.4.Refer to Figure 1-3 tosummarize the growth of actual and estimated global online salesfor the B2C and B2B categories.The SecondWave of Electronic Commerce, 2004-20091.Emphasize how the second wave was characterized by an expanding internationalscope, with sellers beginning to do business in other countries and languages.2.Note that in the second wave, established companies began using their own internalfunds to finance gradual expansion of electronic commerce opportunities.3.Explain why the increase in broadband connections in homes was a key element in theB2C component of the second wave.4.Highlight the fact that the use of electronic mail (ore-mail) in the first wave was a toolfor relatively unstructured communication.5.Note that in the second wave, sellers began using e-mail as an integral part of theirmarketing and customer contact strategies.6.Briefly discuss how companies began thesecond wave with a renewed interest inmaking the Internet work as an effective advertising medium.7.Note that the sale of digital products was fraught with difficulties during the first waveof electronic commerce. Use the music industry as an example.8.Discuss how the second wave fulfilled the promise of available technology bysupporting the legal distribution of music, video, and other digital products on the Web.9.Describe the concept and examples ofWeb 2.0.10.Introduce the termsfirst-mover advantageandsmart-follower strategy.TeachingTipStudents can learn more aboutsocial networks usingWeb 2.0 athttp://www.ibm.com/developerworks/webservices/library/ws-socialcollab/index.html?ca=datTheThird Waveof Electronic Commerce, 2010-Present1.Review the followingfactorsthatcame together to start a third wave in the developmentofelectronic commerce.

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Emergence of Mobile Commerce:Discuss the rise ofmobile commerce(m-commerce)and the increasing use ofsmartphonesand tablet computers.Stress thatan important change brought about by fully operational handheld devices is thattheInternet becomes truly available everywhere.Definemobile softwareapplications (mobile apps)and discuss their impact on mobile commerce.Emergence ofGlobal ElectronicCommerce:Briefly discusshow inexpensivedevices such as mobile phones and tablets havemade the Internet availableeverywhere and affectedglobal online business in less developed countries withrapidly growingeconomies.Widespread Social Networking:Briefly explain how Web 2.0 technologies thatenabled part of the growth in electronic commerce that occurred in the second wavewill play a major role in the third wave. Describesocial commerce.Increased Participation by Small Businesses:Briefly explain how the third wave ofelectronic commerce will include the participation of a significantly largerproportion of smaller businesses. Define the termcrowdsourcing.Sophisticated Analysis of Large Datasets:Introduce the termsbig dataanddataanalytics. Note that companies that store large amounts of data about theircustomers’ behavior on their Web sites can combine that information with theirexisting data about customers’ past purchases to predict the kinds of products,services, or special offers in which each customer might be interested.Integration of Tracking Technologies into B2B:Briefly explain how Internettechnologies are increasingly integrated with each other and with communicationsystemstoallow companies to communicate with each other and share transaction,inventory level, and customer demand information effectively.The“Boom and Bust” Myth1.In this section,discuss that the reported “bust” of electronic commerce between 2000and 2002 was actually a minor slowdown and that growthcontinued through the 2008–2009 global recession. Refer to Figure 1-4 to summarize the growth of actual andestimated online sales.Quick Quiz 11.A(n) ____ is an exchange of value, such as a purchase, a sale, or the conversion of rawmaterials into afinished product.Answer:transaction2.The group of logical, related, and sequential activities and transactions in whichbusinesses engage are often collectively referred to as ____.Answer:business processes3.____ occurs when one business transmits computer-readable data in a standard formatto another business.Answer:Electronic data interchange (EDI)

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4.Businesses that engage in EDI with each other are called ____.Answer:trading partners5.____ is the general term for a group of technologies have emerged and combined tomake new businesses possible on the Web.Answer: Web 2.0Business Models, Revenue Models, and Business Processes1.Introduce the termsbusiness modelandrevenue model.TeachingTipStudents canlearn more aboutbusiness modelsby readingthe following article:http://timkastelle.org/blog/2012/01/eight-models-of-business-models-why-theyre-importantFocus on Specific Business Processes1.Emphasizethat although much of this book is devoted to explaining technologies, thebook’s focus is on the business of electronic commerce; the technologies only enablethe business processes.Role ofMerchandising1.Definemerchandising.2.Note that the skills of merchandising and personal selling can be difficult to practiceremotely. However, companies must be able to transfer their merchandising skills to theWeb for their Web sites to besuccessful.Product/Process Suitability to Electronic Commerce1.Refer to Figure 1-5 to illustrateexamples of business processes categorized bysuitability for electronic commerce and traditionalcommerce.2.Introduce the termscommodity itemandshippingprofile.3.Explain that aproduct that has a strong brand reputation is easier to sell on the Webthan an unbranded item, because the brand’s reputation reduces the buyer’s concernsabout quality when buying that item sight unseen.4.Point out that traditional commerce, rather than electronic commerce, can be a betterway to sell items that rely on personal selling skills.5.Note that a combination of electronic and traditional commerce strategies works bestwhen thebusiness process includes both commodity and personal inspection elements.

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Electronic Commerce: Opportunities, Cautions, and Concerns1.Emphasize that not every business process is suitable forelectronic commerce.Opportunities forElectronic Commerce1.Introduce the termsvirtualcommunityandsocial networking sites.TeachingTipAsk students to discuss virtual communities in which they participate.2.Students should be able to identify the benefits of electronic commerce, such as itsability to increasethe speed and accuracy with which businesses can exchangeinformation, reducingcosts on both sides of transactions.3.Students should also appreciate the ability to consider a wide variety of products andservices 24 hours a day, every day, and that they can have digital products deliveredthrough the Internet.4.Notealso that the benefits of electronic commerce extend to the general welfare ofsociety. Electronic payments of tax refunds, public retirement, and welfare support costless to issue and arrive securely and quickly when transmitted over the Internet.Electronic Commerce:Current Barriers1.Point out thatsome business processes might never lend themselves to electroniccommerce.Use the examples of perishable foods and high-cost, unique items such ascustom-designed jewelry.2.Discuss four issues that currently act as barriers to electronic commerce.The Need foraCritical Mass:Provide examples of products and services thatrequire a critical mass of potential buyers be equipped and willing to buy throughthe Internet.Use online grocers such as Peapod as an example.Predictability of Costs and Revenues:Briefly describe the challenge for businessessurrounding return-on-investment calculations and employee recruitment andretention.Technology Integration Issues:Highlight the difficulty of integrating existingdatabases and transaction-processing software designed for traditional commerceinto the software that enables electronic commerce.Cultural and Legal Concerns:Outline aspects of cultural and legal obstacles toconducting all types of electronic commerce.Quick Quiz 2

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1.A(n) ____ is a set of processes that combine to achieve a company’s goal, which is toyield aprofit.Answer: business model2.A(n) ____ is a specific collection of business processes used to identify customers,market to those customers, and generate sales to those customers.Answer:revenue model3.A(n) ____ is a product or service that is hardto distinguish from the same products orservices provided by other sellers; its features have become standardized and wellknown.Answer: commodity item4.A product’s ____ is the collection of attributes that affect how easily that product can bepackaged and delivered.Answer:shipping profile5.____sitesareWeb sites that individuals and businesses use to conduct socialinteractions online.Answer: Social networkingEconomic Forces and Electronic Commerce1.Introduce theformal definition ofmarketandthe termhierarchical businessorganizations, whicheconomists generally refer to asfirmsorcompanies.Transaction Costs1.Define the termtransactioncosts.Be sure to mention thata significant component oftransaction costs can be the investment a seller makes in equipment or in the hiring ofskilled employees to supply the product or service to the buyer.2.Use Figure 1-6 to illustrate a market form of economic organization for a sweaterdealer.Markets and Hierarchies1.Introduce the termsvertical integration. Use Figure 1-7 to illustrate a hierarchal formof economic organization for a sweater dealer.2.Introduce the termstrategic business unit(SBU)/business unit.UsingElectronic Commerce to Reduce Transaction Costs1.Mentionthat businesses and individuals can use electronic commerce to reducetransaction costs by improving the flow of information and increasing the coordinationof actions.

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2.Use the example of an employment transaction, emphasizing how the use oftelecommuting and mobile technologies reduce transactioncosts.Network Economic Structures1.Introduce the termsnetwork economic structure,strategic alliances/strategicpartnerships,virtual companies, andstrategic partners.2.Explain why network organizations are particularly well suited to technology industriesthat are information intensive.Reference Figure 1-8 to illustrate a network organization.3.Note electroniccommerce can make networks,which rely extensively on informationsharing, much easier to construct and maintain. Some researchers believethese networkforms of organizing commerce will become predominant in the near future.Network Effects1.Introduce thetermslaw of diminishing returnsandnetwork effect.2.Point out that regardless of how businesses in a particular industry organizethemselves–as markets, hierarchies, or networks–yourstudents will need a way toidentify business processes and evaluate whether electronic commerce is suitable foreach process.Quick Quiz 31.____ are the total of all costs that a buyer and seller incur as they gather informationand negotiate a purchase-and-sale transaction.Answer:Transaction costs2.The practice of an existing firm replacing one or more of its supplier markets with itsown hierarchical structure for creating the supplied product is called ____.Answer:vertical integration3.A(n) ____is one particular combination of product,distribution channel, and customertype.Answer:strategic business unit, business unit4.Entities that come together as a team for a specific project or activity are called ____.Answer: strategic partners5.As more people or organizationsparticipate in a network, the value of the network toeach participant increases. This increase in value is called a(n) ____.Answer:network effect

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Identifying Electronic Commerce Opportunities1.Explain that one wayfor studentsto focus on specific business processes as candidatesfor electronic commerce is to break the business down into a series of value-addingactivities that combine to generate profits and meet other goals of the firm.2.Define the termindustry.Strategic Business Unit Value Chains1.Introduce the termsvalue chain,primary activities, andsupporting activities.2.Illustratea value chain for a strategic business unit, including both primary andsupporting activitiesusing Figure 1-9. These value chain activities will occur in someform in any strategic business unit.3.Review the primary activities each strategic business unit conductsusing Figure 1-9:design, identify customers, purchase materials and supplies, manufacture product orcreate service, market and sell, deliver, and provide after-sale service and support.4.Review the primary support activities the central corporate organization typicallysuppliesusing Figure 1-9: finance and administration activities, humanresourceactivities,andtechnology development activities.Industry Value Chains1.Define the termsvalue systemandindustry value chain.2.Note that,by becoming aware of how other business units in the industry value chainconduct their activities, managers can identify new opportunities for costreduction,product improvement, or channel reconfiguration.3.Illustrate an industry value chain for a wooden chair from its inception as trees in aforest to its grave in a landfillor at a sawdust recyclerusing Figure 1-10.4.Point out that many managers have found ways to use electronic commercetechnologies to reduce costs,improve product quality, reach new customers or suppliers,or create new ways of sellingexisting products.5.Explain that,when firms are considering electronic commerce, the value chain can bean excellent way to organize the examination of business processes within theirbusiness units and in otherparts of the product’s life cycle.SWOT Analysis: Evaluating Business Unit Opportunities1.Point out that most electronic commerceinitiatives add value by either reducingtransaction costs, creating some type of network effect, or a combination of both.2.Explain theimportance ofSWOT analysis(strengths,weaknesses,opportunitiesandthreats).

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3.Refer to Figure 1-11 toillustratequestions that an analyst would ask in conducting aSWOT analysis for any company or strategic business unit.4.Refer to Figure 1-12 to explain the results of Dell Computer’s SWOT analysis.International Nature of Electronic Commerce1.Note the rapidly increasing proportion of online business activitybased outside theU.S.2.Refer to Figure 1-13 to illustrate the proportion of online B2C sales that arise in themaingeographicregions of the world.3.Introducethekey issues that any company faces when it conducts internationalcommerce:trust,culture, language,government,and infrastructure.Trust Issues on the Web1.Explain that companies with established reputations in the physical world often createtrust byensuring that customers know who they are.2.Discuss the rationale for the following statement:For businesses to succeed on the Web,they must find ways to quickly generate the trust that traditional businesses take years todevelop.Language Issues1.Explain the phrase, “think globally, act locally.”2.Point outthat the first step that a Web business usually takes to reach potentialcustomers in other countries, and thus in other cultures, is to provide local languageversions of its Web site.Note that this may mean translating the Web site into anotherlanguage or regional dialect.3.Introducemachine translationandlocalization.Cultural Issues1.Emphasize the followingtwopoints:An important element of business trust is anticipating how the other party to atransaction will act in specific circumstances.A company’s brand conveys expectations about how the company will behave;therefore,companies with established brands can build online businesses morequickly and easily than a new company without a reputation.2.Define the termculture.3.Provide examples oferrorsstemming from subtle language and cultural standards.4.Discuss why designers of Web sites for international commerce must be very carefulwhen they choose icons to representcommonactions.

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Culture and Government1.Note thatthecensorship of Internet content and communications restricts electroniccommerce because it prevents certain types of products and services from being sold oradvertised.Further, it reduces the interest level of many potential participants in onlineactivities.2.Discuss howcountries, such as the People’s Republic of China and Singapore, arewrestling with the issues presented by the growth of the Internet as a vehicle for doingbusiness.3.Point out that somecountries, although they do not ban electronic commerce entirely,have strong cultural requirements that have found their way into the legal codes thatgovern business conduct.Infrastructure Issues1.Pointoutthat businesses that successfully meet the challenges posed by trust, language,andculture issues still face the challenges posed by variations and inadequacies in theinfrastructure that supports the Internet throughout the world.2.Introduce the termsfreight forwarder,customs broker, andbonded warehouse.3.Illustrate multiple flows of information and transfer of physical objects that occur in atypical international trade transactionusing Figure 1-14.Quick Quiz 41.A(n) ____ is a way of organizing the activities that each strategic business unitundertakes to design, produce,promote, market, deliver, and support the products orservices it sells.Answer:value chain2.____ means a translation that considers multiple elements of the local environment,such as business and cultural practices, in addition to local dialect variations in thelanguage.Answer: Localization3.A(n) ____ is a company that arranges shipping and insurance for internationaltransactions.Answer:freight forwarder4.A(n) ____ is a secure location where incoming international shipments can be held untilcustoms requirements are satisfied or until payment arrangements are completed.Answer:bonded warehouseClass Discussion Topics1.How does the international nature of e-commerce affect its infrastructure?

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2.What steps should be taken to overcome the cultural issues of electronic commerce?3.Describe the changes in the types of businesses participating in electronic commerce astechnology advances have occurred through the first, second, and third wave.Additional Projects1.Look at the following Web site:http://www.jpeterman.com/!LDpstjukHvlflHaogITYkA!/.Use SWOT analysis toevaluate the business strategy.2.Create adiagram (similar to the diagram in Figure 1-9) that describes the industry valuechain foran industry that holds special interest for you.(Also, refer toDecision SupportTools:Porter's Value Chainathttp://www.ifm.eng.cam.ac.uk/research/dstools/value-chain-/)Additional Resources1.SWOT Analysis:http://www.netmba.com/strategy/swot2.Business Modelson the Web:http://www.digitalenterprise.org/models/models.html3.The Case and the Plan for the Virtual Company:http://www.inc.com/magazine/20100401/the-case-and-the-plan-for-the-virtual-company.html4.ThreeTrends Shaping B2B Marketing:http://www.inc.com/articles/201101/3-trends-shaping-b2b-marketing.html5.Cultural Impact On E-Commerce: A Comparative Study:http://iacis.org/iis/2013/241_iis_2013_431-440.pdf

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Key TermsBig data: the term used in business todescribe very large stores of information such asthatcollected by online sellers about their customers.Bonded warehouse:a secure location where incoming international shipments can beheld until customs requirements are satisfied or until payment arrangements arecompleted.Business activity:a task performed by a worker in the course of doing his or her job.Business model: a set of processes that combine to achieve a company’s goal, which isto yield a profit.Business processes:the group of logical, related, and sequential activities andtransactions in which businesses engage.Business unit: a unit within a company that is organized around a specific combinationof product, distribution channel, and customer type. Synonymous with strategicbusiness unit.Business-to-business (B2B):transactions conducted between businesses on the Web.Business-to-consumer (B2C):transactions conducted between shoppers and businesseson the Web.Business-to-government (B2G):a category of electronic commerce that includesbusiness transactions with government agencies, such as paying taxes and filingrequired reports.Commodity item:a product or service that has become so standardized andwellknownthat buyers cannot detect a difference in the offerings of various sellers; buyersusually base their purchase decisions for such products and services solely on price.Consumer-to-consumer (C2C):a category of electronic commerce that includesindividuals who buy and sell items among themselves.Crowdsourcing: Web sites used to gather multiple small investors together for specificbusiness funding activities.Culture:the combination of language and customs that are unique to a particularpopulation.Customs broker:a company that arranges the payment of tariffs and compliance withcustoms laws for international shipments.Data analytics:the highly sophisticated tools for investigating patterns and knowledgecontained in big data.Dot-com:a companythat operatesonly online.E-procurement: synonymous with business-to-business (B2B).Electronic business (e-business):another term for electronic commerce; sometimesused as a broader term for electronic commerce that includes all businessprocesses, asdistinguished from a narrow definition of electronic commerce that includes sales andpurchase transactions only.Electronic commerce (e-commerce):business activities conducted using electronicdata transmission over the Internet and the World Wide Web.Electronic data interchange (EDI):exchange between businesses of computer-readable data in a standard format.Electronic funds transfer (EFT):electronic transfer of account exchange informationover secure privatecommunications networks.

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Firms or companies:theterms economists generally use to refer to hierarchicalbusiness organizations.First-mover advantage:the benefit a company can gain by introducing a product orservice before its competitors.Freight forwarder:a company that arranges shipping and insurance for internationaltransactions.Hierarchical business organization:firms that include a number of levels withcumulative responsibility.A top-level president or officer typically heads theseorganizations. A number of vice presidents report to the president. A larger number ofmiddle managers report to the vice presidents.Industry:multiple firms selling similar products to similar customers.Industry valuechain:the larger stream ofactivities in which a particular businessunit’s value chain is embedded.Law of diminishing returns:the characteristic of most activities to yield less value asthe amount of consumption increases.Localization:a type of language translation that considers multiple elements of thelocal environment, such as business and cultural practices, in addition to local dialectvariations in the language.Machine translation:language translation that is done by software; such translationcan reach speeds of 400,000 words per hour.Market:a real or virtual space in which potential buyers and sellers come into contactwith each other and agree on a medium of exchange (such as currency or barter).Merchandising:the combination of store design, layout, and product display intendedto create an environment that encourages customers to buy.Mobile commerce (m-commerce):resources accessed using devices that have wirelessconnections, such as stock quotes, directions, weather forecasts, and airline flightschedules.Mobilesoftware applications (mobile apps):apps issued by sellers to make shoppingat their stores easier and more convenient that accounted for 42% of all B2C mobilesales in 2014.Network economic structure:a business structure wherein firmscoordinate theirstrategies, resources, and skill sets by forming a long-term, stable relationship based ona shared purpose.Network effect:an increase in the value of a network to its participants, which occursas more people or organizations participate in the network.Primary activities:activities that are required to do business: design, production,promotion, marketing, delivery, and support of products or services.Procurement:the business activity that includes all purchasing activities plus themonitoring of all elements of purchase transactions.Pure dot-com:a company that operates only online; also called dot-com.Revenue model:the combination of strategies and techniques that a company uses togenerate cash flow into the business from customers.Shipping profile:the collection of attributes, including weight and size that affect howeasily a product can be packaged and delivered.Smart-follower strategy: an approach in which a business observes first-mover failuresand enters abusiness later, when large investments are no longer required and businessprocesses have been tested.

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