Chapter 1

Foundations of Electronic
Commerce

Learning Objectives
Define electronic commerce and describe its various categories
Distinguish between electronic markets and inter-organizational
systems
Describe the benefits of electronic commerce to organizations,
consumers, and society
Describe the limitations of electronic commerce
Understand the forces that drive the widespread use of electronic
commerce
Describe and discuss the changes that will be caused by electronic
commerce
Discuss some major managerial issues regarding electronic
commerce
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Opening Vignettes:
Intel Corp. and Happy Puppy
Intel Corporation
Business-to-business (B2B) products selling
Customer service
Purchasing from and dealing with suppliers

Happy Puppy
Retailing companys games
Marketing others games
Business-to-consumers (B2C)
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Definitions and Content of Field

Electronic Commerce (EC) is where business
transactions take place via telecommunications
networks, especially the Internet.
Electronic commerce describes the buying and selling of
products, services, and information via computer networks
including the Internet.
The infrastructure for EC is a networked computing
environment in business, home, and government.
E-Business describes the broadest definition of EC. It
includes customer service and intrabusiness tasks. It is
frequently used interchangeably with EC.
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Definitions and Content of Field (cont.)

A global networked environment is known as

the Internet
A counterpart within organizations, is called an
intranet
An extranet extends intranets so that they can
be accessed by business partners.

Pure Vs. Partial Electronic Commerce

Three dimensions
the product (service) sold [physical / digital];
the process [physical / digital]
the delivery agent (or intermediary) [physical / digital]

Traditional commerce
all dimensions are physical

Pure EC
all dimensions are digital

Partial EC
all other possibilities include a mix of digital and physical
dimensions

Virtual product

The Dimensions of Electronic

Commerce
Electronic
commerce areas

Digital
Product

Virtual process
Digital process
Physical process

Physical
Product
Traditional
commerce

The core of
electronic commerce

Physical
agent

Digital
agent

Virtual delivery agent

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The Electronic Commerce Field

Figure 1.2 shows that the EC applications are
supported by infrastructures, and their
implementation is dependent on four major areas
(shown as supporting pillars) people, public policy,
technical standards and protocols, and other
organizations.
The EC management coordinates the applications,
infrastructures, and pillars. It also includes
Internet marketing and advertisement.
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Electronic Commerce Applications

Stocks Jobs On-line banking
Procurement and purchasing Malls On-line marketing and advertising
Home shopping Auctions Travel On-line publishing

People:
Buyers, sellers,
intermediaries,
services, IS people,
and management

Public
policy,
legal, and
privacy
issues

Technical standards
for documents,
security, and
network protocols
payment

Organizations:
Partners,
competitors,
associations,
government services

Infrastructure
(1)
Common business
services infrastructure
(security smart
cards/authentication
electronic payment,
directories/catalogs)

(2)
Messaging and
information distribution
infrastructure
(EDI, e-mail, Hyper Text
Transfer Protocol)

(3)
(4)
Multimedia content
Network infrastructure
and network
(Telecom, cable TV
publishing infrastructure
wireless, Internet)
(HTML, JAVA, World
(VAN, WAN, LAN,
Wide Web, VRML)
Intranet, Extranet)

(5)
Interfacing
infrastructure
(The databases,
customers, and
applications)

Management

Prentice Hall, 2000

A Framework for Electronic Commerce

Electronic Markets
A market is a network of interactions and
relationships where information, products,
services, and payments are exchanged.
The market handles all the necessary
transactions.
An electronic market is a place where shoppers
and sellers meet electronically.
In electronic markets, sellers and buyers
negotiate, submit bids, agree on an order, and
finish the execution on- or off-line.

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Shopper/Purchaser

Seller/Supplier
Electronic commerce
network
(Infrastructure)

Product/service information request

Purchase request
Payment or payment advice

Response to information request

Purchase acknowledgment
Shipping notice
Purchase/service delivery (if online)
Payment acknowledgment

Electronic Market
(Transaction Hander)

Response to fulfillment request

Shipping notice

Payment remittance notice

Electronic transfer of funds

Payment approval
Electronic transfer of funds

Shopper/Purchasers Bank

Purchase fulfillment request

Purchase change request

Electronic transfer of funds

Transaction Handlers Bank

(Automated Clearing House)

Seller/Suppliers Bank

Electronic Markets
Prentice Hall, 2000

11

Interorganization Information Systems

An interorganizational information system (IOS)
involves information flow among two or more
organizations.
Its major objective is efficient routine transaction
processing, such as transmitting orders, bills, and
payments using EDI or extranets.
Scope: An IOS is a unified system encompassing
two or several business partners.
A typical IOS includes a company and its suppliers
and and/or customers.
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Types of Interorganizational Systems

Electronic data interchange (EDI)
Extranets
Electronic funds transfer (EFT)
Integrated messaging systems
Shared databases
Electronically-supported supply chain
management
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Classification of EC by the Nature

of the Transactions
Business-to-business
Business-to-customer
Intra business transactions
Others
Business to Business

Interorganizational
System

Business to Customer
Electronic
Commerce

Business to Business
Intraorganizational

Other
Prentice Hall, 2000

Classification of Electronic Commerce

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Electronic Commerce is
Interdisciplinary
Marketing
Computer sciences
Consumer behavior
and psychology
Finance
Economic
Production/Logistic

Management
information systems
Accounting and
auditing
Management
Business law and
ethics
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The Benefits of
Electronic Commerce
Benefits to Organizations
Expands the marketplace to national and
international markets
Decreases the cost of creating, processing,
distributing, storing and retrieving paper-based
information
Allows reduced inventories and overhead by
facilitating pull type supply chain management
The pull type processing allows for customization
of products and services which provides
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competitive advantage to its implementers

Benefits to Organizations (cont.)

Reduces the time between the outlay of capital

and the receipt of products and services
Supports business processes reengineering (BPR)
efforts
Lowers telecommunications cost - the Internet is
much cheaper than value added networks (VANs)

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Benefits to Customers
Enables customers to shop or do other
transactions 24 hours a day, all year round from
almost any location
Provides customers with more choices
Provides customers with less expensive products
and services by allowing them to shop in many
places and conduct quick comparisons
Allows quick delivery of products and services in
some cases, especially with digitized products
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Benefits to Customers (cont.)

Customers can receive relevant and detailed
information in seconds, rather than in days or
weeks
Makes it possible to participate in virtual auctions
Allows customers to interact with other customers
in electronic communities and exchange ideas as
well as compare experiences
Electronic commerce facilitates competition,
which results in substantial discounts.
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Benefits to Society
Enables more individuals to work at home, and to
do less traveling for shopping, resulting in less
traffic on the roads, and lower air pollution
Allows some merchandise to be sold at lower
prices benefiting the poor ones
Enables people in Third World countries and rural
areas to enjoy products and services which
otherwise are not available to them
Facilitates delivery of public services at a reduced
cost,increases effectiveness, and/or improves
quality
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The Limitations of
Electronic Commerce
Technical Limitations of Electronic Commerce
Lack of sufficient systems security, reliability,
standards, and communication protocols
Insufficient telecommunication bandwidth
The software development tools are still evolving
and changing rapidly
Difficulties in integrating the Internet and
electronic commerce software with some existing
applications and databases
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Technical Limitations of Electronic

Commerce (cont.)
The need for special Web servers and other
infrastructures, in addition to the network servers
(additional cost)
Possible problems of interoperability, meaning
that some EC software does not fit with some
hardware, or is incompatible with some operating
systems or other components

22

Non-Technical Limitations
Cost and justification (35% of the respondents)
The cost of developing an EC in house can be very
high, and mistakes due to lack of experience, may
result in delays. There are many opportunities for
outsourcing, but where and how to do it is not a
simple issue. Furthermore, to justify the system one
needs to deal with some intangible benefits which are
difficult to quantify.

23

Non-Technical Limitations (cont.)

Security and Privacy (17% of the respondents)
These issues are especially important in the B2C area,
and security concerns are not truly so serious from a
technical standpoint. Privacy measures are constantly
improving too. Yet, the customers perceive these
issues as very important and therefore the EC industry
has a very long and difficult task of convincing
customers that online transactions and privacy are, in
fact, fairly secure.

Lack of trust and user resistance (4%)

Customers do not trust an unknown faceless seller,
paperless transactions, and electronic money. So
switching from a physical to a virtual store may be

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Non-Technical Limitations (cont.)

Other limiting factors are:

Lack of touch and feel online

Many unresolved legal issues
Rapidly evolving and changing EC
Lack of support services
Insufficiently large enough number of sellers and
buyers
Breakdown of human relationships
Expensive and/or inconvenient accessibility to the
Internet
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The Driving Forces of Electronic

Commerce
The New World of Business
Business pressures
Organizational responses
The role of Information
Technology (including
electronic commerce)

26

Major Business Pressures

Market and
economic pressures

Strong competition
Global economy
Regional trade agreements (e.g. NAFTA)
Extremely low labor cost in some countries
Frequent and significant changes in markets
Increased power of consumers

Societal and
environmental pressures

Changing nature of workforce

Government deregulation of banking and other services
Shrinking government budgets subsides
Increased importance of ethical and legal issues
Increased social responsibility of organizations
Rapid political changes

Technological pressures

Rapid technological obsolescence

Increase innovations and new technologies
Information overload
Rapid decline in technology cost Vs. performance ratio
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Organizational Responses
External Environment,
Social, Economic,
Political, etc

The Organizations
Strategy

Organization
Structure and the
Corporate Culture

Management
and
Business Process

Information
Technology

Individual
and Roles
28
Framework for Organizational and Societal Impacts of Information Technology

Business Process Reengineering

Reducing cycle time and time to market
Empowerment of employees and collaborative
work
Knowledge management
Customer-focused approach
Business alliances virtual corporation

29

Everything Will Be Changed

Improving Direct Marketing
Product promotion
New sales channels
Direct savings
Time-to-market (reduced cycle time)
Customer service
Brand or corporate image
30

Other Changes in the Workplace

Transforming Organizations
Work will change
Technology learning
Organizational learning

Redefining Organization
New product capabilities
New business models
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Other Changes in the Workplace (cont.)

Impacts on Manufacturing
Pull processing, mass customization, shorter cycle
time, integration (ERP), electronic bidding and
procurement

Impacts on Finance and Accounting

Electronic payment systems, electronic cash,
automating back office, home banking, electronic
stock trading

Human Resource Management

Electronic recruiting, training, distance learning

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Plan of the Book

Part I

Ch1 Introduction

Part II

EC Application
Ch2 Retailing
Ch3 Consumer Behavior and Market Research
Ch4 Advertisement
Ch5 Service Industries Applications
Ch6 Business-to-Businesses
Ch7 Intranet and Extranet Applications

Part III

Part IV

Support and Implementation

Ch8 Payments
Ch9 Corporate Strategy
Ch10 Public Policy

Part V

Technological Support
Ch11 Infrastructure
Appendix A
Appendix B
Appendix C

Ch12 Economics, Global, Research in EC

33

Management Issues
Is it real?
How to evaluate the magnitude of the
business pressures?
What should be my companys strategy
towards EC?
What is the best way to learn about EC?

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