Advantages of Electronic Commerce

Firms are interested in electronic commerce because, quite simply, it can help increase
profits. All the advantages of electronic commerce for businesses can be summarized in one
statement: Electronic commerce can increase sales and decrease costs. Advertising done
well on the Web can get even a small firm’s promotional message out to potential customers
in every country in the world. A firm can use electronic commerce to reach small groups of
customers that are geographically scattered. The Web is particularly useful in creating virtual
communities that become ideal target markets for specific types of products or services.
A virtual community is a gathering of people who share a common interest, but instead of this
gathering occurring in the physical world, it takes place on the Internet
Just as electronic commerce increases sales opportunities for the seller, it increases purchasing
opportunities for the buyer. Businesses can use electronic commerce to identify
new suppliers and business partners. Negotiating price and delivery terms is easier in electronic
commerce because the Internet can help companies efficiently obtain competitive
bid information. Electronic commerce increases the speed and accuracy with which businesses
can exchange information, which reduces costs on both sides of transactions. Many
companies are reducing their costs of handling sales inquiries, providing price quotes, and
determining product availability by using electronic commerce in their sales support and
order-taking processes.
Electronic commerce provides buyers with a wider range of choices than traditional commerce
because buyers can consider many different products and services from a wider variety
of sellers. This wide variety is available for consumers to evaluate 24 hours a day, every day.
Some buyers prefer a great deal of information in deciding on a purchase; others prefer less.
Electronic commerce provides buyers with an easy way to customize the level of detail in the
information they obtain about a prospective purchase. Instead of waiting days for the mail to
bring a catalog or product specification sheet, or even minutes for a fax transmission, buyers
can have instant access to detailed information on the Web.
Some digital products, such as software, music and video files, or images, can even be delivered
through the Internet, which reduces the time buyers must wait to begin enjoying their
purchases. The ability to deliver digital products online is not just a cost-reduction opportunity.
It can increase sales, too. Intuit sells its TurboTax income tax preparation software online and
lets customers download the software immediately if they wish. Intuit sells a considerable
amount of TurboTax software late in the evening on April 14 each year.
The benefits of electronic commerce extend to the general welfare of society. Electronic
payments of tax refunds, public retirement, and welfare support cost less to issue and
arrive securely and quickly when transmitted over the Internet. Furthermore, electronic
payments can be easier to audit and monitor than payments made by check, providing protection
against fraud and theft losses. To the extent that electronic commerce enables people to telecommute, everyone benefits from the reduction in commuter-caused traffic and pollution. Electronic commerce can also make products and services available in remote areas. For example, distance education is making it possible for people to learn skills and earn degrees no matter where they live or which hours they have available for study.

Product/Process Suitability to Electronic Commerce

Some products, such as books or CDs, are good candidates for electronic commerce because
customers do not need to experience the physical characteristics of the particular item
before they buy it. Because one copy of a new book is identical to other copies, and because
the customer is not concerned about fit, freshness, or other such qualities, customers are
usually willing to order a title without examining the specific copy they will receive. The
advantages of electronic commerce, including the ability of one site to offer a wider selection
of titles than even the largest physical bookstore, can outweigh the advantages of a traditional
bookstore—for example, the customer’s ability to browse the pages of the books. In
later chapters, you will learn how to evaluate the advantages and disadvantages of using
electronic commerce for specific business processes.

Role of Merchandising

Retail merchants have years of traditional commerce experience in creating store environments
that help convince customers to buy. This combination of store design, layout,
and product display knowledge is called merchandising. In addition, many salespeople have
developed skills that allow them to identify customer needs and find products or services
that meet those needs.
The skills of merchandising and personal selling can be difficult to practice remotely.
However, companies must be able to transfer their merchandising skills to the Web for
their Web sites to be successful. Some products are easier to sell on the Internet than
others because the merchandising skills related to those products are easier to transfer
to the Web.

Focus on Specific Business Processes

The revenue model grouping of business processes, companies think of the
rest of their operations as specific business processes. Those processes include purchasing
raw materials or goods for resale, converting materials and labor into finished goods,
managing transportation and logistics, hiring and training employees, managing the
finances of the business, and many other activities.
An important function of this book is to help you learn how to identify those business
processes that firms can accomplish more effectively by using electronic commerce
technologies. In some cases, business processes use traditional commerce activities very
effectively, and technology cannot improve them. Products that buyers prefer to touch,
smell, or examine closely can be difficult to sell using electronic commerce. For example,
customers might be reluctant to buy items such as high-fashion clothing or antique jewelry
if they cannot closely examine the products before agreeing to
purchase them.
You learn how to use Internet technologies to improve existing business
processes and identify new business opportunities. An important aspect of electronic
commerce is that firms can use it to help them adapt to change. The business world
is changing more rapidly than ever before. Although much of this book is devoted to
explaining technologies/.

B U S I N E S S M O D E L S , R E V E N U E M O D E L S , A N D B U S I N E S S P R O C E S S E S

A business model is a set of processes that combine to yield a profit. In the first wave of
electronic commerce, many investors sought out start-up companies with appealing business
models. A good business model was expected to lead to rapid sales growth and market
dominance. The idea that the key to success was simply to copy the business model of
a successful dot-com business led the way to many business failures, some of them quite
dramatic.
In the wake of the dot-com debacle that ended the first wave of electronic commerce,
many business researchers analyzed the efficacy of the business model approach and
began to question the advisability of focusing great attention on a company’s business
model. One of the main critics, Harvard Business School professor Michael Porter, argued
that business models not only did not matter, they probably did not exist. (You can read
more about Porter’s criticisms of the business model approach in the articles cited in the
For Further Study and Research section at the end of this chapter.)
It has become clear to many companies that copying or adapting someone else’s business
model is neither an easy nor wise road map to success. Instead, companies should
examine the elements of their business; that is, they should identify business processes that
they can streamline, enhance, or replace with processes driven by Internet technologies.
Companies and investors do still use the idea of a revenue model, which is a specific collection
of business processes used to identify customers, market to those customers, and
generate sales to those customers. The revenue model idea is helpful for classifying revenue generating
activities for communication and analysis purposes. The details of revenue
models that are used on the Web.

The SecondWave of Electronic Commerce

Economists Chris Freeman and Francisco Louçã describe four waves that occurred in the
Industrial Revolution in their book As Time Goes By (see the For Further Study and
Research section at the end of this chapter). Many researchers predict that electronic commerce
and the information revolution brought about by the Internet will go through similar
waves. Those researchers agree that the second wave of electronic commerce has
begun. This section outlines the defining characteristics of the first wave of electronic commerce
and describes how the second wave is different.
The first wave of electronic commerce was predominantly a U.S. phenomenon. Web
pages were primarily in English, particularly on commerce sites. The second wave is characterized
by its international scope, with sellers doing business in many countries and in
many languages. The problems of language translation and handling currency conversion
will need to be solved to allow efficient conduct of business in the second wave. You
will learn more about the issues that arise in global electronic commerce later in this chapter,
in Chapter 7, and in Chapter 11, which concerns online payment systems.
In the first wave, easy access to start-up capital led to an overemphasis on creating new
large enterprises to exploit electronic commerce opportunities. Investors were excited
about electronic commerce and wanted to participate, no matter how much it cost or how
bad the underlying ideas were. In the second wave, established companies are using their
own internal funds to finance gradual expansion of electronic commerce opportunities.
These measured and carefully considered investments are helping electronic commerce
grow more steadily, though more slowly.
The Internet technologies used in the first wave, especially in B2C commerce, were
slow and inexpensive. Most consumers connected to the Internet using dial-up modems.
The increase in broadband connections in homes is a key element in the B2C component
of the second wave. In 2004, the number of U.S. homes with broadband connections
began to increase rapidly. Most industry estimates showed that about 12 percent of U.S.
homes had broadband connections in early 2004. By late 2005, those estimates were ranging
between 25 and 30 percent. Many experts believe that increased use of home Internet
connections to transfer large audio and video files prompted the surge in broadband
connections. Although these connections are more expensive, they are more than 10
times faster than dial-up. This increased speed not only makes Internet use more efficient,
it can alter the way people use the Web.

The Dot-Com Boom, Bust, and Rebirth

Internet-related businesses were started with
more than $100 billion of investors’ money. In an extended burst of optimism and what
many came to describe as irrational exuberance, investors feared that they might miss the
money-making opportunity of a lifetime. As more investors competed for a fixed number of
good ideas, the price of those ideas increased. Worse, a number of bad ideas were proposed
and funded. More than 5000 of these companies went out of business or were acquired
in the downturn that began in 2000. The media coverage of the “dot-com bust” was
extensive. However, between 2000 and 2003, more than $200 billion was invested in purchasing
electronic commerce businesses that were in trouble and starting new online ventures,
according to industry research firm WebMergers. This second wave of financial
investment has not been reported extensively in either the general or business media, but
it is fueling a rebirth of growth in online business activity.
 After seeing so many news stories during the period from 2000 through 2002 proclaiming
the death of electronic commerce, many people are surprised to learn that the growth in online B2C sales had continued through that period, although at a slower pace than during
the boom years of the late 1990s. Thus, the “bust” that was so widely reported in
the media was really more of a slowdown than a true collapse. After four years of doubling
or tripling every year, growth in online sales slowed to an annual rate of 20 to 30
percent starting in 2001. Most experts expect this growth rate to continue through 2010.
One force driving the growth in online sales to consumers is the ever increasing number
of people who have access to the Internet.

The Development and Growth of Electronic Commerce

Over the thousands of years that people have engaged in commerce with one another, they
have adopted the tools and technologies that became available. For example, the advent
of sailing ships in ancient times opened new avenues of trade to buyers and sellers. Later
innovations, such as the printing press, steam engine, and telephone, have changed the
way in which people conduct commerce activities. The Internet has changed the way people
buy, sell, hire, and organize business activities in more ways and more rapidly than any
other technology in the history of business.

Electronic Funds Transfers (EFTs)

Although the Web has made online shopping possible for many businesses and individuals,
in a broader sense, electronic commerce has existed for many years. For more than 30
years, banks have been using electronic funds transfers (EFTs, also called wire transfers),
which are electronic transmissions of account exchange information over private communications
networks.

Electronic Data Interchange (EDI)

Businesses also have been engaging in a type of electronic commerce, known as electronic data
interchange, for many years. Electronic data interchange (EDI) occurs when one business
transmits computer-readable data in a standard format to another business. In the 1960s, businesses
realized that many of the documents they exchanged were related to the shipping of
goods, for example, invoices, purchase orders, and bills of lading. These documents included the
same set of information for almost every transaction. Businesses also realized that they were
spending a good deal of time and money entering this data into their computers, printing
paper forms, and then reentering the data on the other side of the transaction. Although the purchase
order, invoice, and bill of lading for each transaction contained much of the same
information—such as item numbers, descriptions, prices, and quantities—each paper form usually had its own unique format for presenting that information. By creating a set of standard
formats for transmitting that information electronically, businesses were able to reduce
errors, avoid printing and mailing costs, and eliminate the need to reenter the data.

One serious problem that potential adopters of EDI faced was the high cost of
implementation. Until the late 1990s, doing EDI meant buying expensive computer hardware
and software and then either establishing direct network connections (using leased
telephone lines) to all trading partners or subscribing to a value-added network. A
value-added network (VAN) is an independent firm that offers connection and transactionforwarding
services to buyers and sellers engaged in EDI. Before the Internet came into
existence as we know it today, VANs provided the connections between most trading partners
and were responsible for ensuring the security of the data transmitted. VANs usually
charged a fixed monthly fee plus a per-transaction charge, adding to the already
significant expense of implementing EDI. Many smaller firms were unable to afford to
participate in EDI and lost important customers, who went elsewhere to buy. The companies
that operated VANs have gradually moved EDI traffic to the Internet, but many other
companies have developed other ways to do EDI types of transactions on the Internet. You
will learn more about EDI, VANs, and new B2B transaction technologies

Categories of Electronic Commerce

Some people find it useful to categorize electronic commerce by the types of entities participating
in the transactions or business processes. The five general electronic commerce
categories are business-to-consumer, business-to-business, business processes,
consumer-to-consumer, and business-to-government. The three categories that are most
commonly used are:
● Consumer shopping on the Web, often called business-to-consumer (or B2C)
● Transactions conducted between businesses on the Web, often called
business-to-business (or B2B)
● Transactions and business processes in which companies, governments, and
other organizations use Internet technologies to support selling and purchasing
activities
To understand these categories better, consider a company that manufactures stereo
speakers. The company might sell its finished product to consumers on the Web, which
would be B2C electronic commerce. It might also purchase the materials it uses to make
the speakers from other companies on the Web, which would be B2B electronic commerce.
Businesses often have entire departments devoted to negotiating purchase transactions
with their suppliers. These departments are usually named supply management or
procurement. Thus, B2B electronic commerce is sometimes called e-procurement.
In addition to buying materials and selling speakers, the company must also undertake
many other activities to convert the purchased materials into speakers. These activities
might include hiring and managing the people who make the speakers, renting or
buying the facilities in which the speakers are made and stored, shipping the speakers,
maintaining accounting records, purchasing insurance, developing advertising campaigns,
and designing new versions of the speakers. An increasing number of these transactions
and business processes can be done on theWeb. Manufacturing processes (such as
the fabrication of the speakers) can be controlled using Internet technologies within the
business. All of these communication, control, and transaction-related activities have
become an important part of electronic commerce. Some people include these activities in
the B2B category; others refer to them as underlying or supporting business processes.

E L E C T R O N I C COMMERC E : T H E S E C O N D WAV E

The business phenomenon that we now call electronic commerce has had an interesting
history. From humble beginnings in the mid-1990s, electronic commerce grew rapidly until
2000, when a major downturn occurred. Many people have seen news stories about the
“dot-com boom” followed by the “dot-com bust” or the “dot-bomb.” In the period from 2000
to 2003, many industry observers were writing obituaries for electronic commerce. Just as
the unreasonable expectations for immediate success fueled the high expectations during
the boom years, overly gloomy news reports colored perceptions during this time. Beginning
in 2003, with the general economy still in the doldrums, electronic commerce began
to show signs of new life. Companies that had survived the downturn were not only seeing
growth in sales again, but many of them were showing profits. Although the rapid expansion
and high levels of investment of the boom years are not likely to be repeated, the
second wave of electronic commerce is well under way. This section defines electronic commerce
and describes how it is growing once again in its second wave.

I N T R O D U C T I O N

Very few people in the United States truly enjoy their hunt for a new or used car. Although many auto
dealers have worked to improve their customers’ experiences by introducing fixed pricing and “no-haggle”
policies, a number of auto dealers continue to use aggressive sales approaches that can leave buyers
exhausted, confused, and even worried that they might have been cheated in the transaction.

In 1995, Autobytel launched an online car-buying service that
promised purchasers a haggle-free experience and offered car dealers a way to increase new vehicle
sales volumes and reduce selling costs. Autobytel also acquired the operations of several competitors
and continues to operate their Web sites, including Autoweb.com, AutoSite.com, Autoahorros.com,
Car.com, CarTV.com, and CarSmart, as part of its business.
Buying a car with the assistance of Autobytel requires that the buyer register with an AutobytelWeb
site and specify the desired auto in detail, usually after researching the vehicle’s options and features on
the Internet or by visiting local dealers. More than 90 percent of car buyers today do research on the
Internet before buying their cars.Autobytel provides the buyer with a firm price quote for the selected car,
then forwards the buyer’s contact information to a local participating dealer. Dealers pay Autobytel a
subscription fee to receive exclusive rights to referrals from a particular geographic area for the brands
of vehicles that they sell. The dealer contacts the buyer, who then completes the purchase transaction
at the dealer’s location.
The buyer benefits from a speedy, straightforward, and predictable buying process. The dealer
benefits by selling more automobiles and not paying a commission to a salesperson. Autobytel receives
the monthly subscription fee from each dealer that it has under contract and sells advertising to
insurance and finance companies on its Web site. Autobytel currently has contracts with more than
23,000 auto dealers. Autobytel’s revenue from fees paid by auto dealers on these transactions is more
than $70 million per year. Internet sales referrals to dealers from Autobytel and companies like it
accounted for 22 percent of all U.S. new vehicle sales in 2005.
Autobytel experienced rapid growth in sales from its inception in 1995 through 2002, when sales
growth flattened. Like many other companies launched during the early boom years of electronic
commerce, Autobytel had to change its focus. Instead of pursuing a strategy of revenue growth at all
costs, it began to examine its costs carefully. The company also took steps to improve the quality of its
service by ending relationships with a number of dealers who were generating significant numbers of
customer complaints. In 2004, Autobytel expanded by buying other companies and offering sales
management services and software to auto dealers.
After a year of cost cutting and finding other ways to generate sales growth, Autobytel began
growing again.Autobytel has been earning a profit since 2003.Thus, Autobytel emerged from the difficult
years of 2001 through 2003 as a growing and profitable participant in the second wave of electronic
commerce that you will learn about in this chapter.