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Chapter 1
Foundations of Electronic
Commerce

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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 company’s 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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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.
Definitions and Content of Field (cont.)

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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

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Physical
agent
Digital
agent
Digital
Product
Physical
Product Physical process
Digital process
Virtual process
Virtual delivery agent
Virtualproduct
Electronic
commerce areas
The core of
electronic commerce
The Dimensions of Electronic
Commerce
Traditional
commerce

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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.
The Electronic Commerce Field

9. A Framework for Electronic Commerce 9
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)
Multimedia content
and network
publishing infrastructure
(HTML, JAVA, World
Wide Web, VRML)
(4)
Network infrastructure
(Telecom, cable TV
wireless, Internet)
(VAN, WAN, LAN,
Intranet, Extranet)
(5)
Interfacing
infrastructure
(The databases,
customers, and
applications)
Management
© Prentice Hall, 2000

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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.
Electronic Markets

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Shopper/Purchaser Seller/Supplier
Electronic Market
(Transaction Hander)
Electronic commerce
network
(Infrastructure)
Product/service information request
Purchase request
Payment or payment advice
Purchase fulfillment request
Purchase change request
Response to fulfillment request
Shipping notice
Payment approval
Electronic transfer of funds Electronic transfer of funds
Shopper/Purchaser’s Bank
Payment remittance notice
Electronic transfer of funds
Transaction Handler’s Bank
(Automated Clearing House)
Seller/Supplier’s Bank
Electronic Markets
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Response to information request
Purchase acknowledgment
Shipping notice
Purchase/service delivery (if online)
Payment acknowledgment

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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.
Interorganization Information Systems

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Electronic data interchange (EDI)
Extranets
Electronic funds transfer (EFT)
Integrated messaging systems
Shared databases
Electronically-supported supply chain
management
Types of Interorganizational Systems

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Business-to-business
Business-to-customer
Intra business transactions
Others
Electronic
Commerce
Business to Business
Business to Customer
Intraorganizational
Other
Interorganizational
System
Business to Business
Classification of Electronic Commerce
Classification of EC by the Nature
of the Transactions
© Prentice Hall, 2000

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Marketing
Computer sciences
Consumer behavior
and psychology
Finance
Economic
Production/Logistic
Management
information systems
Accounting and
auditing
Management
Business law and
ethics
Electronic Commerce is
Interdisciplinary

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The Benefits of
Electronic Commerce
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
competitive advantage to its implementers
Benefits to Organizations

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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
Lack of sufficient system’s 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
Technical Limitations of Electronic Commerce

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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

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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.

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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
difficult.
Non-Technical Limitations (cont.)

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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
Non-Technical Limitations (cont.)

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

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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
Framework for Organizational and Societal Impacts of Information Technology
Management
and
Business Process
Organization
Structure and the
Corporate Culture
Individual
and Roles
Information
Technology
The Organization’s
Strategy
External Environment,
Social, Economic,
Political, etc

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

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

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Transforming Organizations
Work will change
Technology learning
Organizational learning
Redefining Organization
New product capabilities
New business models
Other Changes in the Workplace

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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
Other Changes in the Workplace (cont.)

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Plan of the Book
Ch1 IntroductionPart I
Support and Implementation
Ch8 Payments
Ch9 Corporate Strategy
Ch10 Public Policy
Part III
Technological Support
Ch11 Infrastructure
Appendix A
Appendix B
Appendix C
Part IV
Ch12 Economics, Global, Research in ECPart V
Part II
Ch2 Retailing
Ch3 Consumer Behavior and Market Research
Ch4 Advertisement
Ch5 Service Industries Applications
Ch6 Business-to-Businesses
Ch7 Intranet and Extranet Applications
EC Application

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