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CHAPTER 1 OVERVIEW OF ELECTRONIC COMMERCE

Content

Opening Case: Zappos WOWs Their

1.1 Electronic Commerce: Definitions and Concepts

1.2 The Electronic Commerce Field: Classification, Content, and History

1.3 E-Commerce 2.0: From Web 2.0 to Enterprise Social Networking and Virtual Worlds

1.4 The Digital World: Economy, Enterprises, and Society

1.5 Electronic Commerce Drivers and the Changing Business Environment

1.6 Electronic Commerce Business Models

1.7 Benefits, Limitations, and Impacts of Electronic Commerce

1.8 Overview of This Book

Managerial Issues

Closing Case: Beijing 2008: A Digital Olympics

Learning Objectives

Upon completion of this chapter, you will be able to:

1. Define electronic commerce (EC) and describe its various categories.

2. Describe and discuss the content and framework of EC.

3. Describe the major types of EC transactions.

4. Discuss e-commerce 2.0.

5. Understand the elements of the digital world.

6. Describe the drivers of EC as they relate to business pressures and organizational responses.

7. Describe some EC business models.

8. Describe the benefits and limitations of EC to organizations, consumers, and society.

Opening Case: ZAPPOS WOWs THEIR CUSTOMERS

Zappos.com Inc. (“Zappos.com”; zappos.com) is an online retailer with one of the largest selection of shoes anywhere—online or offline.

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The Opportunity

Nick Swinmurn founded the company in 1999 after spending a day at a San Francisco mall looking for a pair of shoes and returning home empty-handed. If one store had the right style, it did not have the right color; the next store had the right color, but it did not have the correct size. Nick tried to locate the shoes he wanted online, but after a frustrating day of browsing, he discovered that he was unable to find what he wanted online.

Swinmurn discovered that there was no major online retailer that specialized in shoes. So, he decided to create a Web site that offered the very best selection in shoes in terms of brands, styles, colors, sizes, and widths.

The Solution

The company’s strategy was to offer such a huge selection that the customers would say WOW! And by 2009 this selection exceeded 3.3 million items (from 1,200 vendors)—unmatchable by any online or offline store.

The company’s initial business model was to sell only online, and only shoes. This model has evolved to also sell several related products ranging from jewelry to clothes and to also sell via a few physical outlets.

Believing that the speed at which a customer receives an online purchase plays a very important role in customer retention, Zappos constructed huge warehouses containing everything it sells.

In order to ensure fast order fulfillment, the company worked with Arup, a global firm of designers, engineers, planners, and business consultants providing a diverse range of professional services to its suppliers; designers; and other business partners around the globe. For example, the logistics designers worked with the Zappos warehouse automation team to design a world-class “direct-to-customer” fulfillment system. The high-speed material handling system (from FKI Logistex) is fully automated and housed in a Shepherdsville, Kentucky, 800,000 square foot warehouse. The system allows rapid delivery to customers no matter where they are located. The company offers free shipping with domestic orders, and often delivers the next day.

The Zappos shopping experience also features extensive Web site search options and clear views of every product (see photo on next page). Unlike most other online retailers, Zappos does not offer an item for sale unless it is physically available in its warehouse. Once the last size or color of a shoe is shipped out, it is no longer offered on the Web site. The moment a new style, size, or color is available in the warehouse, it instantly pops up on the Web site. This “live inventory” is made possible by a full-service photo lab in the fulfillment center, where digital photographs of each item are taken from a variety of angles and immediately uploaded to Zappos.com. The photo lab even includes a studio to shoot live human models for certain shoes, apparel, and accessories.

The company’s culture is also a key to the success of the business. Without dedicated and excited employees, the company becomes an adequate company, not the best.

The culture has matured over the life of the company to include ten (10) core values from which the company developed the culture, brand, and business strategies. These values are shown in Online File W1.1.

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File W1.1.

Zappos also realized that, along with the best selection, customer service is a key success factor. Therefore, Zappos operates under the theory that providing an excellent shopping experience (instead of maximizing profits) will be followed by sales growth.

The company’s “WOW” philosophy of customer experiences and the huge selection are supplemented by 365-day free returns and 24/7 customer service. Until 2008, it also included 110 percent price protection and free overnight shipping on every order.

The company uses EC mechanisms such as blogs, Tweets, discussion forums, e-newsletters, user-contributed videos, and more to create a community of loyal buyers and foster its relationship with its customers.

The employees are members of an enterprise social network, and the mechanisms listed in the customers’ community, as well as other features of social networks, are used to keep employees happy and, therefore, more productive. Employees are well trained to work as individuals, as well as in teams. The company provides EC mechanisms to foster individual and team work.

Doing business online requires a security system to protect customers’ and vendors’ data. Zappos provides encryption and other security measures to protect customer data. 2

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Source: zappos.com/shoes. Used with permission.

The Results

Gross merchandise sales started at “almost nothing” in 1999 and doubled every year to reach more than $1 billion in 2008. The total number of employees grew from 3 in 1999 to over 1,500 in 2009.

By focusing on service and product selection that WOWs the customers, employees, vendors, and investors, Zappos is on its way to fulfilling its vision that one day 30 percent of all retail transactions in the United States of shoes and related items will be online; and people will buy from the company with the best service and the best selection—Zappos will be that company.

In July 2009, Amazon.com “acquired” Zappos. However, the Zappos brand will continue to be separate from the Amazon.com brand. Zappos will have access to many of Amazon.com’s resources, but will continue to build the brand and culture just as it has in the past. The Zappos mission remains the same: delivering happiness to all stakeholders, including employees, customers, and vendors. Zappos plans to continue to maintain its relationships with its vendors, and Amazon.com will continue to maintain its relationships it has with its own vendors.

Sources: zappos.com (accessed July 2009), FKI Logistex (2007), Logistics Online (2008), Taylor (2008), Wall Street Journal (2009), and en.wikipedia.org/wiki/Zappos.com (accessed November 2009).

WHAT WE CAN LEARN . . .

The Zappos case illustrates a story of a very successful start-up company that is doing business almost exclusively online. Doing business electronically is one of the major activities of e-commerce (EC), the subject of this book. Selling online is a popular and very competitive activity. In this case, a business is selling to individual customers in what is known as business-to-customer (B2C). The case demonstrates several of the topics that you will learn in Chapter 1 and throughout the book. These are:

a. You need to have the right idea, capitalizing on the capabilities of online business.

b. These capabilities include the ability to offer a very large number of products such that no single company in the physical world can even come close to your inventory. You can do it because your customer base is huge, and people can buy from anywhere at any time. You can also do it with less cost since you do not need physical stores.

c. Every company needs a business model that describes how the company operates, how it generates sales, and how it provides value to the customers and eventually profits to its owners. This model is a part of EC strategy and can be changed over time.

d. In online businesses customers cannot see the physical product, store, or sellers. Therefore, a good business needs to provide services such as superb customer care, a good return policy, detailed information about the products including a superb visual presentation of each product, and trust in the brand. 3

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Source: zappos.com/shoes. Used with permission.

The Results

Gross merchandise sales started at “almost nothing” in 1999 and doubled every year to reach more than $1 billion in 2008. The total number of employees grew from 3 in 1999 to over 1,500 in 2009.

By focusing on service and product selection that WOWs the customers, employees, vendors, and investors, Zappos is on its way to fulfilling its vision that one day 30 percent of all retail transactions in the United States of shoes and related items will be online; and people will buy from the company with the best service and the best selection—Zappos will be that company.

In July 2009, Amazon.com “acquired” Zappos. However, the Zappos brand will continue to be separate from the Amazon.com brand. Zappos will have access to many of Amazon.com’s resources, but will continue to build the brand and culture just as it has in the past. The Zappos mission remains the same: delivering happiness to all stakeholders, including employees, customers, and vendors. Zappos plans to continue to maintain its relationships with its vendors, and Amazon.com will continue to maintain its relationships it has with its own vendors.

Sources: zappos.com (accessed July 2009), FKI Logistex (2007), Logistics Online (2008), Taylor (2008), Wall Street Journal (2009), and en.wikipedia.org/wiki/Zappos.com (accessed November 2009).

WHAT WE CAN LEARN . . .

The Zappos case illustrates a story of a very successful start-up company that is doing business almost exclusively online. Doing business electronically is one of the major activities of e-commerce (EC), the subject of this book. Selling online is a popular and very competitive activity. In this case, a business is

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exclusively online. Doing business electronically is one of the major activities of e-commerce (EC), the subject of this book. Selling online is a popular and very competitive activity. In this case, a business is selling to individual customers in what is known as business-to-customer (B2C). The case demonstrates several of the topics that you will learn in Chapter 1 and throughout the book. These are:

a. You need to have the right idea, capitalizing on the capabilities of online business.

b. These capabilities include the ability to offer a very large number of products such that no single company in the physical world can even come close to your inventory. You can do it because your customer base is huge, and people can buy from anywhere at any time. You can also do it with less cost since you do not need physical stores.

c. Every company needs a business model that describes how the company operates, how it generates sales, and how it provides value to the customers and eventually profits to its owners. This model is a part of EC strategy and can be changed over time.

d. In online businesses customers cannot see the physical product, store, or sellers. Therefore, a good business needs to provide services such as superb customer care, a good return policy, detailed information about the products including a superb visual presentation of each product, and trust in the brand.

e. In a regular store you pay and pick up the merchandize. In an online business the product is shipped to you. Therefore, order fulfillment needs to be very efficient and timely.

f. A major strategy to engage both customers and employees is to use social networking within the company’s Web site(s).

g. Finally, an online business is a business first, and it must use all basic and critical success factors of a business, such as having a business strategy, operating an effective supply chain, having financial viability, providing a superb relationship with its business partners, notably the suppliers; and, perhaps most important, being innovative, creative, and open-minded in order to maintain a strategic advantage.

The Zappos case covers major topics related to B2C and doing business online in general. These topics are discussed throughout the book. Chapter 1 provides an introduction to the field and an overview of the book. The chapter also covers the drivers, benefits, and limitations of EC.

1.1 ELECTRONIC COMMERCE: DEFINITIONS AND CONCEPTS

Let’s begin by looking at what the management guru Peter Drucker had to say about EC:

The truly revolutionary impact of the Internet Revolution is just beginning to be felt. But it is not “information” that fuels this impact. It is not “artificial intelligence.” It is not the effect of computers and data processing on decision making, policymaking, or strategy. It is something that practically no one foresaw or, indeed even talked about 10 or 15 years ago; e-commerce—that is, the explosive emergence of the Internet as a major, perhaps eventually the major, worldwide distribution channel for goods, for services, and, surprisingly, for managerial and professional jobs. This is profoundly changing economics, markets and industry structure, products and services and their flow; consumer segmentation, consumer values and consumer behavior; jobs and labor markets. But the impact may be even greater on societies and politics, and above all, on the way we see the world and ourselves in it. (Drucker 2002, pp. 3–4)

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it. (Drucker 2002, pp. 3–4)

DEFINING ELECTRONIC COMMERCE

Electronic commerce (EC) is the process of buying, selling, transferring, or exchanging products, services, and/or information via computer networks, mostly the Internet and intranets. EC is often confused with e-business. For an overview, see en.wikipedia.org/wiki/E-commerce.

electronic commerce (EC)

The process of buying, selling, or exchanging products, services, or information via computer.

DEFINING E-BUSINESS

Some people view the term commerce as describing only buying and selling transactions conducted between business partners. If this definition of commerce is used, the term electronic commerce would be fairly narrow. Thus, many use the term e-business instead. E-business refers to a broader definition of EC, not just the buying and selling of goods and services, but also servicing customers, collaborating with business partners, conducting e-learning, and conducting electronic transactions within an organization. However, others view e-business as comprising those activities that do not involve buying or selling over the Internet, such as collaboration and intrabusiness activities; that is, it is a complement of the narrowly defined e-commerce. In this book, we use the broadest meaning of electronic commerce, which is basically

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However, others view e-business as comprising those activities that do not involve buying or selling over the Internet, such as collaboration and intrabusiness activities; that is, it is a complement of the narrowly defined e-commerce. In this book, we use the broadest meaning of electronic commerce, which is basically equivalent to the broadest definition of e-business. The two terms will be used interchangeably throughout the text.

e-business

A broader definition of EC that includes not just the buying and selling of goods and services, but also servicing customers, collaborating with business partners, and conducting electronic transactions within an organization.

MAJOR EC CONCEPTS

Several other concepts are frequently used in conjunction with EC. The major ones are as follow.

Pure Versus Partial EC

EC can take several forms depending on the degree of digitization (the transformation from physical to digital) of (1) the product (service) sold, (2) the process (e.g., ordering, payment, fulfillment), and (3) the delivery method. The possible configurations of these three dimensions (Exhibit 1.1) determine different levels of EC. A product may be physical or digital, the process may be physical or digital, and the delivery method may be physical or digital. These alternatives create eight cubes, each of which has three dimensions. In traditional commerce, all three dimensions of the cube are physical (lower-left cube); in pure EC, all dimensions are digital (upper-right cube). All other cubes include a mix of digital and physical dimensions.

If there is at least one digital dimension, we consider the situation EC, but only partial EC. For example, purchasing a computer from Dell’s Web site or a book from Amazon.com is partial EC, because the merchandise is physically delivered. However, buying an e-book from Amazon.com or a software product from Buy.com is pure EC, because the product, payment, and delivery to the buyer are all digital.

EXHIBIT 1.1 The Dimensions of Electronic Commerce

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Source: Whinston, A. B., Stahl, D. O., and Choi, S. The Economics of Electronic Commerce. Indianapolis, IN: Macmillan Technical Publishing, 1997. Used with permission of authors.

EC Organizations

Purely physical organizations (companies) are referred to as brick-and-mortar (old economy) organizations, whereas companies that are engaged only in EC are considered virtual, or pure-play, organizations. Click-and-mortar (click-and-brick) organizations are those that conduct some EC activities, usually as an additional marketing channel. Gradually, many brick-and-mortar companies are changing to click-and-mortar ones (see the application case about Mary Kay in Online File W1.2).

brick-and-mortar (old economy) organizations

Old-economy organizations (corporations) that perform their primary business offline, selling physical products by means of physical agents.

virtual (pure-play) organizations

Organizations that conduct their business activities solely online.

click-and-mortar (click-and-brick) organizations

Organizations that conduct some e-commerce activities, usually as an additional marketing channel.

ELECTRONIC MARKETS AND NETWORKS

EC can be conducted in an electronic market (e-marketplace) where buyers and sellers meet online to exchange goods, services, money, or information. Any individual can also open a market selling products or services online. Electronic markets are connected to sellers and buyers via the Internet or to its counterpart within organizations, an intranet. An intranet is a corporate or government network that uses Internet tools, such as Web browsers, and Internet protocols. Another computer environment is an extranet, a network that uses the Internet to link multiple intranets in a secure manner.

electronic market (e-marketplace)

An online marketplace where buyers and sellers meet to exchange goods, services, money, or information.

intranet

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intranet

An internal corporate or government network that uses Internet tools, such as Web browsers, and Internet protocols.

extranet

A network that uses the Internet to link multiple intranets.

Section 1.1 REVIEW QUESTIONS

1. Define EC and e-business.

2. Distinguish between pure and partial EC.

3. Define click-and-mortar and pure-play organizations.

4. Define electronic markets, IOSs, and intraorganizational information systems.

5. Define intranets and extranets.

1.2 THE ELECTRONIC COMMERCE FIELD: CLASSIFICATION, CONTENT, AND HISTORY

The EC field is diversified so some classification can help. A good example how EC is done over these networks can be seen in the case of Dell (Online File W1.3).

The Dell case demonstrates several ways that businesses can use EC to improve the bottom line. Dell is not the only company that is doing business online. Thousands of other companies, from retailers to hospitals, are moving in this direction. In general, selling and buying electronically can be either business-to-consumer (B2C) or business-to-business (B2B). In B2C, online transactions are made between businesses and individual consumers, such as when a person purchases a pair of shoes at zappos.com or a computer at dell.com. In B2B, businesses make online transactions with other businesses, such as when Dell electronically buys components from its suppliers. Dell also collaborates electronically with its partners and provides customer service online (e-CRM). Several other types of EC are described in the closing case, and others will be described soon.

According to the U.S. Census Bureau, e-commerce sales accounted for 3.2 percent of total retail sales in 2007, rising from 2.8 percent in 2006. The percentage was flat in 2008. Forrester estimates that retail e-commerce sales will increase to 6 percent of total retail sales in 2009 and 2010, 7 percent in 2011, and 8 percent in 2011 (reported by Todé 2009). 6

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percent in 2011 (reported by Todé 2009).

These activities comprise the essence of EC. However, EC can be explained better by viewing the following framework.

AN EC FRAMEWORK

The EC field is a diverse one, involving many activities, organizational units, and technologies (e.g., see Khosrow-Pour 2006). Therefore, a framework that describes its contents is useful. Exhibit 1.2 introduces one such framework.

As can be seen in the exhibit, there are many EC applications (top of exhibit), some of which were illustrated in Online File W1.3 about Dell; others will be shown throughout the book (see also en.wikipedia.org/wiki/E-commerce). To execute these applications, companies need the right information, infrastructure, and support services.

EXHIBIT 1.2 A Framework for Electronic Commerce

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Exhibit 1.2 shows that EC applications are supported by infrastructure and by the following five support areas (shown as pillars in the exhibit):

People. Sellers, buyers, intermediaries, information systems and technology specialists, other employees, and any other participants comprise an important support area.

Public policy. Legal and other policy and regulatory issues, such as privacy protection and taxation, which are determined by governments. Included as part of public policy is the issue of technical standards, which are established by government and/or industry-mandated policy-making groups. Compliance with regulations is an important issue.

Marketing and advertising. Like any other business, EC usually requires the support of marketing and advertising. This is especially important in B2C online transactions, in which the buyers and sellers usually do not know each other.

Support services. Many services are needed to support EC. These range from content creation to payments to order delivery.

Business partnerships. Joint ventures, exchanges, and business partnerships of various types are common in EC. These occur frequently throughout the supply chain (i.e., the interactions between a company and its suppliers, customers, and other partners).

The infrastructure for EC is shown at the bottom of the exhibit. Infrastructure describes the hardware, software, and networks used in EC. All of these components require good management practices. This means that companies need to plan, organize, motivate, devise strategy, and restructure processes, as needed, to optimize the business use of EC models and strategies.

CLASSIFICATION OF EC BY THE NATURE OF THE TRANSACTIONS AND THE RELATIONSHIPS AMONG PARTICIPANTS

A common classification of EC is by the nature of the transactions or the relationship among the participants. The following major types of EC transactions are listed below with the place in the book where that they are presented.

Business-to-Business (B2B)

All the participants in business-to-business (B2B) e-commerce are either businesses or other organizations. Today, over 85 percent of EC volume is B2B (Mockler et al. 2006).

business-to-business (B2B)

E-commerce model in which all of the participants are businesses or other organizations.

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Business-to-Consumer (B2C)

Business-to-consumer (B2C) EC includes retail transactions of products or services from businesses to individual shoppers. The Zappos opening case illustrates B2C. The typical shopper at Zappos or Amazon.com is an individual. This EC type is also called e-tailing.

business-to-consumer (B2C)

E-commerce model in which businesses sell to individual shoppers.

e-tailing

Online retailing, usually B2C.

Business-to-Business-to-Consumer (B2B2C)

In business-to-business-to-consumer (B2B2C) EC, a business provides some product or service to a client business. The client business maintains its own customers, who may be its own employees, to whom the product or service is provided. An example is Godiva (see Case 1.1 p. 10). The company sells

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In business-to-business-to-consumer (B2B2C) EC, a business provides some product or service to a client business. The client business maintains its own customers, who may be its own employees, to whom the product or service is provided. An example is Godiva (see Case 1.1 p. 10). The company sells chocolates directly to business customers. Those businesses may then give the chocolates as gifts to employees or to other businesses. Godiva may mail the chocolate directly to the recipients (with compliments of…). An interesting example of B2B2C can be found at wishlist.com.au.

business-to-business-to-consumer (B2B2C)

E-commerce model in which a business provides some product or service to a client business that maintains its own customers.

Consumer-to-Business (C2B)

The consumer-to-business (C2B) category includes individuals who use the Internet to sell products or services to organizations and individuals who seek vendors to bid on products or services for them. Priceline.com is a well known organizer of C2B travel service transactions.

consumer-to-business (C2B)

E-commerce model in which individuals use the Internet to sell products or services to organizations or individuals who seek sellers to bid on products or services they need.

Intrabusiness EC

The intrabusiness EC category includes all internal EC organizational activities that involve the exchange of goods, services, or information among various units and individuals in that organization. Activities can range from selling corporate products to one’s employees, to online training, and to collaborative design efforts.

intrabusiness EC

E-commerce category that includes all internal organizational activities that involve the exchange of goods, services, or information among various units and individuals in an organization.

Business-to-Employees (B2E)

The business-to-employees (B2E) category is a subset of the intrabusiness category in which an organization delivers services, information, or products to individual employees. A major category of employees is mobile employees, such as field representatives. EC support to such employees is also called business-to-mobile employees (B2ME). The Mary Kay application case (Online File W1.2) also demonstrates B2E.

business-to-employees (B2E)

E-commerce model in which an organization delivers services, information, or products to its individual employees.

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Consumer-to-Consumer (C2C)

In the consumer-to-consumer (C2C) category (see Chapter 6), consumers transact directly with other consumers. Examples of C2C include individuals selling residential property, cars, and so on in online classified ads. EBay’s auctions are mostly C2C. The advertising of personal services over the Internet and the online selling of knowledge and expertise are other examples of C2C.

consumer-to-consumer (C2C)

E-commerce model in which consumers sell directly to other consumers.

Collaborative Commerce

When individuals or groups communicate or collaborate online, they may be engaged in collaborative commerce, or c-commerce. For example, business partners in different locations may design a product together (see the Boeing case at Online File W1.4).

collaborative commerce (c-commerce)

E-commerce model in which individuals or groups communicate or collaborate online.

E-Learning

In e-learning, training or formal education is provided online. E-learning is used heavily by organizations for training and retraining employees (called e-training). It is also practiced at virtual universities.

e-learning

The online delivery of information for purposes of training or education.

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E-Government

In e-government EC, a government entity buys or provides goods, services, or information from or to businesses (G2B) or from or to individual citizens (G2C) (see Chapter 6).

e-government

E-commerce model in which a government entity buys or provides goods, services, or information from or to businesses or individual citizens.