CHAPTER ONE
AN OVERVIEW OF E-COMMERCE
1.1 E-Commerce Defined
Nowadays E-commerce is used everywhere in everyday life. It ranges from credit /debit card
authorization, travel reservation over a phone/ network, wire fund transfers across the globe, point
of sale (POS) transactions in retailing, electronic banking, electronic insurance, fund raising,
political campaigning, on-line education and training, auctioneering, on-line lottery, to arranging
funeral services on-line.
E-commerce is the use of the Internet and the Web to transact business. More formally, we focus
on digitally enabled commercial transactions between and among organizations and individuals.
Each of these components of our working definition of e-commerce is important. Digitally enabled
transactions include all transactions mediated by digital technology. For the most part, this means
transactions that occur over the Internet and the Web. Commercial transactions involve the
exchange of value (e.g., money) across organizational or individual boundaries in return for
products and services. Exchange of value is important for understanding the limits of e-commerce:
Without an exchange of value, no commerce occurs.
E-Business vs. E-commerce
People use, the term e-commerce and e-business interchangeably which is factually wrong.
E-commerce is more specific than e-business. E-business involves the use electronic platforms-
intranets, extranets and Internet to conduct a company’s business. Internet and other technologies
now help companies carry on their business faster, more accurately and over a range of time and
space. They have created intranets to help employees communicate with each other and access
information found in the company’s computers. They have set up extranets with major suppliers
and distributers to assist information exchange, orders, transactions and payments. Companies
such as Cisco, Microsoft and Oracle run almost entirely as e-business, in which memos, invoices,
engineering drawings, sales and marketing information –virtually everything-happens over the
Internet instead of on paper.
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E-business includes all electronic–based information exchanges within or between companies and
customers. In contrast e-commerce involves buying and selling processes supported by electronic
means, primarily the Internet. E-markets are market spaces rather than physical marketplaces.
Sellers use e-markets to offer their products and services online. Buyers use them to search for
information, identify what they want, and place orders using credit or other means of electronic
payment. E-commerce is the online transaction of business, featuring linked computer systems of
the vendor, host, and buyer. Electronic transactions involve the transfer of ownership or rights to
use a good or service.
E-commerce includes e-marketing and e-purchasing\e-procurement. E-marketing is the
marketing side of e-commerce. It consists of the companies efforts to communicate about,
promote, and sell products and services over the Internet. Thus [Link], [Link], Wal-
[Link] etc. conduct e-marketing at their websites. The flip side of e-marketing is e-purchasing,
the buying side of e-commerce. It consists of companies purchasing goods and services and
information from online suppliers.
1.2 Major Forces that Shape the Digital Era\ The Major Drivers of the New Economy
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Many forces play a major role in reshaping the world economy (digital era), among them
technology, globalization, and market deregulation. Here we will describe four specific drivers
that underpin the new economy:
Digitalization and connectivity
Customization and customerization
Explosion of Internet
New forms of Intermediaries
1. Digitalization and Connectivity
In the past, most appliances and systems-such as the telephone, the wrist watch, recorded music,
and panel gauges-operated with analog information. Analog information is continuously variable
in response to physical stimuli: thus a phonogram plays music by responding to the physical
grooves in the record. Today most appliance and systems operate with digital information, which
converts text, data, sound, an images into a stream of zeros and ones that can be combined into
bits and transmitters from appliance to appliance. Software is essentially digital instructions for
operating systems, games, storage, and other applications.
But bits will not reside in separate appliances unless connectivity is established. For bits to flow
from one appliance and location to another, a wired or wireless communications network is
necessary. The Internet, the "information highway," can dispatch bits at an incredible speed from
one location to another. Much of today's business is carried over networks connecting people and
companies. These networks are called Intranets, where they connect people within a company to
one another and to the company mainframe, Extranets when they connect a company with its
suppliers and distributors; and Internet when they connect users to a large worldwide "information
repository." Connectivity is further enhanced by wireless communication.
2. Customization and Customerization
The old economy revolved around manufacturing companies whose main drive was to standardize
production, products, and business processes. They invested large sums in brand building to tout
the advantages of their standard market offerings. Through standardization and branding,
manufacturers hoped to grow and take advantage of economies of scale. And the key to managing
their assets was to establish a command-and-control system that would run the business like a
machine.
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In contrast, the new economy is supported by information businesses. Information has the
advantages of being easy to differentiate, customize, personalize, and dispatch over networks at
incredible speed. As companies grew proficient at gathering information about individual
customers and business partners (suppliers, distributors, retailers), and as their factories were
designed more flexibly, they increased their ability to individualize their market offerings,
messages, and media. For example, Dell Computer invites customers to specify exactly what they
want in a computer and delivers a custom-built one in a few days. P&G, on its [Link] site,
allows a person to specify needs for a shampoo by answering a set of questions, and then P&G
formulates a unique shampoo for the person. Levis is now able to produce customized jeans based
on a person’s measurements.
In this process, we can distinguish between customization and customerization.
Customization means that the company is able to produce individually differentiated goods
whether ordered in person, on the phone, or online. By going online, companies essentially
enable consumers to design their own goods; in effect, it enables them to be prosumers, namely
self-producing consumers. The company is essentially providing a workshop where each
individual can design what he or she wants.
The company also acquired the capacity to interact with each customer personally, namely to
personalize messages, services, and the relationship. The customer can request customization
of products, services, prices, and delivery channels. The combination of operational
customization and marketing customization has been called customerization. A company is
customerized when it is able to dialogue with individual customers and respond by
customizing its products, services, and messages on a one-to-one basis.
Customization is not for every company: There are several downsides.
Customization may be very difficult to implement for complex products such as automobiles.
Customization can raise the cost of goods by more than the customer is willing to pay. Some
customers do not know what they want until they see actual products. Customers cannot
cancel the order after the company has started to work on the product. The product may be
hard to repair and have little sales value. In spite of this, customization has worked well for
some products-laptop computers, apparel, skincare products, and vitamins-and is an
opportunity worth investigating.
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3. Explosion of Internet
With the creation of World Wide Web and Web browsers in 1990s ,the Internet was transformed
from a mere communication tool into a celebrity revolutionary technology .
4. New forms of Intermediaries
The new technological capabilities have led thousands of entrepreneurs to launch a dotcom in the
hope of striking gold. The amazing success of early online dot-corns such as AOL, Amazon,
Yahoo, eBay, E-trade, and dozens of others struck terror in the hearts' of many established
manufacturers and retailers. For example, Compaq had its hands tied because it sold its computers
through retailers, whereas Dell Computer grew faster by choosing to sell online. Established store-
based retailers-notably bookstores, music stores, travel agents, stockbrokers, and car dealers-began
to doubt their future as more businesses went into direct online marketing. They feared, and rightly
so, being disintermediated by the new e-tailers. But disintermediation was only half the story.
Although some established middlemen lost their businesses, new middlemen sprang up to supply
Internet services to both businesses and consumers. Reintermediation took place on a grand scale.
New online middlemen appeared such as [Link], [Link], [Link],
[Link], …
Perspectives of Electronic E-Commerce: Types of E-commerce by the nature of the market
relationship Perspctive
There are a variety of different types of e-commerce and many different ways to characterize these
types.
For the most part, we distinguish different types of e-commerce by the nature of the market
relationship—who is selling to whom. The exceptions are P2P and m-commerce, which are
technology-based distinctions.
I. B2C. The most commonly discussed type of e-commerce is Business-to-Consumer (B2C)
e-commerce, in which online businesses attempt to reach individual consumers. Even
though B2C is comparatively small, it has grown exponentially since 1995, and is the type
of e-commerce that most consumers are likely to encounter.
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II. B2B. Business-to-Business (B2B) e-commerce, in which businesses focus on selling to
other businesses, is the largest form of e-commerce with about hundreds of billions in
transactions.
III. C2C. Consumer-to-Consumer (C2C) e-commerce provides a way for consumers to sell
to each other, with the help of an online market maker such as the auction site eBay. In
C2C e-commerce, the consumer prepares the product for market, places the product for
auction or sale, and relies on the market maker to provide catalog, search engine, and
transaction-clearing capabilities so that products can be easily displayed, discovered, and
paid for.
IV. P2P. Peer-to-peer technology enables Internet users to share files and computer resources
directly without having to go through a central Web server. In peer-to-peer’s purest form,
no intermediary is required. For instance, Gnutella is a peer-to-peer freeware software
application that permits users to directly exchange musical tracks, typically without any
charge.
V. M-commerce. Mobile commerce, or m-commerce, refers to the use of wireless digital
devices to enable transactions on the Web. These devices utilize wireless networks to
connect cell phones and handheld devices such as the PalmVIIx to the Web. Once
connected, mobile consumers can conduct many types of transactions, including stock
trades, instore price comparisons, banking, travel reservations, and more.
VI. B2G—Business to Government e-commerce can be considered yet another type of e-
commerce. For the purposes of this text, we subsume B2G e-commerce within B2B e-
commerce, viewing the government as simply a form of business when it acts as a procurer
of goods and/or services.
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Unique Features of E-Commerce
1. Ubiquity
E-commerce is ubiquitous, meaning that it is available just about everywhere, at all times. It
liberates the market from being restricted to a physical space and makes it possible to shop from
your desktop, at home, at work, or even from your car, using mobile commerce. The result is called
a market space—a market place extended beyond traditional boundaries and removed from a
temporal and geographic location.
From a consumer point of view, ubiquity reduces transaction costs—the costs of participating in
a market. To transact, it is no longer necessary that you spend time and money traveling to a
market. At a broader level, the ubiquity of e-commerce lowers the cognitive energy required to
transact in a market space. Cognitive energy refers to the mental effort required to complete a task.
Humans generally seek to reduce cognitive energy outlays. When given a choice, humans will
choose the path requiring the least effort.
2. Global Reach
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E-commerce technology permits commercial transactions to cross cultural and national
boundaries far more conveniently and cost effectively than is true in traditional commerce. As a
result, the potential market size for e-commerce merchants is roughly equal to the size of the
world’s online population
3. Universal Standard
One strikingly unusual feature of e-commerce technologies is that the technical standards of the
Internet, and therefore the technical standards for conducting e-commerce, are universal
standards—they are shared by all nations around the world. In contrast, most traditional
commerce technologies differ from one nation to the next.
The universal technical standards of e-commerce greatly lower market entry costs—the cost
merchants must pay just to bring their goods to market. At the same time, for consumers, universal
standards reduce search costs—the effort required to find suitable products. And by creating a
single, one-world marketspace, where prices and product descriptions can be inexpensively
displayed for all to see, price discovery becomes simpler, faster, and more accurate. With e-
commerce technologies, it is possible for the first time in history to easily find all the suppliers,
prices, and delivery terms of a specific product anywhere in the world. Although this is not
necessarily realistic today for all or many products, it is a potential that will be exploited in the
future.
E-commerce is made possible through hardware (Internet) and software/content (World Wide
Web). The Internet – In its infancy, the architects developed standards that are now globally
recognized (TCP/IP). The World Wide Web – Standards are becoming #1 priority (XML, HTML,
etc.)
4. Richness
Information richness refers to the complexity and content of a message. Traditional markets,
national salesforces, and small retail stores have great richness: They are able to provide personal,
face-to-face service using aural and visual cues when making a sale. The richness of traditional
markets makes them a powerful selling or commercial environment. Prior to the development of
the Web, there was a trade-off between richness and reach: the larger the audience reached, the
less rich the message. E-commerce technologies have changed the traditional tradeoff between
richness and reach. The Internet and the Web can deliver, to an audience of millions, “rich”
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marketing messages with text, video, and audio, in a way not possible with traditional commerce
technologies such as radio, television, or magazines.
5. Interactivity
This technology allows two-way communication between marketers and consumers.
Consumer/user can interact with the content. Engaging consumer/user is a powerful feature.
6. Information Density
The Internet and the Web vastly increase information density - the total amount and quality of
information available to all market participants, consumers and merchants alike.
The e-commerce technology reduces information collection, storage, and processing and
communication costs. Simultaneously, these technologies increase greatly the currency, accuracy
and timeliness of information- making information more useful and important than ever. Due to
these technologies price and costs become more transparent. Price transparency refers to the ease
with which consumers can find out the variety of prices in the market. Cost transparency refers
to the ability of consumers to discover the actual costs merchants pay for products.
7. Personalization/Customization
E-commerce technologies permit personalization: Merchants can target their marketing messages
to specific individuals by adjusting the message to a person’s name, interests, and past purchases.
The technology also permits customization—changing the delivered product or service based on
a user’s preferences or prior behavior. Given the interactive nature of e-commerce technology, a
great deal of information about the consumer can be gathered in the marketplace at the moment of
purchase. With the increase in information density, a great deal of information about the
consumer’s past purchases and behavior can be stored and used by online merchants. The result is
a level of personalization and customization unthinkable with existing commerce technologies.
1.2 Forms of E-Commerce
Companies of all type are now engaged in e-commerce. Now a days there are three possibilities of
conducting business.
The first option would be the traditional form of businesses-brick-and-mortal companies (brick
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only). These forms of businesses are characterized by their natural physical existence in the actual
business setting and their entire business operations are not supported by online technologies.
The second option would be pure-click or click only companies which reside in the cyber world.
We can distinguish between pure-dick companies, those that launched a Web site without any
previous existence as a firm, and the third options are brick-and-click companies, existing
companies that added an online site for information and/ or e-commerce.
There are several kinds of pure-click companies: Search engines, Internet Service Providers
(ISPs), commerce sites, transaction sites, content sites, and enabler sites.
Search engines and portals such as Yahoo! and Alta Vista started as search engines and later
added services such as news, weather, stock reports, entertainment, and storefronts hoping to
become the user's point of entry on the Internet. ISPs such as AOL and Compuserv provide
Internet and e-mail connections for a fee. Commerce sites sell books, music, toys, insurance,
stocks, clothes, financial services, and so on. Among the most prominent ones are Amazon,
CDNow, and [Link]. Transaction sites such as auctions and brokerages like eBay and E-
Trade take a commission for transactions conducted on their sites. Content sites such as The
Street, New York Times, and Encyclopaedia
1.5 Advantages and Limitations of E-Commerce
Advantages Some advantages that can be achieved from e-commerce include:
1. Being able to conduct business 24 x 7 x 365: E-commerce systems can operate all day every
day. Your physical storefront does not need to be open in order for customers and suppliers
to be doing business with you electronically.
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2. Access the global marketplace: The Internet spans the world, and it is possible to do
business with any business or person who is connected to the Internet. Simple local
businesses such as specialist record stores are able to market and sell their offerings
internationally using e-commerce. This global opportunity is assisted by the fact that, unlike
traditional communications methods, users are not charged according to the distance over
which they are communicating.
3. Speed: Electronic communications allow messages to traverse the world almost
instantaneously. There is no need to wait weeks for a catalogue to arrive by post: that
communications delay is not a part of the Internet / e-commerce world.
4. Market space: The market in which web-based businesses operate is the global market. It
may not be evident to them, but many businesses are already facing international competition
from web-enabled businesses.
5. Opportunity to reduce costs: The Internet makes it very easy to 'shop around' for products
and services that may be cheaper or more effective than we might otherwise settle for. It is
sometimes possible to, through some online research, identify original manufacturers for
some goods - thereby bypassing wholesalers and achieving a cheaper price.
6. Computer platform-independent: 'Many, if not most, computers have the ability to
communicate via the Internet independent of operating systems and hardware. Customers are
not limited by existing hardware systems' (Gascoyne & Ozcubukcu, 1997:87).
7. Efficient applications development environment: - 'In many respects, applications can be
more efficiently developed and distributed because they can be built without regard to the
customer's or the business partner's technology platform. Application updates do not have to
be manually installed on computers. Rather, Internet-related technologies provide this
capability inherently through automatic deployment of software updates' (Gascoyne &
Ozcubukcu, 1997:87).
8. Allowing customer self service and 'customer outsourcing': People can interact with
businesses at any hour of the day that it is convenient to them, and because these interactions
are initiated by customers, the customers also provide a lot of the data for the transaction that
may otherwise need to be entered by business staff. This means that some of the work and
costs are effectively shifted to customers; this is referred to as 'customer outsourcing'.
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9. Stepping beyond borders to a global view: Using aspects of e-commerce technology can
mean your business can source and use products and services provided by other businesses
in other countries. This seems obvious enough to say, but people do not always consider the
implications of e-commerce.
E-commerce disadvantages and constraints
Some disadvantages and constraints of e-commerce include the following.
1. Time for delivery of physical products: It is possible to visit a local music store and walk
out with a compact disc or a bookstore and leave with a book. E-commerce is often used to
buy goods that are not available locally from businesses all over the world, meaning that
physical goods need to be delivered, which takes time and costs money. In some cases there
are ways around this, for example, with electronic files of the music or books being accessed
across the Internet, but then these are not physical goods.
2. Physical product, supplier & delivery uncertainty: When you walk out of a shop with an
item, it's yours. You have it; you know what it is, where it is and how it looks. In some respects
e-commerce purchases are made on trust. This is because, firstly, not having had physical
access to the product, a purchase is made on an expectation of what that product is and its
condition. Secondly, because supplying businesses can be conducted across the world, it can
be uncertain whether or not they are legitimate businesses and are not just going to take your
money. It's pretty hard to knock on their door to complain or seek legal recourse! Thirdly, even
if the item is sent, it is easy to start wondering whether or not it will ever arrive.
3. Perishable goods: Forget about ordering a single gelato ice cream from a shop in Rome!
Though specialized or refrigerated transport can be used, goods bought and sold via the Internet
tend to be durable and non-perishable: they need to survive the trip from the supplier to the
purchasing business or consumer. This shifts the bias for perishable and/or non-durable goods
back towards traditional supply chain arrangements, or towards relatively more local e-
commerce-based purchases, sales and distribution. In contrast, durable goods can be traded
from almost anyone to almost anyone else, sparking competition for lower prices. In some
cases this leads to disintermediation in which intermediary people and businesses are
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bypassed by consumers and by other businesses that are seeking to purchase more directly
from manufacturers.
4. Limited and selected sensory information: The Internet is an effective conduit for visual and
auditory information: seeing pictures, hearing sounds and reading text. However it does not
allow full scope for our senses: we can see pictures of the flowers, but not smell their fragrance;
we can see pictures of a hammer, but not feel its weight or balance. Further, when we pick up
and inspect something, we choose what we look at and how we look at it. This is not the case
on the Internet. If we were looking at buying a car on the Internet, we would see the pictures
the seller had chosen for us to see but not the things we might look for if we were able to see
it in person. And, taking into account our other senses, we can't test the car to hear the sound
of the engine as it changes gears or sense the smell and feel of the leather seats. There are many
ways in which the Internet does not convey the richness of experiences of the world. This lack
of sensory information means that people are often much more comfortable buying via the
Internet generic goods - things that they have seen or experienced before and about which there
is little ambiguity, rather than unique or complex things.
5. Returning goods: Returning goods online can be an area of difficulty. The uncertainties
surrounding the initial payment and delivery of goods can be exacerbated in this process. Will
the goods get back to their source? Who pays for the return postage? Will the refund be paid?
Will I be left with nothing? How long will it take? Contrast this with the offline experience of
returning goods to a shop.
6. Privacy, security, payment, identity, contract: Many issues arise - privacy of information,
security of that information and payment details, whether or not payment details (eg credit card
details) will be misused, identity theft, contract, and, whether we have one or not, what laws
and legal jurisdiction apply.
7. Defined services & the unexpected: E-commerce is an effective means for managing the
transaction of known and established services, that is, things that are everyday. It is not suitable
for dealing with the new or unexpected. For example, a transport company used to dealing with
simple packages being asked if it can transport a hippopotamus, or a customer asking for a
book order to be wrapped in blue and white polka dot paper with a bow. Such requests need
human intervention to investigate and resolve.
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8. Personal service: Although some human interaction can be facilitated via the web, e-
commerce can not provide the richness of interaction provided by personal service.
For most businesses, e-commerce methods provide the equivalent of an information-rich
counter attendant rather than a salesperson. This also means that feedback about how people
react to product and service offerings also tends to be more granular or perhaps lost using e-
commerce approaches. If your only feedback is that people are (or are not) buying your
products or services online, this is inadequate for evaluating how to change or improve your
e-commerce strategies and/or product and service offerings.
9. Size and number of transactions: E-commerce is most often conducted using credit card
facilities for payments, and as a result very small and very large transactions tend not to be
conducted online. The size of transactions is also impacted by the economics of transporting
physical goods. For example, any benefits or conveniences of buying a box of pens online from
a US-based business tend to be eclipsed by the cost of having to pay for them to be delivered
to you in Australia.
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