Hoofdstuk 10: E-commerce

1. Hoofdstuk 10: E-commerce

2. Overzicht • Introduceren van e-business • Types • Successen en mislukkingen • Economische impact • Impact op de waardeketen • Bedrijfsmodellen op het web • B2B technologieën en bedrijfsmodellen • On line advertising • Web analytics

3. E-Commerce and E-Business • E-Commerce (EC): process of buying and selling goods and services electronically • Any electronic means, not just the Internet • Two sides to consider for a company: • buying from suppliers • selling to customers • E-Business (EB): e-commerce + the use of Internet and other digital technologies for performing (internal) business processes and coordinating with suppliers and partners; more fashionable term…

4. Categories of Electronic Commerce • In terms of nature of participants • Business-to-Consumer (B2C): retailing products and services to individual shoppers • Business-to-Business (B2B): sales of goods and services among businesses • Consumer-to-Consumer (C2C): consumers selling to consumers • In terms of participants' connection (touch point) • Through a PC • Mobile commerce (m-commerce): using handheld wireless devices (e.g. Internet-enabled mobile phone or PDA) • Location-based commerce (l-commerce): m-commerce transactions targeted to individuals in specific locations, at specific times • Using interactive digital TV (sometimes called “t-commerce”)

5. E-Business: Related Areas • E-Learning: use of ICT in learning/teaching (e.g. web-based distance learning programmes) • E-Government: use of ICT in government and public services to improve efficiency and provision of information and services • G2C (government-to-citizen) • G2B (government-to-business) • G2G (government-to-government) • The list goes on: e-health, e-culture, …

6. INFORMATION PHYSICAL+ INFORMATION Commerce in General BUYER FINDS SELLER SELECTION OF GOODS NEGOTIATION SALE PAYMENT DELIVERY POST-SALE ACTIVITY

7. INFORMATION PHYSICAL+ INFORMATION E-Commerce SOME TECHNOLOGIES USED: SOME INFORMATION GATHERED: SEARCH ENGINE SEARCH BEHAVIOR BUYER FINDS SELLER ON-LINE CATALOG BROWSING BEHAVIOR RECOMMENDER AGENT CUSTOMER PREFERENCES CONFIGURATOR SELECTION OF GOODS EFFECTIVENESS OF PROMOTIONS SHOPPING BOT BARGAINING STRATEGIES AGGREGATOR INTERNET PRICE SENSITIVITIES NEGOTIATION AUTOMATED AGENTS PERSONAL DATA TRANSACTION PROCESSOR SALE MARKET BASKET DATA INTERCHANGE CREDIT/PAYMENT INFORMATION CRYPTOGRAPHY PAYMENT E-PAYMENT SYSTEMS DELIVERY REQUIREMENTS DELIVERY TRACKING AGENT ON-LINE PROBLEM REPORTS ON-LINE HELP POST-SALE ACTIVITY CUSTOMER SATISFACTION BROWSER SHARING FOLLOW-ON SALES OPPORTUNITIES INTERNET TELEPHONY

8. Electronic Delivery? • Delivery of services • Delivery of services can be done 100% electronically, with considerable cost reduction potential  online service industry is growing rapidly • Examples: electronic banking, online securities trading, online job markets, travel services, real estate transactions, etc. • Delivery of products • A few “digitised” products: mp3s, e-books, … • For other types of products, finding a cost-effective physical delivery strategy is a key issue

9. Order Fulfilment and Logistics • Order fulfilment: all of the activities needed to provide customers with ordered goods and services, including related customer services • Logistics: the operations involved in the efficient and effective flow and storage of goods, services, and related information from point of origin to point of consumption • Traditional vs. “e”-logistics • traditionally: large amounts of materials to a few destinations • e-logistics: typically small parcels sent to many homes (in B2C) • Reverse logistics • The movement of returns from customers to vendors • Third-party logistics (3PL) suppliers

10. Types of Companies in the “New Economy” • Bricks-and-mortar (or “old-economy”): traditional companies based in the physical world only. • Pure-play (or virtual) organisations are companies that are engaged only in electronic commerce. • Clicks-and-mortar organisations are those that conduct some e-commerce activities, yet their primary business is done in the physical world.

11. Potential Advantages of B2C E-Commerce • May eliminate need for maintaining physical shop front • Reduced transaction costs; increased transaction speed • Ease of crossing geographical boundaries • Web sites available 24/7 • Ease of updating existing and distributing new information • Providing additional value for customers • Internet: universal, easy-to-use set of technologies and standards • Empowers smaller companies … but success is far from guaranteed!

12. NASDAC INDEX The Dot Com Bubble Burst • A typical "dot-com" company relied on network effects to justify losing money to build market share, or even mind share, through giving their product away in the hope that they could eventually charge for it. • Stock market bubble: occurs when speculators note the fast increase in value and decide to buy in anticipation of further rises, rather than because the shares are undervalued. • The bubble burst in late 2000 and through 2001.

13. Dot Com Failures: Pets.com “You did not need to have a doctorate in economics to see that many of these dot-com companies wouldn't work. Take Pets.com, which sold pet supplies online. Imagine you just ran out of dog food and kitty litter. What do you do? Do you run to the nearest hardware store and pick some up? Or do you go online, order it, then wait four to six weeks while your dog starves and your cat shits all over the living room floor.” (Philip J. Kaplan)

14. Not the failure of B2C altogether • At the end of 2002, 40% of surviving dot-coms and 70% of online retailers in the US were reporting profits (Business Week 2003) • Amazon started making profits in the 4th quarter of 2001 • Estimated quarterly U.S. retail e-commerce sales as a percent of total quarterly retail sales, 1999(4Q)-2006(3Q): Source: http://www.census.gov/mrts/www/ecomm.html [accessed Feb. 2007]

15. And B2C is just part of the story Things to bear in mind about e-business: • Not necessarily with the consumer B2B: much larger share of overall revenue “The dollar value of B2B comprises at least 85 percent of the total transaction value of e-commerce” (Source: 2003 eMarketer report, quoted in Turban 2006, p.195) • Not necessarily using Internet & WWW Majority of B2B still uses EDI technology

16. How is B2B Different from B2C? • More complex process that may involve extensive negotiation over prices, product specifications, etc. • Often longer-term, higher stickiness • Need for systems integration buyer/seller; additional technologies • Focus on realising process cost efficiencies • Collaborative commerce • ...

17. Internal Integration (does Marketing talk to Operations?) External Integration (does the firm talk to the outside world?) Key Areas of E-Business: Example Setting Build-to-order (e.g. Dell) or Ship-to-order (e.g. Amazon) Enterprise Suppliers (e.g. computer components, book publishers) Consumers (B2C) CRM world (B2B) SCM world ERP, EAI, …

18. Front/Back Office; Systems Integration • Back-office operations: the activities that support fulfilment of sales, such as accounting and logistics • Front-office operations: the business processes, such as sales and advertising, that are visible to customers • Need to integrate front & back office processes and systems • Examples of systems integration: • E.g., when a customer browses / orders a product online (front-end system), the product description, inventory count, and order information are likely to be retrieved from / stored in one or more databases (back-end system) • Integration with ERP, CRM, SCM software, etc. • Enterprise Application Integration (EAI) software

19. (Source: Turban 2006, p.28) Limitations & Barriers for E-Business Adoption

20. Reducing Transaction Costs • The Internet (potentially) reduces transaction costs • Finding buyers: no mass-mailing of expensive brochures, or expensive TV and radio ads • Fully automatic collection of payments • (in some cases:) Delivering product • Support: email, FAQ, user forums instead of person-to-person

21. Economic Impact of Digitisation • Traditional economic cost structure: Source: V. Grover & P. Ramanlal, Digital economics and the e-business dilemma, Business Horizons 47(4), 2004, p.71-80

22. Economic Impact of Digitisation (contd.) • Economics of digital production costs: Source: V. Grover & P. Ramanlal, Digital economics and the e-business dilemma, Business Horizons 47(4), 2004, p.71-80

23. Economic Impact of Digitisation (contd.) • Cost structure of digital products or services: • Near-unlimited economies of scale; no or few capacity constraints • High fixed costs (intellectual capital vs. plant and equipment) • Fixed costs incurred early and may not be recoverable • Marginal costs approaching zero • Four “information age” strategies to create competitive advantage (Grover & Ramanlal): • Versioning • Confounding: make it difficult for buyers to compare • Creating network effects (and charge for value derived from it…) • Preemptive pricing

24. Impact on Value Chain • The Internet offers a new distribution channel • Channel conflict vs. cooperation • The Internet has led to the unbundling of information from traditional value chain channels • Disintermediation: getting rid of the “middle-man” • Reintermediation: new types of middle-men • The Internet is allowing companies to work more closely with suppliers and other business partners

25. Industry Value Chain Firm Value Chain and Industry Value Chain Firm Value Chain

26. Disintermediation • Disintermediation: removal of intermediary steps in a value chain, e.g., selling directly to consumers  lower purchase transaction costs  potential price advantages Example taken from: Laudon & Laudon, Essentials of Information Systems, 2005

27. Channel Conflict • Channel conflict: tension among different distribution chains for the same product or service • Channel member perceives another channel to be engaged in behaviour that prevents or impedes it from achieving its own goals • Web-based direct sales channel  Risk of alienating traditional sales reps (internal conflicts), distributors (external conflicts), … Threats may include lockouts or even lawsuits by distributors • Disintermediation is usually not instantaneous: how to placate partners in the distribution channel while taking steps toward the eventual demise of these relationships? • Channel cooperation

28. Reintermediation • Reintermediation: shifting of the intermediary function in a value chain to a new source • Delivery, e.g., becomes a critical part of overall customer satisfaction (Royal Mail, DHL, UPS, …) • New intermediaries: information brokers, net marketplaces, intelligent agents, …

29. Porter's Competitive Forces Model • Five major forces of competition determine industry structure and how economic value is divided among the industry players in an industry • Analysis of these forces helps companies develop their competitive strategy

30. Source: Porter, M. E. (2001), Strategy and the Internet, Harvard Business Review, 79(3), p. 62-78 suggested reading included in Appendix 8

31. Impact on Value Chain (contd.) • The Internet has changed relations with suppliers and other business partners • Increased opportunities for integration • Lower entry barriers (lower setup cost) • Increased flexibility choosing partners • Lower switching costs • Net marketplaces

32. Common Revenue Models Source: Turban, E. et al., Electronic Commerce 2006: A Managerial Perspective, Prentice Hall, 2006, p.21

33. Impact on Business Models The Internet is changing business models by: • giving rise to new kinds of business models Examples: iTunes, Google, … • reinventing tried-and-true models Example: eBay

34. Brokerage Model Net marketplace Auction broker Transaction broker ... Advertising Model Portal Search-based advertising … Infomediary Model Merchant Model Manufacturer (Direct) Model Affiliate Model Community Model Subscription Model Utility Model A Classification of Business Models

35. Brokerage Model • Brokers are market-makers: they bring buyers and sellers together and facilitate transactions • Usually a broker charges a fee or commission for each transaction it enables • Common in B2B, B2C, C2C • Can take on many forms: • B2B net marketplace • Auction Broker • Transaction Broker: provides a third-party payment mechanism for buyers and sellers to settle a transaction • Example: PayPal • Expedia, Travelocity, Orbitz, ...

36. E-Auctions • Auctions (e.g. eBay): market mechanism by which sellers place offers and buyers make sequential bids; auction broker charges the seller a listing fee and commission scaled with the value of the transaction • Forward vs. reverse auctions • Forward auctions: auctions that sellers use as a selling channel to many potential buyers; items are placed at sites for auction and buyers bid continuously for the items. • Reverse auctions: have one buyer, usually an organisation, that wants to buy a product/service; suppliers are invited to submit bids. • The Internet facilitates dynamic pricing • Liquidation auctions vs. market efficiency auctions

37. Proxy Bidding and Sniping Software • Proxy bidding: allows a bidder to • state a maximum bid for an item • place new bids without actually being in front of their computer eBay's system: http://pages.ebay.com/help/buy/proxy-bidding.html • Sniping: bidding at the last possible moment, hence minimising chance of driving up the price during the auction • Sniping software/services: handle the actual transaction • Decide on bid just above what you think will be the highest proxy bid, and on a time to place the bid, and the software does it for you • One shot to get it right • Possibility to bid for the same item at multiple auctions and automatically retract other outstanding bids if you win one auction (if allowed…)

38. Typical Unfair Practices in Online Auctions • “Puffing” or “shilling”, which means fake bidding by initiator or proxy participants to drive the price up/down • The setting of unrealistic target prices • Fake/hidden identity of bidders/initiators • Non acceptance of best bid • Hidden reserve prices (unless allowed) • Price dumping • Auction rings, bid shielding and other collusion Note: plenty of academic research on auction models!

39. An Electronic Payment Broker: PayPal

40. Manufacturer (Direct) Model • Direct Model: a manufacturer (i.e. a company that creates a product or service) reaching buyers directly and thereby compressing the distribution channel • Typical example: Dell

41. Other Examples of Business Models • Content Provider • Provides digital content • Example: news service (offering streamed video, e.g. CNN) • Customer usually charged a periodic fee to subscribe to the service • Advertising can also provide revenue • Web Portal • Initial point of entry to the web • Often started out as a search engine or directory; includes varied content or services which can usually be further customised (e.g. Yahoo!, MSN, AOL, …) • Attractive for advertisers when the volume of viewer traffic is large or highly specialised (niche portals serving a particular demographic)

42. Internal Integration (does Marketing talk to Operations?) External Integration (does the firm talk to the outside world?) Key Areas of E-Business: Example Setting Build-to-order (e.g. Dell) or Ship-to-order (e.g. Amazon) Enterprise Suppliers (e.g. computer components, book publishers) Consumers (B2C) CRM world (B2B) SCM world ERP, EAI, …

43. Supply Chain Management (SCM) • “Supply chain management is the coordination of production, inventory, location, transportation, and information among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served.” (Hugos, Essentials of Supply Chain Management, 2003) • e-SCM: collaborative use of technology for SCM

44. Some Predictions Made in 2000… • A Gartner report estimated that a staggering $7.3 trillion worth of global corporate spending would go through the Internet in 2004, up from $145 billion in 1999. • By 2005, “the entire supply chain between suppliers and buyers will be automated.” (Geri Spieler, Gartner analyst) • “Any company will be able to order anything on the Web and have it customised.” (id.). (Source: NY Times, May 7, 2003) In reality: • Not all industries similarly affected by B2B e-commerce • Computer, automotive, aerospace and defence, and industrial equipment industries probably moving fastest

45. The Traditional Supply Chain • A chain is something linear... • Point-to-point B2B Tier 3Suppliers Tier 2Suppliers Tier 1 Suppliers

46. The Future Internet-Driven Supply “Network” • Chains evolving into collaborative networks • Virtual companies • Exchanges • Not quite there yet... (Picture taken from: Laudon & Laudon, Essentials of MIS)

47. B2B Technologies • Traditional EDI • Internet/XML-based frameworks

48. Traditional B2B Technologies: EDI • Electronic Data Interchange (EDI): • Transfer of electronic data from one organisation's computer system to another's in a commonly agreed format • To be processed by the receiver's computer system without the need for human interpretation • Set of hardware and software that accommodate the EDI process • Often involves third-party service provider (‘value-added networks’) • International standards bodies and proposed standards Europe: UN/EDIFACT (EDI for Administration, Commerce and Transport); US: X12 • Used since 1980s to automate routine transactions between established trading partners • Long-term, point-to-point, and tightly coupled relationships • Still widely used in B2B integration practice

49. B2B Technologies: EDI (contd.) • Examples of EDI relationships • Manufacturer(s) working together with supplier(s) • Large EDI groups (e.g. SWIFT: international financial transfers)

50. Company A EDI to Internal Internal to EDI Middleware Middleware Company B Internal to EDI Middleware EDI EDI to Internal Middleware Company C EDI to Internal Internal to EDI Middleware Middleware B2B Technologies: EDI (contd.)