Electronic Commerce

1. Electronic Commerce Yan Xiong College of Business CSU Sacramento 9/25/03

2. Agenda • What is Electronic Commerce? • Understanding the Internet • IT components of Electronic Commerce • Control issues related to Electronic Commerce • E-Payment

3. “In a few years' time, there will be no Internet companies - there will just be companies - and all companies that will operate in the future, will be Internet companies.” -A. Grove, ~1999

4. E-Business “Electronic business (e-business) is the use of information technology and electronic communication networks to exchange business information and conduct transactions in electronic, paperless form.” Glover, Liddle and Prawitt

5. Types of E-Commerce • Business to Business (B2B) • Business to Customer (B2C) • Various others (e.g., Government to Customers) • Were projected to grow at same rate • BUT . . . then came “dot.com failures”

6. E-Business Forecast ** ** Forrester and Gartner Groups (2000)

7. Add proliferation line Where we’ve been Discovery High Expectations Reality Check Pragmatic Adoption 2000 2001 2002 1999

8. Machine to Machine Progression Forecast Order Contract Manufacturers Distributors Ship Notice Inventory Forecast Quality Data Customers Invoice Payment Build Signal Ship Notice Orders Forecast Suppliers Payment Logistics Invoice Product Information Order Order Ack. Payment • Rosettanet standardizes format and choreography for transactions • Web services exposes business capabilities as real-time executable functions • Look for the best of both to merge Advanced Ship Notice Invoice Inventory Reporting Receipt Notification Web services EDI FTP Rosettanet

9. EDI • Electronic Data Interchange • Mature technology (15 years) now being moved to Internet • Mainframe computers • Batch processing • Using value added network (VAN) • Standards have been developed Accounting standards recently

10. Typical EDI Transaction Manufacturer Purchase Order Value-Added Network Purchase Order Confirmation Confirmation Supplier E-mail using ANSI X12 standard

11. EDI Disadvantages • Changes limited by EDI structure-serial process • EDI using VANs costly • Works best between pairs of companies • Difficult for small firms to participate Cisco has small firms use web service

12. Financial Electronic Data Interchange (FEDI) • Use of EDI to exchange information is only part of buyer-seller relationship in B2B electronic commerce • Electronic funds transfer (EFT): making cash payments electronically • EFT done through Automated Clearing House (ACH) network

13. Emerging B2B Problems • Antitrust issues • Control issues • Virus and security problems • Privacy of data issues • Problems greater than with traditional business enterprises due to multiplicity of players

14. B2C Effects • Globalization of markets • One-to-one marketing • Customization of products / services • Integration of systems with clients • Dell linked to clients intranets • Intel has to improve Taiwan Phone Company

15. B2C Effects • E-service not even envisaged before • e.g., UPS adding computer setup service to Dell’s provisioning • Commoditization of products • Commodity is product with narrow profit margins and no major brand differentiation in price • e.g., printers

16. B2C Opportunities • Companies can create electronic catalogs on Web sites to totally automate sales order entry • Electronic commerce applications can also improve quality of post-sales customer support

17. B2C Opportunities • For products that can be digitized : • (books, software, music) • inbound / outbound logistics steps of value chain can be performed electronically • Improve efficiency / effectiveness of value chain support activities

18. $1.07 $0.39 $0.01 Tellers ATMs Online Bank Per-transaction Costs E-Business

19. Home Heating Case • Downes and Mui • East Coast client • Part of larger oil and gas retail operation • 17% share of total market • Only 4% of direct sales to residents

20. Home Heating Oil • OPPORTUNITIES: • Sales to residents accounted for 75% of profits • Sales to independent distributors at a much lower margin than to residential customers

21. Home Heating Oil • PROBLEMS: • Company’s brand name not strong • 70% of residential customers over age of 50 • Exit costs too high to walk away from business

22. Heating Oil Case • SOLUTION: • Bypass distributors • Break industry rules • Destroy its own Value Chain • Prospects so poor, they had little to lose • New “Virtual Fuel Company” (VFC)

23. Virtual Fuel Company • Early stages: • Customers can order via telephone or Web • Longer term: • Connect sensors from home heating tanks to production facilities • Over wireless network or internet

24. Virtual Fuel Company • Will be able to tell customer when it is time to reorder • Maybe JIT system? • Fuel truck pulls up to residence just when heating oil tank reaches empty

25. New Model Advantages • No expensive sales or distribution function • Outsource order process to customer • Compete aggressively with local dealers on price • Reverse local dealer advantage of location and personal relationships

26. Heating Oil Case • BOTTOM LINE: “ . . .a disadvantaged player already in the industry decided to solve its problem by wrecking the business model for everyone.” Downes and Mui

27. But . . . . • . . .what does this have to do with accounting? • electronic transactions more difficult to track / control • fuzzy borders between firms (e.g., vendors / customers) • revenue recognition • auditing becomes more difficult

28. So . . . • . . . let’s learn some more about this beast that we have to tame: • how the Internet works • IT components • control issues • e-payments

29. Agenda • Understanding the Internet

30. Internet Layers Infrastructure Layer Application Layer Intermediary Layer Commerce Layer

31. Infrastructure Layer • Companies providing products and services to create Internet provider (IP) network infrastructure • Includes: • Internet Service Providers (ISPs) • security vendors • fiber optics vendors • telecommunications companies

32. Application Layer • Enables business activities to be performed online • Provides software production and services to facilitate Web transactions • Includes: • Web development software • search engine software • Web databases

33. Intermediary Layer • Increases efficiency of electronic markets by facilitating interaction between buyers and sellers • Acts as mechanism for transaction processing through previous layers • Includes: • brokerages • online travel agents • online advertising

34. Commerce Layer • Sales of products and services over the Internet to consumers and businesses • Includes: • “e-tailers” • manufacturers selling online • subscription-based services • online entertainment • airlines selling tickets online

35. Definitions • IP: Internet protocol • IP Address: message destination • Message Packet: String of data, each carrying IP and IP Address • Regional Node: Meshing of transmission lines

36. POP Phone Lines Local bank of modems – Point of Presence Phone Company DSL Modem Phone Lines Cable Modem Cable Node CONNECTION OPTIONS Dial-up Modem You ISP Internet Service Provider Neighborhood

37. Connection Options • Dialup Modem: can make local call to access Internet • DSL Modem: regular phone service and Internet service, on same line at same time • Cable Modem: the more neighbors accessing node at same time, the slower the connection

38. E-mail Messages IPO Domain Name Server (DNS) Message sits on the E-mail server until receiver logs on; then message sent. log-on Recei- vor E-mail Server

39. Servers • High capacity computer • contains network software • Handles: • communication • storage • resource sharing • Application software / data common to all users

40. Internet Protocols • Protocol: guidelines computers use to talk to one another • Internet Protocol (IP): for moving raw data • Transmission Control Protocol(TCP): for making sure that data arrives intact • Putting them together = TCP / IP

41. Agenda • IT components of Electronic Commerce

42. Types of Networks • Global networks used by many companies to conduct e- commerce and to manage internal operations consist of: • Private portion owned or leased by the company • The Internet

43. Private Portion • Local area network (LAN): system of computers and other devices (printers) located in close proximity to each other • Wide area network (WAN): covers a wide geographic area

44. Nodes in close proximity to each other e.g., same building Owned by using organization e.g., not leased from carrier LAN

45. Simplicity Group production Data sharing Faster data transfer Cheaper Easier resource control Why a LAN?

46. WANs • Companies typically own all equipment for local area network (LAN) • Usually don’t own long-distance data communications connections of wide area network (WAN) • Either contract to use value-addednetwork (VAN) or use the Internet

47. Intranets • Internal networks connecting to main Internet • Can be navigated with same browser software, but are closed off from general public

48. Extranets • Link the intranets of two or more companies • Either Internet or VAN can be used to connect companies forming extranet • Value-added networks (VAN) more reliable and secure than Internet • but more expensive

49. Network Types • Value-added Network (VAN) • large-scale telecommunications networks • leased connections to clients • charge based on usage • Virtual Private Network (VPN) • less expensive (public network) • encrypt all packets

50. What is a VPN? • Info-Tech Research Group DotComAdvisor • Network encrypted with special security protocol • Requires a server for authenticating remote users