Electronic Commerce, Tenth Edition 1-1

Chapter 1
Introduction to Electronic Commerce

At a Glance

Instructor’s Manual Table of Contents

 Overview

 Objectives

 Teaching Tips

 Quick Quizzes

 Class Discussion Topics

 Additional Projects

 Additional Resources

 Key Terms
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Lecture Notes

Overview
In the late 1990s, electronic commerce was still emerging as a new way to do business; at
that time, most companies were doing very little buying or selling online. They still were
selling products in physical stores or taking orders over the telephone and by mail.
However, a few companies had established solid footholds online. Amazon.com was a
rapidly growing bookseller and eBay had taken the lead as a profitable auction site. The
business of providing search tools for finding information online was dominated by a few
well-established sites, including AltaVista, HotBot, Lycos, and Yahoo!. Most industry
observers at that time believed that any new search engine Web site would find it very
difficult to compete against these established operations.

Chapter Objectives
In this chapter, students will learn about:
 What electronic commerce is and how it has evolved into a second wave of growth
 Why companies concentrate on revenue models and the analysis of business processes
instead of business models when they undertake electronic commerce initiatives
 How economic forces have created a business environment that is fostering the
continued growth of electronic commerce
 How businesses use value chains and SWOT analysis to identify electronic commerce
opportunities
 The international nature of electronic commerce and the challenges that arise in
engaging in electronic commerce on a global scale

Teaching Tips
Electronic Commerce: Into the Third Wave

1. In this section, you will define electronic commerce and describe its evolution from the
first wave into the second wave and outline prospects for movement into a third wave of
development.

Electronic Commerce and Electronic Business

1. Introduce the terms electronic commerce (e-commerce), electronic business (e-

business), and dot-com/pure dot com.
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Categories of Electronic Commerce

1. Introduce the five general electronic commerce categories: business-to-consumer,

business-to-business, business processes, consumer-to-consumer, and business-to-
government. Figure 1-1 presents a rough approximation of the relative sizes of the three
main categories of electronic commerce.

2. Briefly describe consumer-to-consumer and business-to-government as two additional

categories of electronic commerce recognized by some researchers.

3. Figure 1-2 provides a summary of the five main categories of electronic commerce.

4. Introduce the terms supply management/procurement, e-procurement, activity,

transaction, business processes, and telecommuting/telework.

The Development and Growth of Electronic Commerce

1. The Internet has changed the way people buy, sell, hire, and organize business activities
in more ways and more rapidly than any other technology in the history of business.

2. The following topics should also be discussed:

 Electronic Funds Transfers (EFTs): Explain that, for more than 40 years,
banks have been using electronic funds transfers (EFTs, also called wire
transfers).
 Electronic Data Interchange (EDI): Introduce the terms trading partners and
value added network (VAN).

The Dot-Com Boom, Bust, and Rebirth

1. Note that one force driving the growth in online sales to consumers is the ever-
increasing number of people who have access to the Internet.

2. In addition to the growth in the B2C sector, B2B sales online have been increasing
steadily for almost two decades. Figure 1-3 depicts actual and estimated online sales in
B2C and B2B categories.

The Second Wave of Electronic Commerce

1. Compare the evolution of electronic commerce to other historic changes in economic

organization, e.g., the Industrial Revolution.

2. Identify aspects of the first wave of electronic commerce, predominantly a U.S.

phenomenon.
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3. Explain that, in the first wave of electronic commerce, easy access to start-up capital led
to an overemphasis on creating new large enterprises to exploit electronic commerce
opportunities.
4. Note that the increase in broadband connections in homes is a key element in the B2C
component of the second wave.

5. Highlight the fact that the use of electronic mail (or e-mail) in the first wave was as a
tool for relatively unstructured communication. In the second wave, sellers are using e-
mail as an integral part of their marketing and customer contact strategies.

6. Emphasize that the increasing availability of wireless Internet connections has increased
the volume and nature of B2B electronic commerce.

7. Describe the concept and examples of Web 2.0.

Teaching Students can learn more about Web 2.0 from the Web 2.0 Journal:
Tip http://web2.sys-con.com/.

8. Introduce the term first-mover advantage.

9. Review the summary of key characteristics of the first and second waves in Figure 1-4.

The Third Wave Begins

1. Discuss the rise of mobile commerce (m-commerce) and the increasing use of smart
phones and tablet computers.

2. Stress that one of the most important changes brought about by fully operational
handheld devices is that the Internet becomes truly available everywhere.

3. Tracking technologies are increasingly integrated with each other and with
communication systems allowing companies to communicate with each other and share
transaction, inventory level, and customer demand information effectively. Provide
students with examples.

4. Briefly explain how Web 2.0 technologies that enabled part of the growth in electronic
commerce that occurred in the second wave will play a major role in the third wave.
Describe social commerce.

Quick Quiz 1
1. A(n) ____ is an exchange of value, such as a purchase, a sale, or the conversion of raw
materials into a finished product.
Answer: transaction
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2. The group of logical, related, and sequential activities and transactions in which
businesses engage are often collectively referred to as ____.
Answer: business processes

3. ____ occurs when one business transmits computer-readable data in a standard format
to another business.
Answer: Electronic data interchange (EDI)

4. Businesses that engage in EDI with each other are called ____.
Answer: trading partners

5. ____ is the general term for a group of technologies have emerged and combined to
make new businesses possible on the Web.
Answer: Web 2.0

Business Models, Revenue Models, and Business Processes

1. Introduce the terms business model and revenue model.

To learn more about a framework for business models, read the following article:
Teaching http://www.businessweek.com/managing/content/jan2010/ca20100122_888042.
Tip htm.

Focus on Specific Business Processes

1. Accentuate that, although much of this book is devoted to explaining technologies, the
book’s focus is on the business of electronic commerce; the technologies only enable
the business processes.

Role of Merchandising

1. Define merchandising.

2. Note that the skills of merchandising and personal selling can be difficult to practice
remotely. However, companies must be able to transfer their merchandising skills to the
Web for their Web sites to be successful.

Product/Process Suitability to Electronic Commerce

1. Introduce the terms commodity item and shipping profile.

2. Explain that a product that has a strong brand reputation is easier to sell on the Web
than an unbranded item, because the brand’s reputation reduces the buyer’s concerns
about quality when buying that item sight unseen.
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Electronic Commerce: Opportunities, Cautions, and Concerns

1. Note that electronic commerce is not something that every business should necessarily
undertake.

Opportunities for Electronic Commerce

1. Introduce the terms virtual community and social networking sites.

Teaching Ask students to discuss virtual communities in which they participate.

Tip

2. Students should be able to identify the benefits of electronic commerce, such as its
ability to increase the speed and accuracy with which businesses can exchange
information, reducing costs on both sides of transactions.

3. Note also that the benefits of electronic commerce extend to the general welfare of
society. Electronic payments of tax refunds, public retirement, and welfare support cost
less to issue and arrive securely and quickly when transmitted over the Internet.

Electronic Commerce: Cautions and Concerns

1. Point out that, most of the cautions and concerns regarding electronic commerce today,
stem from the rapidly developing pace of the underlying technologies and the reluctance
of people to change the way they do things. These barriers have disappeared for many
types of online business and will continue to disappear as electronic commerce matures
and becomes more generally accepted.

 The Need for Critical Mass: Provide examples of products and services that
require a critical mass of potential buyers be equipped and willing to buy
through the Internet.

Predictability of Costs and Revenues

1. Briefly describe the challenge for businesses surrounding return-on-investment

calculations and employee recruitment and retention.

Technology Integration Issues

1. Highlight the difficulty of integrating existing databases and transaction-processing

software designed for traditional commerce into the software that enables electronic
commerce.

Cultural and Legal Concerns

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1. Outline aspects of cultural and legal obstacles to conducting all types of electronic
commerce.
Quick Quiz 2
1. A(n) ____ is a product or service that is hard to distinguish from the same products or
services provided by other sellers; its features have become standardized and well
known.
Answer: commodity item

2. A(n) ____ is a specific collection of business processes used to identify customers,

market to those customers, and generate sales to those customers.
Answer: revenue model

3. A(n) ____ is a set of processes that combine to achieve a company’s goal, which is to
yield a profit.
Answer: business model

4. A product’s ____ is the collection of attributes that affect how easily that product can be
packaged and delivered.
Answer: shipping profile

5. ____ are Web sites that individuals and businesses use to conduct social interactions
online
Answer: Social networking sites

Economic Forces and Electronic Commerce

1. Introduce the formal definition of market and the term hierarchical business
organizations/firms/companies.

Transaction Costs

1. Be sure to mention that a significant component of transaction costs can be the

investment a seller makes in equipment or in the hiring of skilled employees to supply
the product or service to the buyer.

Markets and Hierarchies

1. Introduce the terms vertical integration and strategic business unit (SBU)/business
unit.

Using Electronic Commerce to Reduce Transaction Costs

1. Mention that businesses and individuals can use electronic commerce to reduce
transaction costs by improving the flow of information and increasing the coordination
of actions.
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Network Economic Structures

1. Introduce the terms network economic structure, strategic alliances/strategic

partnerships, virtual companies, and strategic partners.

2. Explain why network organizations are particularly well suited to technology industries
that are information intensive. Note that electronic commerce can make networks,
which rely extensively on information sharing, much easier to construct and maintain.
Some researchers believe that these network forms of organizing commerce will
become predominant in the near future.

Network Effects

1. Introduce the terms law of diminishing returns and network effect.

2. Regardless of how businesses in a particular industry organize themselves—as markets,

hierarchies, or networks—students will need a way to identify business processes and
evaluate whether electronic commerce is suitable for each process.

Quick Quiz 3
1. ____ are the total of all costs that a buyer and seller incur as they gather information
and negotiate a purchase-and-sale transaction.
Answer: Transaction costs

2. The practice of an existing firm replacing one or more of its supplier markets with its
own hierarchical structure for creating the supplied product is called ____.
Answer: vertical integration

3. Entities that come together as a team for a specific project or activity are called ____.
Answer: strategic partners

4. A(n) ____ is one particular combination of product, distribution channel, and customer
type.
Answer: strategic business unit, business unit

5. As more people or organizations participate in a network, the value of the network to

each participant increases. This increase in value is called a(n) ____.
Answer: network effect

Identifying Electronic Commerce Opportunities

1. Explain that one way for students to focus on specific business processes as candidates
for electronic commerce is to break the business down into a series of value-adding
activities that combine to generate profits and meet other goals of the firm.
Electronic Commerce, Tenth Edition 1-10

2. Define the term industry.

Strategic Business Unit Value Chains

1. Introduce the terms value chain, primary activities, and supporting activities.

Industry Value Chains

1. Define the terms value system and industry value chain.

2. Note that, by becoming aware of how other business units in the industry value chain
conduct their activities, managers can identify new opportunities for cost reduction,
product improvement, or channel reconfiguration.

3. Explain that, when firms are considering electronic commerce, the value chain can be
an excellent way to organize the examination of business processes within their
business units and in other parts of the product’s life cycle.

SWOT Analysis: Evaluating Business Unit Opportunities

1. Explain the importance of SWOT analysis (strengths, weaknesses, opportunities and

threats).

2. Point out that most electronic commerce initiatives add value by either reducing
transaction costs, creating some type of network effect, or a combination of both.

International Nature of Electronic Commerce

1. Note the rapidly increasing proportion of online business activity based outside the
United States.

2. Discuss the key issues that any company faces when it conducts international
commerce: trust and culture, language, government, and infrastructure.

Trust Issues on the Web

1. Explain that companies with established reputations in the physical world often create
trust by ensuring that customers know who they are.

2. Discuss the rationale for the following statement: For businesses to succeed on the Web,
they must find ways to quickly generate the trust that traditional businesses take years to
develop.

Language Issues

1. Explain the phrase, “think globally, act locally.”

Electronic Commerce, Tenth Edition 1-11

2. Outline that the first step that a Web business usually takes to reach potential customers
in other countries, and thus in other cultures, is to provide local language versions of its
Web site. Note that this may mean translating the Web site into another language or
regional dialect.

3. Introduce machine translation and localization.

Cultural Issues

1. Emphasize the following points: An important element of business trust is anticipating

how the other party to a transaction will act in specific circumstances. A company’s
brand conveys expectations about how the company will behave; therefore, companies
with established brands can build online businesses more quickly and easily than a new
company without a reputation.

2. Define the term culture.

Culture and Government

1. Note that the censorship of Internet content and communications restricts electronic
commerce because it prevents certain types of products and services from being sold or
advertised. Further, it reduces the interest level of many potential participants in online
activities.

2. Some countries, although they do not ban electronic commerce entirely, have strong
cultural requirements that have found their way into the legal codes that govern
business conduct.

Infrastructure Issues

1. Point out that businesses that successfully meet the challenges posed by trust, language,
and culture issues still face the challenges posed by variations and inadequacies in the
infrastructure that supports the Internet throughout the world.

2. Introduce the terms freight forwarder, customs broker, and bonded warehouse.

Quick Quiz 4
1. A(n) ____ is a way of organizing the activities that each strategic business unit
undertakes to design, produce, promote, market, deliver, and support the products or
services it sells.
Answer: value chain

2. A(n) ____ is a company that arranges shipping and insurance for international
transactions.
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Answer: freight forwarder

3. A(n) ____ is a secure location where incoming international shipments can be held until
customs requirements are satisfied or until payment arrangements are completed.
Answer: bonded warehouse

4. ____ means a translation that considers multiple elements of the local environment,
such as business and cultural practices, in addition to local dialect variations in the
language.
Answer: Localization

Class Discussion Topics

1. How does the international nature of e-commerce affect its infrastructure?

2. What steps should be taken to overcome the cultural issues of electronic commerce?

3. Describe the changes in the types of businesses participating in electronic commerce as

technology advances have occurred through the first, second, and third wave.

Additional Projects
1. Look at the following Web site: www.jpeterman.com/. Use SWOT analysis to evaluate
the business strategy.

2. Create a diagram (similar to the diagram in Figure 1-10) that describes the industry
value chain for an industry that holds special interest for you.
(Also, refer to The Value Chain: http://www.quickmba.com/strategy/value-chain/ )

Additional Resources
1. SWOT Analysis: www.netmba.com/strategy/swot/

2. Business Models: www.digitalenterprise.org/models/models.html

3. The Case and the Plan for the Virtual Company

http://www.inc.com/magazine/20100401/the-case-and-the-plan-for-the-virtual-
company.html

4. Three Trends Shaping B2B Marketing:

http://www.inc.com/articles/201101/3-trends-shaping-b2b-marketing.html
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5. The Impact of Cultural Differences on Trust in E-Commerce:

http://www.iadis.net/dl/final_uploads/200402C017.pdf
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Key Terms
 Activity: a task performed by a worker in the course of doing his or her job.
 Bonded warehouse: a secure location where incoming international shipments can be
held until customs requirements are satisfied or until payment arrangements are
completed.
 Business model: a set of processes that combine to achieve a company’s goal, which is
to yield a profit.
 Business processes: the group of logical, related, and sequential activities and
transactions in which businesses engage.
 Business-to-business (B2B): transactions conducted between businesses on the Web.
 Business-to-consumer (B2C): transactions conducted between shoppers and businesses
on the Web.
 Business-to-government (B2G): a category of electronic commerce that includes
business transactions with government agencies, such as paying taxes and filing
required reports.
 Business unit: a unit within a company that is organized around a specific combination
of product, distribution channel, and customer type. Synonymous with strategic
business unit.
 Commodity item: a product or service that has become so standardized and well-
known that buyers cannot detect a difference in the offerings of various sellers; buyers
usually base their purchase decisions for such products and services solely on price.
 Company: a business engaged in commerce; synonymous with firm.
 Consumer-to-consumer (C2C): a category of electronic commerce that includes
individuals who buy and sell items among themselves.
 Culture: the combination of language and customs that are unique to a particular
population.
 Customs broker: a company that arranges the payment of tariffs and compliance with
customs laws for international shipments.
 Dot-com: a company that operates only online.
 Electronic business (e-business): another term for electronic commerce; sometimes
used as a broader term for electronic commerce that includes all business processes, as
distinguished from a narrow definition of electronic commerce that includes sales and
purchase transactions only.
 Electronic commerce (e-commerce): business activities conducted using electronic
data transmission over the Internet and the World Wide Web.
 Electronic data interchange (EDI): exchange between businesses of computer-
readable data in a standard format.
 Electronic funds transfer (EFT): electronic transfer of account exchange information
over secure private communications networks.
 E-procurement: synonymous with business-to-business (B2B).
 Firm: a business engaged in commerce.
 First-mover advantage: the benefit a company can gain by introducing a product or
service before its competitors.
 Freight forwarder: a company that arranges shipping and insurance for international
transactions.
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 Hierarchical business organization: firms that include a number of levels with

cumulative responsibility. These organizations are typically headed by a top-level
president or officer. A number of vice presidents report to the president. A larger
number of middle managers report to the vice presidents.
 Industry: multiple firms selling similar products to similar customers.
 Industry value chain: the larger stream of activities in which a particular business
unit’s value chain is embedded.
 Law of diminishing returns: the characteristic of most activities to yield less value as
the amount of consumption increases.
 Localization: a type of language translation that considers multiple elements of the
local environment, such as business and cultural practices, in addition to local dialect
variations in the language.
 Machine translation: language translation that is done by software; such translation
can reach speeds of 400,000 words per hour.
 Market: a real or virtual space in which potential buyers and sellers come into contact
with each other and agree on a medium of exchange (such as currency or barter).
 Merchandising: the combination of store design, layout, and product display intended
to create an environment that encourages customers to buy.
 Mobile commerce (m-commerce): resources accessed using devices that have wireless
connections, such as stock quotes, directions, weather forecasts, and airline flight
schedules.
 Network economic structure: a business structure wherein firms coordinate their
strategies, resources, and skill sets by forming a long-term, stable relationship based on
a shared purpose.
 Network effect: an increase in the value of a network to its participants, which occurs
as more people or organizations participate in the network.
 Primary activities: activities that are required to do business: design, production,
promotion, marketing, delivery, and support of products or services.
 Procurement: the business activity that includes all purchasing activities plus the
monitoring of all elements of purchase transactions.
 Pure dot-com: a company that operates only online; also called dot-com.
 Revenue model: the combination of strategies and techniques that a company uses to
generate cash flow into the business from customers.
 Shipping profile: the collection of attributes, including weight and size, that affect how
easily a product can be packaged and delivered.
 Smart phone: a mobile phone that includes a functional Web browser and a full
keyboard.
 Social commerce: the use of interpersonal connections online to promote or sell goods
and services.
 Social networking site: Web sites used by individuals and businesses to conduct social
interactions online.
 Strategic alliance: the coordination of strategies, resources, and skill sets by companies
into long-term, stable relationships with other companies and individuals based on
shared purpose.
 Strategic business unit (SBU): a unit within a company that is organized around a
specific combination of product, distribution channel, and customer.
 Strategic partners: the entities taking part in a strategic alliance.
 Strategic partnership: synonymous with strategic alliance.
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 Supply management: synonymous with procurement, which is the business activity

that includes all purchasing activities plus the monitoring of all elements of purchase
transactions?
 Supporting activities: secondary activities that back up primary business activities.
These include human resource management, purchasing, and technology development.
 SWOT analysis: evaluation of the strengths and weaknesses of a business unit, and
identification of the opportunities presented by the markets of the business unit and
threats posed by competitors of the business unit.
 Telecommuting: an employment arrangement in which the employee logs in to the
company computer from an off-site location through the Internet instead of traveling to
an office.
 Telework: synonymous with telecommuting.
 Trading partners: businesses that engage in EDI with one another.
 Transaction: an exchange of value, such as a purchase, a sale, or the conversion of raw
materials into a finished product.
 Transaction costs: the total of all costs incurred by a buyer and seller as they gather
information and negotiate a transaction.
 Value-added network (VAN): an independent company that provides connection and
EDI transaction forwarding services to businesses engaged in EDI.
 Value chain: a way of organizing the activities that each strategic business unit
undertakes to design, produce, promote, market, deliver, and support the products or
services it sells.
 Value system: synonymous with industry value chain.
 Vertical integration: the practice of an existing firm replacing one of its suppliers with
its own strategic business unit that creates the supplied product.
 Virtual community: an electronic gathering place for people with common interests.
 Virtual company: a strategic alliance occurring among companies that operate on the
Internet.
 Web 2.0: technologies that include software that allow users of Web sites to participate
in the creation, editing, and distribution of content on a Web site owned and operated by
a third party.
 Wire transfer: synonymous with electronic funds transfer, which is the electronic
transfer of account exchange information over secure private communications
networks?