UNIT 1 INTRODUCTION TO E-COMMERCE
UNIT 1 INTRODUCTION TO E-COMMERCE
Introduction to E-Commerce
NOTES Structure 1.0 Introduction 1.1 Unit Objectives 1.2 History and Overview of E-commerce 1.2.1 Origin of E-Business 1.2.2 E-Commerce Opportunities for Businesses 1.2.3 Working of E-Business Models
1.3 Types of E-Commerce 1.3.1 Evolution of E-Business Models 1.3.2 Consumer-to-Business E-Commerce Model
1.4 E-Commerce Transactions 1.4.1 Various Aspects of E-Commerce Transactions
1.5 1.6 1.7 1.8
Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises
1.0 INTRODUCTION Electronic commerce, or e-commerce, is the process of buying and selling goods and services over the Internet or other computer networks. Because of the online boom and a larger share of disposable income, the amount of trade conducted electronically has also grown. This has also spurred innovations in electronic funds transfer, supply chain management, online marketing and transaction processing and inventory management. Although a large portion of e-commerce is conducted electronically, some e-commerce involves the transportation of physical items also. The popularity of e-commerce is such that almost all big retailers who have physical outlets are present on the Web. In this unit, the terms e-commerce and e-business have been used interchangeably. The unit will give you a comprehensive overview of various concepts related to e-commerce.
1.1 UNIT OBJECTIVES After going through this unit, you will be able to: • Learn about the history of e-commerce • Assess various types of e-commerce models such as B2B, B2C and C2C models • Know about the various aspects of e-commerce transactions
1.2 HISTORY AND OVERVIEW OF E-COMMERCE E-commerce deals with buying and selling of information, products and services through a computer network without actually visiting an actual physical store. It can also be considered as a business activity that uses an electronic medium for the delivery of information, products, services and payment through the electronic medium.
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E-commerce involves the paperless exchange of information in a business with the use of Electronic Data Interchange (EDI), electronic bulletin boards, e-mail and other technologies. It helps to automate processes and transactions that are usually done on paper. E-commerce technologies have assisted companies to change the way they operate and become more technologically savvy.
1.2.1 Origin of E-Business E-business refers to conducting business over the Internet with the help of electronic devices like computers and laptops, phone lines, fax machine, secure Internet lines and so on. In the 1950s, computers were used by organizations to process and store records of internal transactions. However, the information between businesses continued to be exchanged on paper, like purchase orders, invoices, cheques, remittance devices and other standard forms, which were used to document transactions. IBM was the first company which used the term e-business internationally. In 1972, IBM used the term as ‘e-business’ and the first successful transaction was executed between the United States and the European Union in 1993, with the invention of personal computers. Although these information transfer agreements between trading partners increased efficiency and reduced errors, they were still not an ideal solution. A range of processes, such as EDI, e-mail, Internet and Internet applications were combined to provide ways to exchange information between individuals, companies, customers and computers. The core element of e-business remains the Internet. Electronic business has become very popular in the past few years, with the value of transactions in India estimated to cross $68.2 million.
Differences between e-commerce and e-business In the English language, the terms business and commerce are mostly used interchangeably as nouns that mean organized profit-seeking activity. However, in the electronic realm, there is a subtle difference between e-commerce and e-business. The differences between e-business and e-commerce are listed in Table 1.1. Table 1.1 E-Businesses versus E-Commerce
E-Business Scope involves buying/selling, marketing, procurement, logistics and educating the customer over the Internet Involves the processes and cultures of an online business enterprise Connecting critical business systems to customers, employees, vendors, and business partners, using Intranets, extranets, e-commerce technologies, collaborative applications and the Web Establishment of fully integrated value chains Information partnership, real-time information
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E-Commerce Scope involves mostly buying or selling over the Internet Involves only the economic aspects of an online business enterprise Establishing a channel between sellers and buyers of goods and services
Requirement of integrated value chain is limited because only buyers and sellers are involved There is not much sharing of real-time information between buyers and sellers
1.2.2 E-Commerce Opportunities for Businesses
Introduction to E-Commerce
Many businesses need e-commerce software packages to help take advantage of various business opportunities: 1. Tourism and travel sector: Consumers can make online reservations in hotels and restaurants; can purchase air and railway tickets and so on.
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2. Banking sector: Most banks have made their services available online through their respective Websites. These services include making payments, paying bills, purchasing and selling shares, checking account balance and transferring funds and so on. 3. Health care sector: Most health care companies provide their services online, such as payment of premiums, issue of policies, providing reimbursements and so on. 4. Stock sector: De-mat account facilities are provided to customers who can do overall analyses of the stock markets and their related transactions. 5. Financial sector: The financial sector provides e-commerce services, which are made optimum use of by users for paying insurance, loans, mortgages and so on.
1.2.3 Working of E-Business Models To understand the operating procedure of an e-business model, consider a customer who wants to make an online purchase. He is transferred to the online transaction server where all the information is converted into an encrypted form. Once he has placed his order, the information moves through a private gateway to a processing network where the issuing and acquiring banks complete or deny the transaction. This process takes only few seconds. A typical online transaction is shown in Figure 1.1. Online Customer
Merchant Website
Internet
Online Transaction Server
Check Your Progress 1. What is e-commerce?
Processing Network
Acquiring Merchant Bank
Issuing Consumer Bank
2. List any three sectors where e-commerce technology is currently applied.
Figure 1.1 Online Transaction Self-Instructional Material
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1.3 TYPES OF E-COMMERCE A transaction in an electronic market describes a number of interactions between parties. This includes, for example, ordering products, making payments, supporting delivery and marketing and promotion activities. One must therefore have a marketing strategy for transacting commerce through which a corporation maintains itself and generates revenue. Business models are defined as, ‘A set of shared common characteristics, behaviour and methods of doing business that enables a firm to generate profits through increasing revenues and reducing cost.’ Business models are created for the purpose of trying to answer the following questions: (i) How can you get competitive advantage? (ii) Which product-market strategy is to be followed? (iii) What should be the marketing mix? There are mainly five types of e-commerce models: 1. Business-to-consumer (B2C) model: This is the most commonly prevalent e-commerce segment, in which online retailers and marketers sell their products to consumers by using data made available through online marketing tools. This model concentrates on individual buyers and offers consumers the capability to browse, select and merchandise online from a wider variety of sellers and at better prices. The B2C e-business interaction is most appropriate for the following types of transactions: • Easily transformable goods, i.e., products that are easily transformable into digital format, such as videos, software packages, music books, and so on • Highly rated branded items or items with return security • Items sold in packets that are not possible to open in physical stores • Items that follow standard specification The working of B2C has the following steps: i. The customer identifies his/her need. ii. The customer looks for the product or services that suit his/her needs. iii. The customer selects a vendor and negotiates a price. iv. The customer then receives the product or service. v. The customer makes the payment for the received product. vi. The customer gets the services and warranty claims that are associated with the product. 2. Business-to-business (B2B) model: In this form, both buyers and sellers are business set-ups and there are no individual customers. In this model, manufacturers supply goods to retailers or wholesalers. This type of model needs two or more business organizations that do business with each other. It entails commercial activity among companies through the Internet as a medium. At present, there are many types of e-businesses. The B2B ebusiness is of the following types:
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• Supplier oriented: In this type of e-business, a supplier establishes the electronic market where a number of customers or buyers transact with suppliers. Generally, it is done by a supplier which has monopoly over products that it supplies. • Buyer oriented: In this type of e-commerce, big business organization with high volume purchase capacity creates an e-business marketplace for purchases and gains by starting a site of their own. The online e-business marketplace is used by buyers for placing requests for quotations and carrying out the entire purchase process.
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• Intermediary oriented: In this type of B2B e-business, a third party establishes the e-business marketplace and attracts both buyers and sellers to interact with each other. • Application of B2B model: Some of the applications of the B2B model are, inventory management, channel management, distribution management, order fulfillment and delivery payment and payment management. 3. Consumer-to-consumer (C2C) model: This model facilitates the online selling and purchasing of goods and services between two parties. There is no middleman involved and the parties carry out transactions with other consumers directly via online classified advertisements and auctions or by selling personal services or expertise online. This model involves the growing popularity of peer-to-peer (P2P) software that facilities the exchange of data directly between individuals over the Internet. 4. Peer-to-peer (P2P) model: In this model, people share computer files and computer resources directly without being routed through a Web server. Here, both parties must install software that enables them to communicate on the common platform. 5. M-Commerce: Short for mobile commerce, this model facilitates the use of smart phones, personal digital assistants and other mobile devices to conduct business transactions. Other e-commerce business models are listed as follows: • Business-to-employee (B2E) model • Government-to-business (G2B) model • Government-to-citizen (G2C) model Table 1.2 summarizes the various e-business models. Table 1.2 E-Business Models Model B2C B2B B2G C2C C2B
Description Goods or services are sold directly to consumers Goods or services are sold between businesses and other businesses Goods or services are sold to government agencies Goods or services are sold between consumers Consumers fix the cost of their goods or services for other consumers
Sample Websites Pets.com, edirects.com, amazon.com, autobytel.com Verticalnet.com, metalsite.com, shop2gether.com Igov.com Ebay.com, inforocket.com Priceline.com
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1.3.1 Evolution of E-Business Models The Internet has become integral to daily activities ranging from banking to shopping and entertainment. For instance, in modern times, people are using automated teller machines (ATMs), as opposed to human tellers. This has made banking very easy. There are two phases in establishing an e-business—Phase 1 and Phase 2. The trend of companies setting up e-business establishments in the first phase was as follows: • Business organizations rushed to get an e-commerce Website up. • Little or no regard was given to check how scalable or reliable the site was supposed to be. • It was mostly a matter of overtaking competition. A drawback of these first-to-market consumer sites was little or no integration with the production side of the business. The production part of the business tried to establish its own online-based relationship with suppliers. Thus, the lack of integration proved to be a major obstacle for many business organizations. This was due to the following factors: • Growth of customer base • Request for real-time order status • Return of products In the second phase of establishing an e-business, the expectations of customers and suppliers have arisen. This has forced organizations to start planning about integrating the back end business operations and real-time transaction processing. Business organizations should maintain one complete customer–supplier relationship with the help of Internet-based technologies and join those systems to the interpersonal aspects of the business transaction when needed. Many businesses have realized the prospect of ebusiness and are addressing the whole business cycle and controlling Internet technologies. It can be concluded that these days, e-businesses have the power to change the business scene. Nowadays, the value of a company is based on its strategy, business model and its ability to sell. Businesses are using Internet technologies and integrating their systems and processes more efficiently. They are able to greatly reduce the obstacle to entry while significantly increasing their own market reach.
1.3.2 Consumer-to-Business E-Commerce Model In a consumer-to-business (C2B) e-commerce model, a consumer posts online information regarding the goods for sale (project) with a budget. Depending on the popularity of the site and the requirement, interested parties will review and bid on the project. The consumer will review the bids and select the company that will complete the project. In addition to the various types of e-commerce, such as business-to-business (B2B), business-to-consumer (B2C) and consumer-to-consumer (C2C) commerce, there is another model known as consumer-to-business (C2B). A consumer posts his project with a set budget online and within hours companies review the consumer’s requirements and bid on the project. The consumer reviews the bids and selects the company that will complete the project. C2B is a rather unusual online phenomenon. The following instance would explain the concept of C2B ecommerce well: 10
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Neha, a student, wants to fly from New Delhi to London and back, but has only Rs 35,000 to pay for this trip. She puts up an online advertisement on a C2B site for airline companies that provide such a package to budget travellers. If any airline company can match the offer, it will respond to Neha’s advertisement. Thus, this way airline companies can operate, albeit at no profit margin, which is better than flying with empty seats.
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C2B systems represent the future of e-commerce and can be defined as the comparison of shopping activities performed online by a user before purchasing a product.
Example C2B scenarios The following scenarios help clarify the intended role of C2B systems. • Shopping assistance: A pedestrian is walking through the streets of Connaught Place, New Delhi. She passes by the shops and peers through the windows to examine the various offerings. A fashion apparel outlet recently got a new C2B system that requests for this pedestrian’s details and identity information. Based on that, the software determines her preferences for various items of clothing. On the basis of the inventory, the software determines that the shop has certain items that might fit her profile. The store sends a message to the pedestrian on her PDA containing information about the items available in the store and the directions to the store. • Emergency room: A businessman falls ill after having dinner with potential clients in Taj Mahal Hotel, Mumbai. His family is away on holiday in Paris and his family physician is attending a conference. The ambulance picks the patient from the hotel and rushes him to the emergency room at the nearest hospital. The hospital where he usually gets himself examined has sent his personal details to this hospital. Since the hospital has his details, he is not asked to fill out forms or answer questions regarding history or allergies. The local doctors provide the treatment and the patient recovers soon without complications. C2B models must have the following requirements: • Mobile device • Real-time, highly relevant information and personalized attention • Maintenance and access of personal data for various real-life situations • Creation of forms for automated information extraction • Matchmaking between personal requirements and corporate offerings • Automated update of personal information on the completion of specified transactions • Automated system evolution to support new custom data
1.4 E-COMMERCE TRANSACTIONS E-commerce transactions typically refer to all interactions between the owner of a Website and the users of the Website. A standard e-commerce transaction set-up involves the following transaction players:
Check Your Progress 3. List any five e-commerce models. 4. What is C2B e-business model?
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• Sellers who include the following: o Corporate Websites with e-commerce resources, such as secure transaction servers o Corporate intranets to process orders efficiently and effectively o An effective IT staff that manages the flow of information and maintains the e-commerce system • Banking institutions that process and approve credit card payments and electronic fund transfers • Freight companies that facilitate the movement of goods to and from the source and destination places • Authentication authorities that serve as a safe third party to ensure the integrity and security of transactions • Consumers with access to the Internet, disposable income and a mindset to purchase goods online rather than by physical inspection • Firms/businesses with Internet access and the capability to place and take orders over the Internet • The legal framework of the government that looks after electronic documents, signatures, and so on • Legal institutions that enforce related laws and regulations and protect consumers and businesses from fraud • The Internet with a robust infrastructure and a good pricing structure
1.4.1 Various Aspects of E-Commerce Transactions Digital signatures According to the Electronic Signatures in Global and National Commerce Act, digital signatures are defined as ‘an electronic sound, symbol, or process, attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record’. Based on this premise, a digital signature has the same importance as its handwritten equivalent. However, digital signatures usually include those signatures that are encrypted using a digital signing algorithm that has a private key. The difference between traditional signatures and digital signatures is that the former involves signing the name in ink on paper and the latter involves the use of encryption technology. The establishment of a valid contract between various transaction players is the primary concern of e-commerce transactions. This is complicated in online transactions as the contracts are paperless. In such scenarios, digital signatures enable to promote ecommerce because they ensure that all parties have entered into a binding contractual agreement. The next concern is the identification of a party over the Internet. This is because an online enterprise needs to ensure the authenticity and integrity of all parties and ensure the confidentiality of the information submitted. The technical and legal limitations in the use of digital signatures are as follows: • The encryption technology must be kept safe from hackers and forgery. • Public keys may not be posted in a convenient central location, but be scattered among different certificate authorities. 12
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• Certificate authorities may not be licensed or otherwise regulated for consumer protection. • Also, moving to a system of digital signatures may require both time and resources on the part of both the signer and the recipient.
Clickwraps
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It is important that e-commerce sites contain a user agreement or a listing of the terms and conditions of use of the Website (terms of service [TOS]). This gives the user the license to use the Website based on the terms specified and that the user is contractually bound to its provisions. This ensures that there are appropriate rules of behaviour established, such as prohibiting the reproduction of data or banning abusive language. Clickwraps are used to establish TOS agreements, that is, the user must click the ‘I Agree’ or ‘I Accept’ button to access the Website. Thus, these agreements are most commonly called clickwrap.
Payment technologies Credit cards are used for the major part of e-commerce payments. For all kinds of ecommerce transactions, the Website operator will need to have a merchant account and choose an online payment processing service such as CyberCash, PayPal or MoneyZap. The online processing service and the financial institution that manages the merchant account will charge fees for each transaction. The Website will need customized software that can interact with the online processing service and ascertain whether the charge has been approved, and a secure server to process transactions.
Fraud concerns Credit card fraud involves theft and fraud committed using credit cards or other payment mechanisms and obtaining goods or services without paying or by obtaining unauthorized funds. Internet credit card fraud is an ever-increasing concern and digital signatures may be one of the possible solutions to this fraud problem.
Customer relationship management Customer relationship management (CRM) aims at managing and nurturing company interactions with customers and clients. It uses technology to automate and synchronize business processes such as sales, marketing, customer service and technical support. The overall goals of CRM are as follows: • Locate, attract and win new clients • Nurture and retain the existing clients • Entice former clients back • Reduce the cost of marketing and client service The entire process of CRM involves pre-sales, sales and service activities and relationship with customers. Many CRM software applications are now available that enable the recording of this relationship from the time the client expresses desire to make online transaction. Good CRM software effectively saves time in tracking communications and transactions.
Check Your Progress 5. Who are the transaction players in a standard e-commerce transaction set-up? 6. What is the fundamental difference between traditional signatures and digital signatures?
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1.5 SUMMARY In this unit, you have learned that:
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• E-commerce is a business activity that deals with the buying and selling of products, services and information and paying for these through electronic medium, such as the Internet or a computer network, without actually visiting an actual physical store. • E-commerce involves paperless exchange of information in a business with the use of Electronic Data Interchange (EDI), electronic bulletin boards, e-mail and other technologies. It helps to automate processes and transactions that are usually done on paper. • The types of e-commerce models are business-to-consumer (B2C) model, business-to-business (B2B) model, consumer-to-consumer (C2C) model, peerto-peer (P2P) model, m-commerce, business-to-employee (B2E) model, government-to-business (G2B) model and government-to-citizen (G2C) model. • In a consumer-to-business (C2B) e-commerce model, a consumer posts online information regarding the goods for sale (project) with a budget. Depending on the popularity of the site and the requirement, interested parties will review and bid on the project. The consumer will review the bids and select the company that will complete the project. • According to the Electronic Signatures in Global and National Commerce Act, digital signatures are defined as ‘an electronic sound, symbol, or process, attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record’. • Credit card fraud is an ever-increasing concern that involves theft and fraud committed using credit cards or other payment mechanisms and obtaining goods or services without paying or by obtaining unauthorized funds. Digital signatures may be one of the possible solutions to this fraud problem. • Customer relationship management (CRM) uses technology to automate and synchronize business processes such as sales, marketing, customer service and technical support. The entire process of CRM involves pre-sales, sales and service activities and relationship with customers.
1.6 KEY TERMS • E-business: It may be defined as the application of information and communication technologies (ICT) to facilitate all the activities of business. • E-commerce: It consists of buying and selling of goods or services over the Internet or other computer networks. • Business models: They are a set of shared common characteristics, behaviour and methods of doing business that enables a firm to generate profits through increasing revenues and reducing cost.
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• Digital signatures: They are electronic sounds, symbols or processes attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record.
• Customer relationship management (CRM): It is the process of managing and nurturing company interactions with customers and clients.
1.7 ANSWERS TO ‘CHECK YOUR PROGRESS’
Introduction to E-Commerce
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1. E-commerce is a business activity that deals with buying and selling products, services and information and payment for the same, through a computer network without actually visiting an actual physical store. 2. E-commerce technology is currently applied in the following sectors: • Hotels and hospitality industry • Healthcare industry • Stock markets 3. Five e-commerce models are as follows: • Business-to-consumer (B2C) model • Business-to-business (B2B) model • Consumer-to-consumer (C2C) model • Peer-to-peer (P2P) model • M-commerce 4. In a consumer-to-business (C2B) e-business model, a consumer posts online information regarding the goods for sale (project) with a budget. Depending on the popularity of the site and the requirement, interested parties review and bid on the project. The consumer reviews the bids and selects the company that will complete the project. 5. The transaction players in a standard e-commerce transaction set-up are as follows: • Sellers • Banking institutions • Freight companies • Authentication authorities • Consumers • Firms/businesses • Government • Legal institutions • Internet 6. The difference between traditional signatures and digital signatures is that the former involves signing the name in ink on paper and the latter involves using encryption technology.
1.8 QUESTIONS AND EXERCISES Short-Answer Questions 1. List various e-business models with suitable examples. 2. What is a B2B e-business model? 3. How does B2C business model in function? Self-Instructional Material
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4. What do you understand by the P2P e-business model? Use suitable examples in support of your answer.
Long-Answer Questions NOTES
1. Analyse the concept of C2C business models with the help of suitable examples. 2. Trace the history of e-commerce. What advantages does e-commerce offer over physical selling of goods and services? 3. Write a short note on each of the following: • Digital signature • Clickwrap • Credit card fraud • Customer relationship management
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Authors: Narendra Singh & Pushpa Singh: Units (unit-1, 2.4-2.4.1, 2.6-2.10, 3.0-3.2, 3.6-3.6.1, 4.0-4.2, unit-8) Copyright © Narendra Singh & Pushpa Singh, 2011 Jyoti Singh: Units (6.2-6.3) Copyright © Jyoti Singh, 2011 Vikas® Publishing House: (2.0-2.3.2, 2.5-2.5.2, 3.3-3.5, 3.7-3.10, 4.3-4.7, unit-5, 6.0-6.1, 6.4-6.7, unit-7) Copyright © Reserved, 2011 All rights reserved. No part of this publication which is material protected by this copyright notice may be reproduced or transmitted or utilized or stored in any form or by any means now known or hereinafter invented, electronic, digital or mechanical, including photocopying, scanning, recording or by any information storage or retrieval system, without prior written permission from the Publisher. Information contained in this book has been published by VIKAS® Publishing House Pvt. Ltd. and has been obtained by its Authors from sources believed to be reliable and are correct to the best of their knowledge. However, the Publisher, its Authors & UBS shall in no event be liable for any errors, omissions or damages arising out of use of this information and specifically disclaim any implied warranties or merchantability or fitness for any particular use.
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