L-7 Electronic Commerce

ELECTRONIC COMMERCE: THE INTERNET AND ONLINE BUSINESS

 

What the Internet is and how it works.

The Internet is a worldwide network of interconnected computers that lets anyone with access to a personal computer send and receive images and data anywhere. The Internet began in 1969 as a Department of Defense experiment that involved networking four computers to facilitate communications in the event of a nuclear war. Today, this all-purpose, global network allows computer users anywhere to send and receive data, sound, and video content.

A major factor in the Internet’s growth was the introduction of technology and software that provided point-and-click access to the World Wide Web. In 1993 there were 100 web sites, and today there are more than 30 million sites, or domain names. A domain name is a web site address. There are several firms that provide domain names on an annual basis for a fee.

Access to the Internet is achieved via a modem and a connection to an Internet service provider. An Internet service provider is an organization that provides access to the Internet through its own series of local networks.

Satellite hookups have been slower to catch on in the US, where phone service is inexpensive and reliable. However, users in other countries have been faster to adopt satellite technology, which allows them to connect to the Internet from a cellular phone as well as a computer. In some countries, a majority of people online use cell phones to connect to the Internet and look for information and send e-mail. But wireless technology is catching on in the US because wireless technologies offer faster downloads than standard telephone lines.

The Internet was born in the US, but only 40% of all Internet users now live in America. Within a few years 75% of all Internet users will live outside the USA. The top four countries with the most Internet users are the US, China, United Kingdom and Germany. In the USA, over half of users are women and worldwide it is about 45% of all users. Internet users tend to be more affluent and to attain higher levels of education than the general population.

The four functions of the Internet

The four functions of the Internet are:

·    communication, information, entertainment and e-commerce.

The most popular application of the Internet is e-mail (electronic mail). E-mail now outnumbers normal mail by 10 to 1. However this is also influenced by huge amount of spam – unsolicitated junk mail. A more recent adaptation of e-mail is instant messaging. Here, when someone sends a message, it is immediately displayed on the recipient’s computer screen. Communication takes place in real time. Unlike regular e-mail, instant messages have to be relatively short. Other applications are chat rooms, online communities and video conferencing. Voice technology allows users to speak to friends and business associates.

The second use of Internet is information. Many users go online just to get information, by visiting commercial sites such as Google or Alta Vista. Google is one of many search engines that are available on the Internet. Another feature is newsgroups. Newsgroups provide a forum for participants to share information on selected topics. Another fast-growing area of the Internet consists of sites providing online educational services. Many colleges now provide some sort of accredited degree online.

Some of the most popular web sites are portals, sites designed to be a user’s starting place when entering the World Wide Web. All portals offer links to search engines, weather reports, news, jobs, yellow pages, maps, and other popular types of information, as well as e-mail, chat rooms, and the ability to bookmark favorite sites. A search engine is software that scans the web to find sites that contain data requested by the user, such as Alta Vista. Many sites specialize in particular types of information. The authenticity of information is however, only as reliable as the people who put it there. Therefore, the following actions are advisable:

• Know your source, make sure it is a reputable source
• Investigate information by checking more than one source
• Don’t believe all the e-mail announcements forwarded to you, especially those that have been forwarded to you and urge you to forward to your friends, email is a common way to spread viruses.
• Spam is a major problem, it is junk e-mail. Some e-mail providers filter your e-mail by directing all spam to a bulk folder.

The third use of the Internet is entertainment. All kinds of entertainment can be found online including music, movies and books. Music was available free in form of MP3 but recent court rulings have limited availability of file sharing.

The fourth function of the Internet is e-commerce, or electronic commerce. It is a newer application of web technology, but electronic business transactions are growing very fast. This gives the Internet a key role in firms’ sales and distribution strategies. Both large and small companies have established a web presence to take advantage. A growing number of companies sell their products online, increasing the need to understand the Web’s advantages and limitations.

Scope of electronic commerce

Companies worldwide are discovering the advantages of e-commerce such as reduction of paperwork and simplification of payment procedures. As with other types of buyer-seller interaction, e-commerce involves a chain of events for customer and seller:

- It starts with product information;

- moves through the order, invoicing, and payment processes;

- and ends with customer service.

The first wave of e-commerce brought techniques that lowered sellers’ costs, but now the power is shifting to buyers, with a wider range of suppliers. A number of innovations promote both business-to-business and business-to-consumer e-commerce. One is encryption systems, which enable users to gather credit card numbers and other personal data required for completing transactions while protecting the security of purchasers. Another is broadband technology, which enables users to downloading more data at faster speeds. The growth of e-commerce has attracted many software firms that help companies move into e-commerce. Examples include IBM and Microsoft.

E-commerce has also affected governments and others in the not-for-profit sector. For example, some sites allow registering cars, paying taxes or to look for government jobs. Companies also establish an Internet presence to expand beyond their geographical boundaries to reach new markets, cut costs, and improve customer relationships. Putting massive business catalogs on the Web, for example, saves publishing and postage costs. With a few keystrokes, customers can send orders and service requests directly from their computers to the seller’s computer – cutting the need for inbound telemarketing personnel and other customer service representatives.

The two main types of e-commerce are transactions between businesses and transactions between businesses and customers. Both are offering new opportunities but business-to-business (B2B) transactions are fueling the growth of e-commerce.

 

Business-to-Business (B2B) transactions

 

A key aspect of B2B e-commerce is electronic data interchange (EDI), a computer-to-computer exchange of invoices, purchase orders, price quotations and other sales information. EDI requires compatible hardware and software systems to exchange data over a network. Use of EDI cuts paper flow, speeds the order cycle, and reduces errors. This has led to further use of Internet; B2B e-commerce is the use of Internet for business transactions between organizations. In USA, over 25% of B2B transactions take place on the Internet, amounting to more than $3 trillion. The number of US businesses engaged in B2B e-commerce is expected to grow to more than 90% by 2010.

In addition to generating sales revenue, B2B e-commerce also provides detailed product descriptions whenever they are needed and slashes order-processing expenses. Initially, companies used their own Web sites to conduct B2B transactions. Today, the types of transactions and sites have become much more varied. The principal forms of B2B e-commerce include electronic exchanges, extranets and private exchanges.

An electronic exchange is a web-based marketplace that cater to a specific industry needs. An example of an electronic exchange is FreeMarkets, where suppliers compete for the business of organizational buyers who might be interested in purchasing something.

Internet commerce also offers an efficient way for businesses to collaborate with vendors, partners, and customers through extranets, secure networks used for e-commerce and accessible through the firm’s web site by external customers, suppliers, or other authorized users. Extranets go beyond ordering and fulfillment processes by giving selected outsiders access to internal information. As with other forms of e-commerce, extranets provide additional benefits such as enhanced relationships with business partners.

For example, MasterCard created an extranet called Member Services Online for its member banks, which gives banks quick access to market and customer research, forms, and transaction information.

The next generation of extranets is the private exchange, a secure web site where a company and its suppliers share all types of data related to e-commerce. A private exchange is more collaborative than a typical extranet, and has been called c-commerce. Collaboration occurs across product ideas, production scheduling, distribution and order tracking.

Another variant of the extranet is the intranet, which provides similar capabilities but limits users to the employees of an organization. An intranet is a network which is accessible only to individuals who work for an organization. Unauthorized access to a company's intranet is blocked by something called a firewall - combinations of hardware and software that keeps unauthorized net users from tapping into private corporate data. A firewall is an electronic barrier between a company’s internal network and the Internet that limits access into and out of the network. However, an impenetrable firewall is difficult to find.

Business-to-consumer (B2C) e-commerce

Business-to-consumer (B2C) e-commerce involves selling directly to consumers over the Internet. Driven by convenience and improved security for transmitting credit-card numbers and other financial information, online retail sales, sometimes called e-tailing, have hit $50 billion annually, with roughly 400 million online purchases. However, this represents only 3% of all retail sales. The figure is higher for some products, like computers, books, and audio and video recordings.

A wide array of B2C e-commerce products are available. Industries such as investment and banking, online reservations and sales for travel and vacations, traditional retailing, and online auctions offer consumers a staggering array of products with just the click of a mouse. For example, at ‘expedia.com’, visitors are able to book airline flights and make hotel reservations.

Many retailers have set up electronic storefronts, web sites where they offer items for sale to consumers. Wal-Mart, for example, has 40,000 products available for sale on its electronic storefront. Generally, retailers provide an online catalog where visitors click items they want to buy and place them into an electronic shopping cart. When the shopper finishes the shopping, the items in the electronic shopping cart are listed on the screen, along with the total amount due, so that the customer can review the entire order and make any desired changes before making a payment.

Online retail selling works best for non-technical products like flowers, books, music, travel and financial services. Even the sale of somewhat technical items, such as personal computers, has proven very successful through the combination of low prices, user-friendly Web sites, and 24-hour customer support.

In order to increase the safety of online use of credit cards, companies have developed secure payment systems for e-commerce. The most common forms of online payment are electronic cash, electronic wallets, and smart cards. Many sites have sophisticated encryption systems. Encryption is the process of encoding data for security purposes.

E-Commerce challenges

The barriers to e-commerce include the following:

·    privacy issues

·    internet fraud

·    traffic jams caused by system overload

·    poor web site design and service

·    unreliable delivery and returns

·    lack of retail experience

·    protection of intellectual property.

Consumers worry that information about them will become available to others without their permission, such as credit card information. Market research indicates that privacy is the top concern of Internet users and may be an impediment to the growth of e-commerce. Secure payment systems have been developed but some e-commerce sites require passwords. Recently, electronic signatures have become available to enter into contracts online such as insurance policies.

Internet fraud is a barrier to e-commerce. Fraud ranges from merchandise that does not match description such as art forgeries to products that were purchased but never delivered. Investment scams are the second most common online crime, which include unreliable company information, often posted by disgruntled employees. As a result, online firms need to work harder to improve the image of the Internet as a safe place to conduct business.

Also, two-thirds of web shopping carts are abandoned before a customer places an order because of poor web site design and service.

Companies that combine traditional retailing with e-commerce have generally been more successful. Along with privacy, intellectual property is difficult to protect on the Internet. Intellectual property is a trademark; invention; or literary, musical, artistic, photographic, or audiovisual work.

The open sharing of information online can conflict with the desire of organizations to protect the use of their brand names, copyrights, logos, patents, and other intellectual property. In the entertainment industry, there has long been complaints that technology makes it too easy for consumers to make unauthorized copies of copyrighted works, such as movies and music. Also, the Anti-Cyber-squatting Consumer Protection Act imposes fines on people registering domain names that are identical to a company’s trademark or an individual’s name.

 

Managing a web site

The following questions must be answered when designing a web site:

1. What is the purpose of the web site?
2. How can we attract repeat visitors?
3. What external links should be established to draw visitors to the site?
4. What external links to databases and other corporate resources are needed?
5. How should it work?
6. What should the domain name be?
7. What should the site contain?
8. Who should put the site on the net – company or web host?
9. How much money should be spent to set up and maintain the site?
10. How current does information on the site need to be?

It is easier to build a bad web site than a good one. Popular web sites like these add to their success by selling advertising space to other firms. Some companies find success by hosting Web sites that offer some value-added service to create goodwill for potential customers.

Organisations like the Mayo Clinic provide useful information or links to related sites that people frequently visit. However, to get people to stay at the site and complete a transaction, the site must also be secure, reliable, and easy to use. One such site is eBay, an auction site.

The main question is what is the goal for the web site. Objectives for the web site determine the scope of its development.

For example, if the company wants to sell merchandise online, the site must include a way for users to place orders, and ask questions about products, as well as links to the company’s databases to track inventory and deliveries. There may also be a way to make payments with credit cards and other methods. Other key decision is whether to create and maintain a site in-house or to contract with outside experts.

Some companies develop their own sites themselves using software like FrontPage. The name of your web site is also an important part of consideration. A domain name should reflect the company and its products and be easy to remember. In the US, the last part of the domain name identifies the type of organization. For example, “.com” for businesses, “.gov” for government sites and “.edu” for educational institutions.

Content is one of the most important factors in determining whether visitors return to a site. Standards for good content vary for every site, but available resources should be relevant to viewers, easy to access and understand, updated regularly, and written or displayed in a compelling, entertaining way. A site should allow interactivity, including the ability to accept customer data and orders, keep up-to-the-minute inventory records, and respond quickly to customer questions and complaints.

After designing the site, the next step is to connect to the Internet by placing the required computer files on a server. This is better done outsourcing to meet the hosting and maintenance needs. Finally in order to attract business to the site requires listing with major search engines like Google.

Costs of developing a web site includes development costs but also the cost of placing the site on a web server, maintaining and updating it, and promoting it. Like so much new technology, the cost of putting a site on a server is falling.

Measuring the effectiveness of a web site is tricky, and the appropriate process often depends on the purpose of the web site.

Measures include:

·    profitability

·    web site traffic counts

·    click-through rates

·    conversion rates

For many companies, revenue or profits is not a major objective. Only 15% of large companies use their web sites to generate revenue, the rest use them to showcase their products and to offer information about their organizations.

Advertisers typically measure the success of their ads in terms of click-through rates. A click-through rate is the percentage of people presented with a banner as who click it, thereby linking to a web site or a pop-up page of information related to the ad. Recently, the average click-through rate has been declining to about 0.5% of viewers. The figure is 1 - 1.5% response rate for direct-mail advertisements.

As e-commerce gains popularity, new models for measuring its effectiveness are being developed. A basic measure is the conversion rate, the percentage of Web site visitors who make purchases. A conversion rate of 3 to 5% is average by today’s standards. A company can use its advertising cost, site traffic, and conversion rate data to find out the cost to win each customer.

E-commerce businesses are trying to boost their conversions rates by ensuring their sites download quickly, are easy to use, and deliver on their promises. Besides measuring click-through and conversion rates, companies can study samples of consumers. One can find out information on web site visitors, including where they come from, what they see, and the number of ‘hits’ or visits to the site, during different times of the day. Other surveys of web users investigate their brand awareness.