COMMERCIAL ASPECTS OF E-COMMERCE
Introduction
Electronic commerce over the Internet is a new way of conducting business. Through only three years old, it has the potential to radically alter economic activities and the social environment. Already, it affects such large sectors as communications, finance and retail trade ( altogether , about 30 per cent of GDP). It holds promise in areas such as education, health and government ( about 20 per cent of GDP). The largest effects may be associated not with many of the impacts that command the most attention ( e.g. customized products, the elimination of middlemen ) but with less visible, but potentially more pervasive, effects on routine business activities
( e.g. ordering office supplies, paying bills, and estimating demand), that is, on the way businesses interact. A combination of regulatory reform and technological innovation
enabled e-commerce to evolve as it has. Although the precursor on a internet appeared in the late 1960s, Internet e-commerce took off with the arrival. of the World Wide Web and browsers in the early 1990s and the liberalization of the telecommunications sector and innovations that greatly expanded the volume and capacity of communications (optic
fiber, digital subscriber line technologies, satellites). As a result, barriers to engage in electronic commerce have progressively fallen for both buyers and sellers. Earlier forms of e-commerce were mostly custom-made, complex, expensive and the province of large firms. Today, for a few thousand dollars, anyone can become a merchant and reach millions of consumer’s worldwide. What used to be business-to-business transactions between known parties has become a complex web of commercial activities, which can involve vast numbers of individuals who may never meet. In this sense, the Internet has
done for electronic commerce what Henry Ford did for the automobile - converted a luxury for the few into a relatively simple and inexpensive device for the many
To explore these impacts and provides a preliminary analytical foundation for further work. It does not present an exhaustive analysis - it is too early for that - but musters as much information as possible so as to provide policy makers with a quantitative picture, albeit blurry, of the current state and likely ,future direction of electronic commerce. On this basis, policy makers can begin to outline the parameters of its impact and identify areas in need of future research.
E-Commerce - Economic Drivers
Economic drivers of e-commerce five broad themes have emerged as important for understanding the economic and social impact of electronic commerce.
Electronic Commerce Transforms the MarketPlace
E-commerce will change the way business is conducted:
traditional intermediary functions will be replaced, new products and markets will be developed, and new and far closer relationships will be created between business and consumers. It will change the organization of work: new channels of knowledge diffusion and human interactivity in the workplace will be opened more flexibility and adaptability will be needed, and Workers’ functions and skills will be redefined.
Electronic Commerce has a Catalytic Effect
E-commerce will serve to accelerate and diffuse more widely changes that are already under way in the economy, such as the reform of regulations, the establishment of electronic links between businesses (ED!), the globalization of economic activity, and the demand for higher-skilled workers. Likewise, many pectoral trends already under way, such as electronic banking, direct booking of travel, and one-to-one marketing, will be accelerated because of electronic commerce.
E-commerce over the Internet vastly increases interactivity in the’ economy. These linkages now eject small businesses and households and reach out to the world at large. Access will shift away from relatively expensive personal computers to cheap and easy-to-use Types and telephones to devices yet to be invented. People will increasingly have the ability to communicate and transact business anywhere, anytime. This will have a profound impact, not the least of which will be the erosion of economic and geographic boundaries.
Openness is an underlying technical and philosophical tenet of the- expansion of electronic commerce. The widespread adoption of the Internet as a platform or business is due to its non-proprietary standards and open nature as well as to the huge industry that has evolved to support it. The economic power that stems from joining a large network will help to ensure that new standards remain open. More importantly, openness has emerged as a strategy, with many of the most success-full e--commerce ventures granting business partners and consumers unparalleled access to their inner workings, databases, and personnel. This has led to a shift in the role of consumers, who are increasingly implicated as partners in product design and creation. An expectation of openness is building on the part of consumers/citizens, which will cause transformations, for better (e.g. increased transparency, competition) or for worse (e.g. potential invasion of privacy), in the economy and society.
Electronic commerce alters the relative importance of time. Many of the routines that help define the “look and feel” of the economy and society are a function of time: mass production is the latest way of producing at the lowest cost; one’s community tends to be geographically determined because time is a determinant of proximity. E-commerce is reducing the importance of time by speeding up production cycles, allowing firms to operate in close coordination and enabling consumers to conduct transactions around the clock’s the role of time changes, so will the structure of business and social activities,
causing potentially large impacts.
Electronic Commerce Growth
At present, electronic commerce over the Internet is relatively small (some $26 billion) but is growing very rapidly and may approach a trillion dollars by 2003-05. Even at that level, it would be less than current sales by direct marketing in the United States using mail, telephone and newspapers (Table 1). Clearly, electronic commerce is in an embryonic stage, and technology and market dynamics are still casting its basic shape. This is especially true for the business-to-Consumer segment (which is only a small fraction of the business-to-business segment), where concerns about security of payment,
potentially fraudulent merchants, privacy of personal data, and difficulty and expense in accessing e--commerce merchants affect its growth potential. These issues represent significant policy challenges. While the appeal of convenience and mass customization may promote business-to-consumer e-commerce, its success is not assured. It may become no more than another channel for retailers, like mail order, rather than a new dominant mode of commerce. Policy decisions will have a major impact on the kind of environment in which e-commerce will develop and should therefore be crafted with care and with due recognition of its fragile and evolving nature.
The near-term (2001/02) and future (2003/05) growth of e-commerce is much more likely to be determined by the business-to-business segment, which currently accounts for at
least 80 per cent of total e-commerce activity.
Three factors will contribute:
i) a reduction in transaction costs and improvement of product quality/customer service;
ii) a defensive reaction to competitors engaging in e--commerce; and
iii) insistence by large businesses that all of their suppliers link into their e- commerce system as a condition of doing business.
The first factor, reduced transaction costs, drives the second and third. It is likely that the largest impact of business-to-business e-commerce will be on small and medium-sized enterprises (SMEs), because many large businesses already have EDI systems in place. The accessibility of the Internet makes electronic Commerce a realistic possibility for SMEs and is likely to lead to its widespread diffusion.
E-commerce’s most significant impact will be on sectors that primarily transmit information ( postal service, communications, radio and TV) and those that produce it ( finance, entertainment, travel agents or stockbrokers). Electronically delivered products such as software, travel services, entertainment and finance are leading products in both the business – to – business and business-to-consumer markets, Because of the intangible nature of such products, existing rules and practices will have to be re-examined.
Even though some Web sites cost hundreds of millions of dollars, simpler sites can be designed and constructed for tens of thousands. In general, it is less expensive to maintain a cyber storefront than a physical one because it is always “open”, has a global market, and has fewer variable costs. For exclusively e-commerce merchants who maintain one” store” instead of many, duplicate inventory costs are eliminated.
A key factor in reducing inventory costs is adopting a “just-intime” inventory system and improving the ability to forecast demand more accurately. Both of these can be accomplished through the adoption of electronic commerce, which strengthens the links between firms. Improved demand forecasting and replenishment of stocks is estimated to lead to a reduction in overall inventories of $250-$350 billion, or about a 20 to 25 per cent reduction in current US inventory levels. While this estimate is probably optimistic, pilot studies on the US auto market obtained 20 per cent savings, and even a 5 per cent
reduction would have a significant economic impact.
By placing the necessary information online in an accessible format, electronic commerce merchants greatly increase the efficiency of the sales process. As a result, even when. customers complete a transaction in a traditional way (off”line), over the phone or in a showroom, they frequently arrive knowing which product they want and ready to buy. This can improve the productivity of sales people by a factor of ten (although in some cases it simply shifts the costs to Consumers).
In what are increasingly knowledge-based economies dominated by sophisticated products, customer service and after-sales service are a major cost for many firms, accounting for more than 10 per cent of operating costs. Through electronic commerce, firms are able to move much of this support online so that customers can access databases or “smart” manuals directly; this significantly cuts costs while\ generally improving
the quality of service.
Internet-based e-commerce procedures now make it possible to apply EDI-type systems to relatively small purchases, thereby drastically reducing errors, ensuring compliance with organizational norms, and speeding the process. Estimates of the savings gained rangE3 from 10 to 50 per cent, although in many cases the time reductions are as important as the monetary savings: firms report cutting the time needed to process
purchase orders by 50 to 96 per cent. Although shipping costs can increase the cost of many products purchased via electronic commerce and add substantially to the final price, distribution costs are significantly reduced (by 50 to 90 percent) for electronically
delivered products such as financial services, software, and travel.
While e-commerce can dramatically reduce some production costs, it does not really offer a “friction free” environment. Rather, owing to new costs associated with establishing trust and reducing the risks inherent in this type of activity, it requires
new intermediaries. Widespread “disinter mediation” (producers selling directly to consumers without the aid of intermediaries) is unlikely to be any more pronounced than
what has already occurred through direct mail, telephone, newspapers, TV and radio. A potentially larger impact involves the ease of access to information that to date has been possessed by intermediaries such as travel agents, insurance agents, stockbrokers and real estate agents. Rather than eliminating intermediaries, it is more likely that their role will be restructured aria redefined.
The translation of cost reductions into price reductions is not automatic. It is contingent on sufficient competition. Currently, price reductions attributable to e-commerce have only been evident in a few sectors (e.g. retail stock trading). However, the lower costs associated with e-commerce should lead to greater product, market and international competition, especially in services, and thus to greater price competition.
While cyber-traders may not yet be representative of a new commercial paradigm, electronic commerce is playing a catalytic role in organizational change by opening up the possibility of new models for organizing production and transacting business, thereby forcing existing firms to re-examine their cost structure and competition strategies.
E-commerce encourages streamlined business processes, flatter organizational hierarchies, continuous training, and inter-firm collaboration. Firms’ ability to reorganize in the new electronic environment will crucially depend on the flexibility and adaptability of workers and on firms’ continuing efforts to innovate.
The Internet opens up certain proprietary relationships, extends relations between sectors, makes the electronic market accessible to smaller businesses and allows them to address international markets. The nature of competition as well as firms’ strategies and competitive advantages in domestic. and international markets also change. Increasingly, new entrants compete in setting standards and providing the interface, and Web-based
alliances will playa strategic role in the emerging standard. Online firms also compete to capture customer information, and virtual communities could playa role in striking the balance of market power among consumers and suppliers. Work can be performed from a variety of locations and firms are increasingly being exposed to global competition.
Smaller firms may in fact benefit from the opportunities offered by electronic commerce as they are unencumbered by existing relationships with traditional retail outlets or a large sales force. They may adopt a business model that forces larger established competitors to restructure their existing relationships or be seen as non-competitive.
The Internet can level the competitive playing field by allowing small companies to extend their geographical reach and secure new customers in ways formerly restricted to much larger firms. Nonetheless, it is also possible that conditions of access to networks and connectivity, technical standards, institutional arrangements and the market power of well-known brands could pose barriers to entry that might impede SME involvement.
This means that both governments and the business community must remain attentive to developments in the electronic marketplace in order to prevent or remove barriers to
full SME participation.
Jobs and Skills
There is concern that some of the efficiencies associated with electronic commerce will result in widespread dislocation of jobs. The preliminary analysis contained in this courseware, studies conducted by other researchers, .and an examination of somewhat analogous activities (such as France’s Minute!) do not support this concern at this stage. It seems more likely that, in the short term, there may be net employment creation as firm’s experiment with both modes of commerce, that, in the medium term, there may be some losses, especially in certain sectors, but that, in the longer term, the combination of new products, extended market reach, and income gains and lower prices derived from productivity increases will lead to net employment gains as increased sales of software, online services, audio-visual, music, publishing and yet- to-be invented products off-set losses due to displacement of other products. These effects are likely to differ across countries, depending on the size and structure of e-commerce. These observations are necessarily speculative because, as a share of all economic activity, e-commerce is currently very small and its potential has not been fully realized.
Table IT Jobs Unfilled Owing to Skill Shortages
World Current estimate of unfilled jobs
600 000
United States 346 000
Germany 60 000
Canada 20 000/30 000
United Kingdom Source 20 000
What is clearer is the fact that electronic commerce will cause changes in the mix of skills required, driving demand for information technology (IT) professionals. This may exacerbate a supply short-age, which has received great attention in the United States, although it is not peculiar to that country (Table 3). For ,- electronic commerce, IT expertise also needs to be coupled with strong business applications skills, and therefore
requires a flexible, multi-skilled works force. Apart from contingent skills needed to support electronic commerce transactions and applications, there will be a more structural arid long-term shift in the skills required performing economic activities on line. In general, e-commerce is likely to accelerate existing upskilling/multi-skilling trends in the OECD workforce.
Business-to-Business Electronic Commerce
In business-to-business electronic commerce businesses use the Internet to integrate the value- added chain, which can extend from the supplier of raw materials to the final consumer consumer. Business for business Bte’cttOi1iCCommerge dominates the total value of e-commerce activity, accounting for about 80 per cent at present. Because the-economic factors affecting the adoption of e-commerce between businesses are such different from those affecting business-to-consumer e-commerce, business-to- business e-commerce is likely to maintain for enlarge is advantage for the foreseeable future:
Electronic links between businesses are not new. They have existed for decades, in the form of electronic data interchange (ED!) supplied by value-added networks (V AN) operated over leased telephone lines. Large manufacturing firms are the main users of EDI. General Electric (GE), one of the largest EDI service suppliers, estimates that 80 per cent of suppliers are not connected to an EDI system but rely on from, telephone or
mail.
Drivers and inhibitors of business-to-business electronic commerce In business-to-business e-commerce, three factors are likely to lead to. .Quick 9..d,optipll of e-commerce
i) a reduction in transaction costs and improvement of product quality/ customer service ii) a defensive reaction A competitors engaging in commerce; and
iii) insistence by large businesses that all oftheir suppliers link into their e-commerce system as a condition of-doing business.
The first factor, reduced transaction costs, drives the second and third and will be explored in greater detail in the next chapter. However, electronic commerce clearly reduces these costs and thus drives its adoption.
It is expected that by 2001-02, many barriers, such as questions of security and reliability, which now limit the extension of Internet EDI to unknown firms, will have been overcome. As a result, there will be a significant increase in business-tobusiness e-commerce as it draws in smaller second- and third-tier suppliers. For example, the US Automotive Network exchange (ANX), developed by the Automotive Industry Action Group (AIAG), makes use of the Transport Control Protocol/Internet Protocol (TCP/IP) to link automotive suppliers to each other and to original equipment manufacturers
(OEM) (e.g. GM, Ford and Chrysler). Dispensing with the multiple networks and protocols that now link first-tier suppliers to OEMs, the new system will provide a single common system that can be extended to include all suppliers.
The largest impact of business –to – business e-commerce is likely to be on small and medium sized enterprises ( SMEs), because many large business already have EDT’ systems .in place. The accessibility of the Internet makes electronic commerce
realistic possibility for SMEs and is likely to lead to its widespread diffusion. In addition to migrating existing activity to e-commerce, new business--to-business products are being created which did not, or could not, exist before electronic commerce over the Internet made them economically viable. For example, spot markets that match buyers and sellers for a wide variety of goods ranging from electronic components to
agricultural commodities to transportation futures have sprung up; they represent only the beginning of what is expected to be a wide number of new business-to-business opportunities. Another example is the extension of EDI-type links via the
Internet. Parcel delivery, logistics and order fulfillment services, frequently by the same firm, are also. experiencing growth as e-commerce increases. As businesses move to “build-to-order” processing and just-in-time inventories, a premium is placed on timely, accurate inbound and outbound logistics. In addition, there is greater demand by final consumers for fast order fulfillment and the ability to track an order as it is being
processed and delivered.
Business-to-Consumer Electronic Commerce
The nature and scope of business-to-consumer electr,or;1ic commerce, Although, business-to-business electronic commerce represents the bulk of all electronic commerce, most attention and speculation about e-commerce has focused”, of the business consumer segment With household transactions typically accounting for over half of all domestic final demand,1o this is not Surprising. Moreover, as business PCs and networks are. maturated, it is natural for the focus of attention to turn to the household. When the product cannot be physically examined, traditional commerce has no advantage over the convenience of electronic commerce. Intangible products. The largest business- to-consumer e-commerce involves intangible product that can be delivered directly to the
consumer’s computer cover the network is composed of Jive broad categories: entertainment, travel news paper/magazines, financial services, and e-mail. Entertainment, which includes adult entertainment, online games, music and video, is the largest category of products sold to consumers. The interactivity of the Internet means that online game players, in some case dozens of people, play against each other ‘rather than against the computer as is the case for most current Banking is also enjoying significant e-commerce activity. Recent Ernst & Young survey of 130 financial services companies in 17 countries found that 13 per cent of the firms were using the Internet for transactions with customers in 1997 and that 60 per cent intended to do so by 1999 (Corrigan and Authers, 1997). Nearly a quarter of the 100 top US banks offer online access to accounts. Europe appears to be significantly ahead of the United States in this area; for example, nearly every major German bank is reportedly already on line and Finland has established an extensive network banking system (Strassment computer games. Many CD-ROM games now incorporate an online component. A limiting factor is the high-bandwidth requirement of some games that use realistic, moving graphics. While rapid growth is forecast for the music industry as well, current achievements have been more modest.
Tangible products To date, the main tangible products sold electronically have been electronics (including computers), books, clothing and food/drink. Each currently generates $100$200 million worth of business-to-consumer sales. Many of these categories are dominated by traditional retailers that have established electronic commerce operations. Behind these broader categories are specialty item merchants (books, flowers, and music CDs) that add value by providing a wider selection, more information about a product, or convenience. As WalMart’s decision to make 80 000 items available on line shows, however, a wide variety of products can be sold over the
Internet (http://www.ft.com/hippocampus/4cfce.htm. 2 April 1997). Even some of the most tangible of all house- Travel services, particularly airline reservations, are another major categories of business-to-consumer e-commerce. A recent European Commission policy paper on electronic commerce credits travel services with over half of all electronic commerce
More than 2 700 US newspapers post an edition on line, and 60 per cent of them have a daily print circulation of less than 30 000 financial services are an important business-to-consumer category. Because many firms engaged in online activity also provide traditional financial services, hold items (groceries, houses, cars) are now sold electronically.
The business-to-consumer segment of electronic commerce is very sector-specific.
Business-to-Consumer Electronic CommerceDrivers/Inhibitors
Factors influencing growth in business-to-consumer electronic commerce differ significantly from those that affect business-tobusiness electronic commerce. They are more likely to limit its growth and to hold it to 10-20 per cent of the overall total in the near term. While competition may force businesses to engage in business-to-business e-commerce, the business-toconsumer segment faces barriers such as concerns about security of payment, potentially fraudulent merchants, privacy of personal data, and difficulty and expense in accessing e-commerce merchants.
In addition to these legal and psychological barriers, three economic factors will have a large impact on the growth of business-to consumer electronic commerce: ease and cost of access, convenience, and the appeal of mass customization. Many observers feel that the cost and complexity of the PC, which is currently the primary access device, is a key factor shaping the demographics of the e-commerce consumer (lDC, 1997b). In addition, there is the cost of getting on line and finding the site with the products of interest. Even when the site is located, navigating it can be a challenge even to the experienced user. It may be that only when there is a very simple - access device, something like a TV with
very simple controls, will business-to-consumer e-commerce reach massive scale. While such devices are available now and are being refined (e.g. WebTV) , it remains to be seen whether or not a broad spectrum of households will quickly adopt e-commerce. Even then, the economic impact may not be large, as the current demographic profile of e-commerce shoppers - high disposable income, young, well-educated - is what most retailers target and the profile attributed with ‘generating most saleS.23 Nonetheless, a simplified access device should stimulate e-commerce shopping.
Once consumers have access, the main drivers of business-to consumer electronic commerce appear to be convenience, choice, personalization, amusement, and savings. Of these, the near-term importance of convenience is frequently singled OUt.24
Given the current demographic profile and life-style of e-commerce shoppers, it is not surprising that they value services that offer convenience.
After convenience, a characteristic frequently cited as a spur to business-to-consumer e-commerce is the possibility of forming a one-to-one relationship between merchant and consumer which allows products to be customized. Current examples include the PC configuration, custom stock portfolios, personalised greeting cards, made-to-measure jeans, and custom-made CD compilations. Many e-merchants that do not offer customised products provide a huge variety of products with niches so small that they begin to approach custom-made products: bookstores offering millions of titles, general
merchandise sites offering 90 per cent of all household needs, and car sites with links to every major manufacturer. This increased choice is a feature that consumers value, especially for locating specialty or .hard-to-find items. Likewise, well-designed sites guide the user, remember consumer preferences, and in some cases reconfigure themselves to reflect past behaviour. At the same time, the premium placed on convenience can work against strategies that emphasize choice as making decisions
takes time. While e-commerce sites are helpful for finding the proverbial “needle in the haystack”, too much choice can confuse and irritate customers.
The Future (Beyond 2002)
Where many factors are likely to affect the future of e-commerce, including general economic conditions, the European monetary union, the millennium bug, and unforeseen technological advances, two of the dominant forces are certain to be the ageing of the “Nintendo” generation - those who grew up with video games and are comfortable with information technology and the widespread diffusion of business-to-business electronic
commerce in the near term. By engaging in business-to business electronic commerce, firms open up and transform many of their operations (see Chapter 3 on industrial
organization), thereby positioning themselves so that the transition to direct sales to consumers should be natural and relatively easy. It is therefore likely that both the demand and supply sides will stimulate electronic commerce.
To judge the potential economic impact of business-toconsumer electronic commerce, the question is whether near-term growth will represent a “skimming of the cream” or
whether it will represent the “tip of the iceberg”, that is, whether a tipping point will be reached and electronic commerce will become a major mode of conducting business 44
On the basis of current experience and judging from the various e-commerce successes and failures to date, sectors likely to be significantly affected by electronic commerce in the future are those whose products have a high price-to-bulk ratio such as music CDs, commodities such as routine business flights, and intangibles such as software that can be delivered electronically. Products unlikely to be significantly affected include those with
high tactile characteristics such as fur coats or high fashion clothing and expensive items such as furniture. But even these may be amenable to electronic commerce if trusted third parties provide accreditation or warranty as is now done for wine and used cars. The future growth of electronic commerce is likely to follow “the reverse product cycle” of innovation in services: in the initial phase, incremental process innovations increase
efficiency; in the second, more radical process innovations lead to substantial improvements in quality; and in the third, “product rather than process innovations become dominant,. new industries emerge and the overall impact on output and
employment is expansionary” . While all three phases will operate in the three time periods analyzed here, the most significant new products can be expected to emerge in the more distant future.
The Future of Existing Products
While the new modes of conducting business offered by electronic commerce will generate growth, products and methods that e-commerce renders obsolete will be displaced. Initially, electronic commerce may generate efficiency gains as new methods replace previous ones. In the process, businesses will fail and jobs will be lost. This is the natural evolution of economies, and there are many historical precedents to show that the economic efficiency that emanates from this “creative destruction” is beneficial to the economy and ultimately generates more growth and jobs.
Nevertheless, when assessing the growth prospects of electronic commerce, it is important to realize that some sectors may experience negative growth.
Impact on Business Value Framework
A common way to evaluate the value of the web is to look at the potential of selling products or information on line. Evaluated by direct sells only, the internet as distribution
channel cannot compete today with other direct marketing channels it is estimated that sells on the Internet (United States) in 1995 totaled US $ 200 millions, whereas, conventional direct sales totaled US$ 60 billions.
Making money from direct sales is certainly the first way of getting value out of electronic commerce, however they are many other ways of value addition is there in following table.
The Organization Source of Business Value
Product promotion
New sales channel
Improve it Direct savings
Time to market
Customer service
Brand image
Technological and
Transform it Organization learning
Customer relations
Redefine it New product capabilities
New business models
The components of the business value of electronic commerce
Three super categories Le. improving, transforming and redefining the organization measure and amount of change in global business model of an organization and measure the impact in terms of business results. Transforming an organization requires more creative, more work, additional level of risks and different time limits that simply improving.
Product Promotion
Through a direct, information rich and interactive contact with customers. Electronic Commerce can emotion of products. The first use of electronic Commerceis to provide product ‘information through online electronic brochures and buying guides. This can be seen as an additional marketing channel, allowing to reach maximum number of customers the advantage of electronic commerce as way to deliver product information is its availability anytime, anywhere, provided the customer has right infrastructure to access the information. But, using an electronic medium also allows for interactivity and
customization. Different ways to customize the advertising content, based on the customer profile or input, are to change the content description relevant to the particular customer, Change the price, allow for new functionalities in some cases or change the path used to navigate in the service.
For instance, an electronic supermarket could provide different graphical user interface for kids, teenagers or housewives, with a look appealing to each of these segments. The advertisement appearing on the pages would also be different. With toys for the kids, music for the teens and jewelry for the housewives. This is coherent with the trends in marketing, such as micromarketing or oneto- one marketing which try and target each consumer with a specific message, according to his needs and desires.
In a world with products being increasingly harder to differentiate, shrinking lire cycles, an abundance of traditional media messages and customers having too little time, electronic commerce offers an opportunity for new promotion strategies, enhancing the branding of product. As such, the promotion strategies, enhancing the branding of products. As such, the quality of the “advertisement’ is the primary value in product promotion.
New Sales Channel
The direct reach to customers and their bidirectional nature in communicating information, electronic commerce systems represent a new sales channel for existing products.
Considering electronic commerce and in particular the World Wide Web, as a sales channel makes sense for two kinds of products:
Physical products sometimes also sold in conventional stores, which can be advertised and for ordered online, such as computer hardware or wine.
Products which can additionally be delivered over the electronic commerce medium, such as information or software. Examples of the first type are the socalled electronic catalogs
such as the Internet Shopping Network, selling all sorts of electronic and computer related goods, or virtual Vineyards, selling wine and food products, support on “line ordering and payment and sometimes online customer service.
Electronic commerce strategies are of primary value in markets where information is of significant added value to the products being brought, rather than in commodity markets. For instance, in the wine industry information on the winery, the type and quality of the wine, or the food it goes well with are of significant value to customers and usually hard to get through the traditional sales channel (e.g. super markets, liquor stores etc). Centralizing, this information digitally is therefore of significant value for customers. The right packaging of information supporting the buyer’s decision can also be of significant
advantage. Similarly the ability of shopping software to automatically propose substitute items with a reduced price to offer a coupon adds value by reducing the final bill. These
features are only possible when all information used in the purchase is digitally available and processed.
In case of information products the electronic commerce medium actually becomes the delivery medium. As such an electronic newspaper does not use paper anymore and can be fully delivered digitally in some cases there is actually no paper version of service.
Direct Savings
By using a public shared infrastructure such as the Internet and digitally transmitting and reusing information, electronic commerce systems can lower the cost of delivering information to customers.
The third component of the business value of electronic commerce is in its opportunity to save on costs. By sharing a digital infrastructure such as the Internet compared to owing a
physical one, marketing, distribution and customer service costs can be drastically reduced.
By using automated systems and digital transmission architecture, personnel, phone, postage and printing cost can be reduced. This especially important in service industries where the cost of customer service usually exceeds the product costs (e.g. for banks, credit cards telecommunication companies. Checking order status, getting a usage statement or a bill are examples of activities, which can be delivered much more cheaply, using electronic commerce. In each case” the customer value is also higher, through a quicker reporting or through the added information value.
Time to Market
Due to their instantaneous nature, electronic commerce systems allow a reduction of the cycle time associated with producing and delivering information and services.
In some markets or for some products, the ability to distribute or receive a product as soon as it’s been created is of primary importance.
In financial market, which very often leads the way in terms of complexity of the environment, some financial products (usually derivation contracts) have return on investment in a matter of hours. Their life cycle is often not much longer. It’s in this type of environment, which will increasingly become routine for other industries, that the speed achieved by electronic commerce to quickly gather information’s on customer
needs, assemble a product by adapting existing ones or assembling building blocks and distributing them will become critical. Linking network of companies, each doing part of that assembly work, is currently a growing research area, as initiatives such Commerce Net’s CALS demonstrate.
Customer Service
Through intelligence built into systems and the extended availability of intelligent support systems, electronic commerce systems can enhance customer service.
The ability to provided online answers to problems, through resolution guides, archives of company encountered problems, electronic mail interaction (and in the future audio and video support) and all that 24 hours a day, 365 days a year, builds customer confidence and retention. Monitoring how customers use this support information also provides insights on improvement areas in current products and the list of issues
encountered with products can be significant source of product feedback for the design of new products.
Customer Relationships
Electronic commerce systems will allow for more personalized relationships between suppliers and their customers, due to their ability to collect information on customer’s needs and behavioral patterns. The role of technology in learning about customers is its ability to record every event in the relationship, such as customers asking for information about a product, buying one, requesting customer service, etc. Throughout all these interactions, either over the phone, in person or online, the needs of the customer are identified and will feed future marketing efforts.
Becoming a trusted partner of a customer is key in maintaining these relationships. It can be achieved by providing him or her with valuable information. That proactivity is likely to generate additional sales volume.
Proactivity is the specific offers which would match his / her needs and buying patterns.
Example of such a strategy is currently used by Amazon, an electronic bookstore on the Web. Amazon allows its customers to program agents, which will send them relevant information. Let’s suppose you’re looking for a book on technology and strategy. Amazon will provide you with a list of the existing books, but also offer you to keep your request “in mind”, send you information on titles published as they arrive. This information is sent through electronic mail and links with the online bookstore.
New Business Models
Changing industry structures and electronic commerce systems allow for new business models, based on the wide availability of information and its direct distribution to endcustomers. Going further than new ones, we also see new business models are new forms of intermediaries, or information brokers. The examples are currently the directory providers or the search engines, such as Yahoo & Lycos.
Introduction
Electronic commerce over the Internet is a new way of conducting business. Through only three years old, it has the potential to radically alter economic activities and the social environment. Already, it affects such large sectors as communications, finance and retail trade ( altogether , about 30 per cent of GDP). It holds promise in areas such as education, health and government ( about 20 per cent of GDP). The largest effects may be associated not with many of the impacts that command the most attention ( e.g. customized products, the elimination of middlemen ) but with less visible, but potentially more pervasive, effects on routine business activities
( e.g. ordering office supplies, paying bills, and estimating demand), that is, on the way businesses interact. A combination of regulatory reform and technological innovation
enabled e-commerce to evolve as it has. Although the precursor on a internet appeared in the late 1960s, Internet e-commerce took off with the arrival. of the World Wide Web and browsers in the early 1990s and the liberalization of the telecommunications sector and innovations that greatly expanded the volume and capacity of communications (optic
fiber, digital subscriber line technologies, satellites). As a result, barriers to engage in electronic commerce have progressively fallen for both buyers and sellers. Earlier forms of e-commerce were mostly custom-made, complex, expensive and the province of large firms. Today, for a few thousand dollars, anyone can become a merchant and reach millions of consumer’s worldwide. What used to be business-to-business transactions between known parties has become a complex web of commercial activities, which can involve vast numbers of individuals who may never meet. In this sense, the Internet has
done for electronic commerce what Henry Ford did for the automobile - converted a luxury for the few into a relatively simple and inexpensive device for the many
To explore these impacts and provides a preliminary analytical foundation for further work. It does not present an exhaustive analysis - it is too early for that - but musters as much information as possible so as to provide policy makers with a quantitative picture, albeit blurry, of the current state and likely ,future direction of electronic commerce. On this basis, policy makers can begin to outline the parameters of its impact and identify areas in need of future research.
E-Commerce - Economic Drivers
Economic drivers of e-commerce five broad themes have emerged as important for understanding the economic and social impact of electronic commerce.
Electronic Commerce Transforms the MarketPlace
E-commerce will change the way business is conducted:
traditional intermediary functions will be replaced, new products and markets will be developed, and new and far closer relationships will be created between business and consumers. It will change the organization of work: new channels of knowledge diffusion and human interactivity in the workplace will be opened more flexibility and adaptability will be needed, and Workers’ functions and skills will be redefined.
Electronic Commerce has a Catalytic Effect
E-commerce will serve to accelerate and diffuse more widely changes that are already under way in the economy, such as the reform of regulations, the establishment of electronic links between businesses (ED!), the globalization of economic activity, and the demand for higher-skilled workers. Likewise, many pectoral trends already under way, such as electronic banking, direct booking of travel, and one-to-one marketing, will be accelerated because of electronic commerce.
E-commerce over the Internet vastly increases interactivity in the’ economy. These linkages now eject small businesses and households and reach out to the world at large. Access will shift away from relatively expensive personal computers to cheap and easy-to-use Types and telephones to devices yet to be invented. People will increasingly have the ability to communicate and transact business anywhere, anytime. This will have a profound impact, not the least of which will be the erosion of economic and geographic boundaries.
Openness is an underlying technical and philosophical tenet of the- expansion of electronic commerce. The widespread adoption of the Internet as a platform or business is due to its non-proprietary standards and open nature as well as to the huge industry that has evolved to support it. The economic power that stems from joining a large network will help to ensure that new standards remain open. More importantly, openness has emerged as a strategy, with many of the most success-full e--commerce ventures granting business partners and consumers unparalleled access to their inner workings, databases, and personnel. This has led to a shift in the role of consumers, who are increasingly implicated as partners in product design and creation. An expectation of openness is building on the part of consumers/citizens, which will cause transformations, for better (e.g. increased transparency, competition) or for worse (e.g. potential invasion of privacy), in the economy and society.
Electronic commerce alters the relative importance of time. Many of the routines that help define the “look and feel” of the economy and society are a function of time: mass production is the latest way of producing at the lowest cost; one’s community tends to be geographically determined because time is a determinant of proximity. E-commerce is reducing the importance of time by speeding up production cycles, allowing firms to operate in close coordination and enabling consumers to conduct transactions around the clock’s the role of time changes, so will the structure of business and social activities,
causing potentially large impacts.
Electronic Commerce Growth
At present, electronic commerce over the Internet is relatively small (some $26 billion) but is growing very rapidly and may approach a trillion dollars by 2003-05. Even at that level, it would be less than current sales by direct marketing in the United States using mail, telephone and newspapers (Table 1). Clearly, electronic commerce is in an embryonic stage, and technology and market dynamics are still casting its basic shape. This is especially true for the business-to-Consumer segment (which is only a small fraction of the business-to-business segment), where concerns about security of payment,
potentially fraudulent merchants, privacy of personal data, and difficulty and expense in accessing e--commerce merchants affect its growth potential. These issues represent significant policy challenges. While the appeal of convenience and mass customization may promote business-to-consumer e-commerce, its success is not assured. It may become no more than another channel for retailers, like mail order, rather than a new dominant mode of commerce. Policy decisions will have a major impact on the kind of environment in which e-commerce will develop and should therefore be crafted with care and with due recognition of its fragile and evolving nature.
The near-term (2001/02) and future (2003/05) growth of e-commerce is much more likely to be determined by the business-to-business segment, which currently accounts for at
least 80 per cent of total e-commerce activity.
Three factors will contribute:
i) a reduction in transaction costs and improvement of product quality/customer service;
ii) a defensive reaction to competitors engaging in e--commerce; and
iii) insistence by large businesses that all of their suppliers link into their e- commerce system as a condition of doing business.
The first factor, reduced transaction costs, drives the second and third. It is likely that the largest impact of business-to-business e-commerce will be on small and medium-sized enterprises (SMEs), because many large businesses already have EDI systems in place. The accessibility of the Internet makes electronic Commerce a realistic possibility for SMEs and is likely to lead to its widespread diffusion.
E-commerce’s most significant impact will be on sectors that primarily transmit information ( postal service, communications, radio and TV) and those that produce it ( finance, entertainment, travel agents or stockbrokers). Electronically delivered products such as software, travel services, entertainment and finance are leading products in both the business – to – business and business-to-consumer markets, Because of the intangible nature of such products, existing rules and practices will have to be re-examined.
Even though some Web sites cost hundreds of millions of dollars, simpler sites can be designed and constructed for tens of thousands. In general, it is less expensive to maintain a cyber storefront than a physical one because it is always “open”, has a global market, and has fewer variable costs. For exclusively e-commerce merchants who maintain one” store” instead of many, duplicate inventory costs are eliminated.
A key factor in reducing inventory costs is adopting a “just-intime” inventory system and improving the ability to forecast demand more accurately. Both of these can be accomplished through the adoption of electronic commerce, which strengthens the links between firms. Improved demand forecasting and replenishment of stocks is estimated to lead to a reduction in overall inventories of $250-$350 billion, or about a 20 to 25 per cent reduction in current US inventory levels. While this estimate is probably optimistic, pilot studies on the US auto market obtained 20 per cent savings, and even a 5 per cent
reduction would have a significant economic impact.
By placing the necessary information online in an accessible format, electronic commerce merchants greatly increase the efficiency of the sales process. As a result, even when. customers complete a transaction in a traditional way (off”line), over the phone or in a showroom, they frequently arrive knowing which product they want and ready to buy. This can improve the productivity of sales people by a factor of ten (although in some cases it simply shifts the costs to Consumers).
In what are increasingly knowledge-based economies dominated by sophisticated products, customer service and after-sales service are a major cost for many firms, accounting for more than 10 per cent of operating costs. Through electronic commerce, firms are able to move much of this support online so that customers can access databases or “smart” manuals directly; this significantly cuts costs while\ generally improving
the quality of service.
Internet-based e-commerce procedures now make it possible to apply EDI-type systems to relatively small purchases, thereby drastically reducing errors, ensuring compliance with organizational norms, and speeding the process. Estimates of the savings gained rangE3 from 10 to 50 per cent, although in many cases the time reductions are as important as the monetary savings: firms report cutting the time needed to process
purchase orders by 50 to 96 per cent. Although shipping costs can increase the cost of many products purchased via electronic commerce and add substantially to the final price, distribution costs are significantly reduced (by 50 to 90 percent) for electronically
delivered products such as financial services, software, and travel.
While e-commerce can dramatically reduce some production costs, it does not really offer a “friction free” environment. Rather, owing to new costs associated with establishing trust and reducing the risks inherent in this type of activity, it requires
new intermediaries. Widespread “disinter mediation” (producers selling directly to consumers without the aid of intermediaries) is unlikely to be any more pronounced than
what has already occurred through direct mail, telephone, newspapers, TV and radio. A potentially larger impact involves the ease of access to information that to date has been possessed by intermediaries such as travel agents, insurance agents, stockbrokers and real estate agents. Rather than eliminating intermediaries, it is more likely that their role will be restructured aria redefined.
The translation of cost reductions into price reductions is not automatic. It is contingent on sufficient competition. Currently, price reductions attributable to e-commerce have only been evident in a few sectors (e.g. retail stock trading). However, the lower costs associated with e-commerce should lead to greater product, market and international competition, especially in services, and thus to greater price competition.
While cyber-traders may not yet be representative of a new commercial paradigm, electronic commerce is playing a catalytic role in organizational change by opening up the possibility of new models for organizing production and transacting business, thereby forcing existing firms to re-examine their cost structure and competition strategies.
E-commerce encourages streamlined business processes, flatter organizational hierarchies, continuous training, and inter-firm collaboration. Firms’ ability to reorganize in the new electronic environment will crucially depend on the flexibility and adaptability of workers and on firms’ continuing efforts to innovate.
The Internet opens up certain proprietary relationships, extends relations between sectors, makes the electronic market accessible to smaller businesses and allows them to address international markets. The nature of competition as well as firms’ strategies and competitive advantages in domestic. and international markets also change. Increasingly, new entrants compete in setting standards and providing the interface, and Web-based
alliances will playa strategic role in the emerging standard. Online firms also compete to capture customer information, and virtual communities could playa role in striking the balance of market power among consumers and suppliers. Work can be performed from a variety of locations and firms are increasingly being exposed to global competition.
Smaller firms may in fact benefit from the opportunities offered by electronic commerce as they are unencumbered by existing relationships with traditional retail outlets or a large sales force. They may adopt a business model that forces larger established competitors to restructure their existing relationships or be seen as non-competitive.
The Internet can level the competitive playing field by allowing small companies to extend their geographical reach and secure new customers in ways formerly restricted to much larger firms. Nonetheless, it is also possible that conditions of access to networks and connectivity, technical standards, institutional arrangements and the market power of well-known brands could pose barriers to entry that might impede SME involvement.
This means that both governments and the business community must remain attentive to developments in the electronic marketplace in order to prevent or remove barriers to
full SME participation.
Jobs and Skills
There is concern that some of the efficiencies associated with electronic commerce will result in widespread dislocation of jobs. The preliminary analysis contained in this courseware, studies conducted by other researchers, .and an examination of somewhat analogous activities (such as France’s Minute!) do not support this concern at this stage. It seems more likely that, in the short term, there may be net employment creation as firm’s experiment with both modes of commerce, that, in the medium term, there may be some losses, especially in certain sectors, but that, in the longer term, the combination of new products, extended market reach, and income gains and lower prices derived from productivity increases will lead to net employment gains as increased sales of software, online services, audio-visual, music, publishing and yet- to-be invented products off-set losses due to displacement of other products. These effects are likely to differ across countries, depending on the size and structure of e-commerce. These observations are necessarily speculative because, as a share of all economic activity, e-commerce is currently very small and its potential has not been fully realized.
Table IT Jobs Unfilled Owing to Skill Shortages
World Current estimate of unfilled jobs
600 000
United States 346 000
Germany 60 000
Canada 20 000/30 000
United Kingdom Source 20 000
What is clearer is the fact that electronic commerce will cause changes in the mix of skills required, driving demand for information technology (IT) professionals. This may exacerbate a supply short-age, which has received great attention in the United States, although it is not peculiar to that country (Table 3). For ,- electronic commerce, IT expertise also needs to be coupled with strong business applications skills, and therefore
requires a flexible, multi-skilled works force. Apart from contingent skills needed to support electronic commerce transactions and applications, there will be a more structural arid long-term shift in the skills required performing economic activities on line. In general, e-commerce is likely to accelerate existing upskilling/multi-skilling trends in the OECD workforce.
Business-to-Business Electronic Commerce
In business-to-business electronic commerce businesses use the Internet to integrate the value- added chain, which can extend from the supplier of raw materials to the final consumer consumer. Business for business Bte’cttOi1iCCommerge dominates the total value of e-commerce activity, accounting for about 80 per cent at present. Because the-economic factors affecting the adoption of e-commerce between businesses are such different from those affecting business-to-consumer e-commerce, business-to- business e-commerce is likely to maintain for enlarge is advantage for the foreseeable future:
Electronic links between businesses are not new. They have existed for decades, in the form of electronic data interchange (ED!) supplied by value-added networks (V AN) operated over leased telephone lines. Large manufacturing firms are the main users of EDI. General Electric (GE), one of the largest EDI service suppliers, estimates that 80 per cent of suppliers are not connected to an EDI system but rely on from, telephone or
mail.
Drivers and inhibitors of business-to-business electronic commerce In business-to-business e-commerce, three factors are likely to lead to. .Quick 9..d,optipll of e-commerce
i) a reduction in transaction costs and improvement of product quality/ customer service ii) a defensive reaction A competitors engaging in commerce; and
iii) insistence by large businesses that all oftheir suppliers link into their e-commerce system as a condition of-doing business.
The first factor, reduced transaction costs, drives the second and third and will be explored in greater detail in the next chapter. However, electronic commerce clearly reduces these costs and thus drives its adoption.
It is expected that by 2001-02, many barriers, such as questions of security and reliability, which now limit the extension of Internet EDI to unknown firms, will have been overcome. As a result, there will be a significant increase in business-tobusiness e-commerce as it draws in smaller second- and third-tier suppliers. For example, the US Automotive Network exchange (ANX), developed by the Automotive Industry Action Group (AIAG), makes use of the Transport Control Protocol/Internet Protocol (TCP/IP) to link automotive suppliers to each other and to original equipment manufacturers
(OEM) (e.g. GM, Ford and Chrysler). Dispensing with the multiple networks and protocols that now link first-tier suppliers to OEMs, the new system will provide a single common system that can be extended to include all suppliers.
The largest impact of business –to – business e-commerce is likely to be on small and medium sized enterprises ( SMEs), because many large business already have EDT’ systems .in place. The accessibility of the Internet makes electronic commerce
realistic possibility for SMEs and is likely to lead to its widespread diffusion. In addition to migrating existing activity to e-commerce, new business--to-business products are being created which did not, or could not, exist before electronic commerce over the Internet made them economically viable. For example, spot markets that match buyers and sellers for a wide variety of goods ranging from electronic components to
agricultural commodities to transportation futures have sprung up; they represent only the beginning of what is expected to be a wide number of new business-to-business opportunities. Another example is the extension of EDI-type links via the
Internet. Parcel delivery, logistics and order fulfillment services, frequently by the same firm, are also. experiencing growth as e-commerce increases. As businesses move to “build-to-order” processing and just-in-time inventories, a premium is placed on timely, accurate inbound and outbound logistics. In addition, there is greater demand by final consumers for fast order fulfillment and the ability to track an order as it is being
processed and delivered.
Business-to-Consumer Electronic Commerce
The nature and scope of business-to-consumer electr,or;1ic commerce, Although, business-to-business electronic commerce represents the bulk of all electronic commerce, most attention and speculation about e-commerce has focused”, of the business consumer segment With household transactions typically accounting for over half of all domestic final demand,1o this is not Surprising. Moreover, as business PCs and networks are. maturated, it is natural for the focus of attention to turn to the household. When the product cannot be physically examined, traditional commerce has no advantage over the convenience of electronic commerce. Intangible products. The largest business- to-consumer e-commerce involves intangible product that can be delivered directly to the
consumer’s computer cover the network is composed of Jive broad categories: entertainment, travel news paper/magazines, financial services, and e-mail. Entertainment, which includes adult entertainment, online games, music and video, is the largest category of products sold to consumers. The interactivity of the Internet means that online game players, in some case dozens of people, play against each other ‘rather than against the computer as is the case for most current Banking is also enjoying significant e-commerce activity. Recent Ernst & Young survey of 130 financial services companies in 17 countries found that 13 per cent of the firms were using the Internet for transactions with customers in 1997 and that 60 per cent intended to do so by 1999 (Corrigan and Authers, 1997). Nearly a quarter of the 100 top US banks offer online access to accounts. Europe appears to be significantly ahead of the United States in this area; for example, nearly every major German bank is reportedly already on line and Finland has established an extensive network banking system (Strassment computer games. Many CD-ROM games now incorporate an online component. A limiting factor is the high-bandwidth requirement of some games that use realistic, moving graphics. While rapid growth is forecast for the music industry as well, current achievements have been more modest.
Tangible products To date, the main tangible products sold electronically have been electronics (including computers), books, clothing and food/drink. Each currently generates $100$200 million worth of business-to-consumer sales. Many of these categories are dominated by traditional retailers that have established electronic commerce operations. Behind these broader categories are specialty item merchants (books, flowers, and music CDs) that add value by providing a wider selection, more information about a product, or convenience. As WalMart’s decision to make 80 000 items available on line shows, however, a wide variety of products can be sold over the
Internet (http://www.ft.com/hippocampus/4cfce.htm. 2 April 1997). Even some of the most tangible of all house- Travel services, particularly airline reservations, are another major categories of business-to-consumer e-commerce. A recent European Commission policy paper on electronic commerce credits travel services with over half of all electronic commerce
More than 2 700 US newspapers post an edition on line, and 60 per cent of them have a daily print circulation of less than 30 000 financial services are an important business-to-consumer category. Because many firms engaged in online activity also provide traditional financial services, hold items (groceries, houses, cars) are now sold electronically.
The business-to-consumer segment of electronic commerce is very sector-specific.
Business-to-Consumer Electronic CommerceDrivers/Inhibitors
Factors influencing growth in business-to-consumer electronic commerce differ significantly from those that affect business-tobusiness electronic commerce. They are more likely to limit its growth and to hold it to 10-20 per cent of the overall total in the near term. While competition may force businesses to engage in business-to-business e-commerce, the business-toconsumer segment faces barriers such as concerns about security of payment, potentially fraudulent merchants, privacy of personal data, and difficulty and expense in accessing e-commerce merchants.
In addition to these legal and psychological barriers, three economic factors will have a large impact on the growth of business-to consumer electronic commerce: ease and cost of access, convenience, and the appeal of mass customization. Many observers feel that the cost and complexity of the PC, which is currently the primary access device, is a key factor shaping the demographics of the e-commerce consumer (lDC, 1997b). In addition, there is the cost of getting on line and finding the site with the products of interest. Even when the site is located, navigating it can be a challenge even to the experienced user. It may be that only when there is a very simple - access device, something like a TV with
very simple controls, will business-to-consumer e-commerce reach massive scale. While such devices are available now and are being refined (e.g. WebTV) , it remains to be seen whether or not a broad spectrum of households will quickly adopt e-commerce. Even then, the economic impact may not be large, as the current demographic profile of e-commerce shoppers - high disposable income, young, well-educated - is what most retailers target and the profile attributed with ‘generating most saleS.23 Nonetheless, a simplified access device should stimulate e-commerce shopping.
Once consumers have access, the main drivers of business-to consumer electronic commerce appear to be convenience, choice, personalization, amusement, and savings. Of these, the near-term importance of convenience is frequently singled OUt.24
Given the current demographic profile and life-style of e-commerce shoppers, it is not surprising that they value services that offer convenience.
After convenience, a characteristic frequently cited as a spur to business-to-consumer e-commerce is the possibility of forming a one-to-one relationship between merchant and consumer which allows products to be customized. Current examples include the PC configuration, custom stock portfolios, personalised greeting cards, made-to-measure jeans, and custom-made CD compilations. Many e-merchants that do not offer customised products provide a huge variety of products with niches so small that they begin to approach custom-made products: bookstores offering millions of titles, general
merchandise sites offering 90 per cent of all household needs, and car sites with links to every major manufacturer. This increased choice is a feature that consumers value, especially for locating specialty or .hard-to-find items. Likewise, well-designed sites guide the user, remember consumer preferences, and in some cases reconfigure themselves to reflect past behaviour. At the same time, the premium placed on convenience can work against strategies that emphasize choice as making decisions
takes time. While e-commerce sites are helpful for finding the proverbial “needle in the haystack”, too much choice can confuse and irritate customers.
The Future (Beyond 2002)
Where many factors are likely to affect the future of e-commerce, including general economic conditions, the European monetary union, the millennium bug, and unforeseen technological advances, two of the dominant forces are certain to be the ageing of the “Nintendo” generation - those who grew up with video games and are comfortable with information technology and the widespread diffusion of business-to-business electronic
commerce in the near term. By engaging in business-to business electronic commerce, firms open up and transform many of their operations (see Chapter 3 on industrial
organization), thereby positioning themselves so that the transition to direct sales to consumers should be natural and relatively easy. It is therefore likely that both the demand and supply sides will stimulate electronic commerce.
To judge the potential economic impact of business-toconsumer electronic commerce, the question is whether near-term growth will represent a “skimming of the cream” or
whether it will represent the “tip of the iceberg”, that is, whether a tipping point will be reached and electronic commerce will become a major mode of conducting business 44
On the basis of current experience and judging from the various e-commerce successes and failures to date, sectors likely to be significantly affected by electronic commerce in the future are those whose products have a high price-to-bulk ratio such as music CDs, commodities such as routine business flights, and intangibles such as software that can be delivered electronically. Products unlikely to be significantly affected include those with
high tactile characteristics such as fur coats or high fashion clothing and expensive items such as furniture. But even these may be amenable to electronic commerce if trusted third parties provide accreditation or warranty as is now done for wine and used cars. The future growth of electronic commerce is likely to follow “the reverse product cycle” of innovation in services: in the initial phase, incremental process innovations increase
efficiency; in the second, more radical process innovations lead to substantial improvements in quality; and in the third, “product rather than process innovations become dominant,. new industries emerge and the overall impact on output and
employment is expansionary” . While all three phases will operate in the three time periods analyzed here, the most significant new products can be expected to emerge in the more distant future.
The Future of Existing Products
While the new modes of conducting business offered by electronic commerce will generate growth, products and methods that e-commerce renders obsolete will be displaced. Initially, electronic commerce may generate efficiency gains as new methods replace previous ones. In the process, businesses will fail and jobs will be lost. This is the natural evolution of economies, and there are many historical precedents to show that the economic efficiency that emanates from this “creative destruction” is beneficial to the economy and ultimately generates more growth and jobs.
Nevertheless, when assessing the growth prospects of electronic commerce, it is important to realize that some sectors may experience negative growth.
Impact on Business Value Framework
A common way to evaluate the value of the web is to look at the potential of selling products or information on line. Evaluated by direct sells only, the internet as distribution
channel cannot compete today with other direct marketing channels it is estimated that sells on the Internet (United States) in 1995 totaled US $ 200 millions, whereas, conventional direct sales totaled US$ 60 billions.
Making money from direct sales is certainly the first way of getting value out of electronic commerce, however they are many other ways of value addition is there in following table.
The Organization Source of Business Value
Product promotion
New sales channel
Improve it Direct savings
Time to market
Customer service
Brand image
Technological and
Transform it Organization learning
Customer relations
Redefine it New product capabilities
New business models
The components of the business value of electronic commerce
Three super categories Le. improving, transforming and redefining the organization measure and amount of change in global business model of an organization and measure the impact in terms of business results. Transforming an organization requires more creative, more work, additional level of risks and different time limits that simply improving.
Product Promotion
Through a direct, information rich and interactive contact with customers. Electronic Commerce can emotion of products. The first use of electronic Commerceis to provide product ‘information through online electronic brochures and buying guides. This can be seen as an additional marketing channel, allowing to reach maximum number of customers the advantage of electronic commerce as way to deliver product information is its availability anytime, anywhere, provided the customer has right infrastructure to access the information. But, using an electronic medium also allows for interactivity and
customization. Different ways to customize the advertising content, based on the customer profile or input, are to change the content description relevant to the particular customer, Change the price, allow for new functionalities in some cases or change the path used to navigate in the service.
For instance, an electronic supermarket could provide different graphical user interface for kids, teenagers or housewives, with a look appealing to each of these segments. The advertisement appearing on the pages would also be different. With toys for the kids, music for the teens and jewelry for the housewives. This is coherent with the trends in marketing, such as micromarketing or oneto- one marketing which try and target each consumer with a specific message, according to his needs and desires.
In a world with products being increasingly harder to differentiate, shrinking lire cycles, an abundance of traditional media messages and customers having too little time, electronic commerce offers an opportunity for new promotion strategies, enhancing the branding of product. As such, the promotion strategies, enhancing the branding of products. As such, the quality of the “advertisement’ is the primary value in product promotion.
New Sales Channel
The direct reach to customers and their bidirectional nature in communicating information, electronic commerce systems represent a new sales channel for existing products.
Considering electronic commerce and in particular the World Wide Web, as a sales channel makes sense for two kinds of products:
Physical products sometimes also sold in conventional stores, which can be advertised and for ordered online, such as computer hardware or wine.
Products which can additionally be delivered over the electronic commerce medium, such as information or software. Examples of the first type are the socalled electronic catalogs
such as the Internet Shopping Network, selling all sorts of electronic and computer related goods, or virtual Vineyards, selling wine and food products, support on “line ordering and payment and sometimes online customer service.
Electronic commerce strategies are of primary value in markets where information is of significant added value to the products being brought, rather than in commodity markets. For instance, in the wine industry information on the winery, the type and quality of the wine, or the food it goes well with are of significant value to customers and usually hard to get through the traditional sales channel (e.g. super markets, liquor stores etc). Centralizing, this information digitally is therefore of significant value for customers. The right packaging of information supporting the buyer’s decision can also be of significant
advantage. Similarly the ability of shopping software to automatically propose substitute items with a reduced price to offer a coupon adds value by reducing the final bill. These
features are only possible when all information used in the purchase is digitally available and processed.
In case of information products the electronic commerce medium actually becomes the delivery medium. As such an electronic newspaper does not use paper anymore and can be fully delivered digitally in some cases there is actually no paper version of service.
Direct Savings
By using a public shared infrastructure such as the Internet and digitally transmitting and reusing information, electronic commerce systems can lower the cost of delivering information to customers.
The third component of the business value of electronic commerce is in its opportunity to save on costs. By sharing a digital infrastructure such as the Internet compared to owing a
physical one, marketing, distribution and customer service costs can be drastically reduced.
By using automated systems and digital transmission architecture, personnel, phone, postage and printing cost can be reduced. This especially important in service industries where the cost of customer service usually exceeds the product costs (e.g. for banks, credit cards telecommunication companies. Checking order status, getting a usage statement or a bill are examples of activities, which can be delivered much more cheaply, using electronic commerce. In each case” the customer value is also higher, through a quicker reporting or through the added information value.
Time to Market
Due to their instantaneous nature, electronic commerce systems allow a reduction of the cycle time associated with producing and delivering information and services.
In some markets or for some products, the ability to distribute or receive a product as soon as it’s been created is of primary importance.
In financial market, which very often leads the way in terms of complexity of the environment, some financial products (usually derivation contracts) have return on investment in a matter of hours. Their life cycle is often not much longer. It’s in this type of environment, which will increasingly become routine for other industries, that the speed achieved by electronic commerce to quickly gather information’s on customer
needs, assemble a product by adapting existing ones or assembling building blocks and distributing them will become critical. Linking network of companies, each doing part of that assembly work, is currently a growing research area, as initiatives such Commerce Net’s CALS demonstrate.
Customer Service
Through intelligence built into systems and the extended availability of intelligent support systems, electronic commerce systems can enhance customer service.
The ability to provided online answers to problems, through resolution guides, archives of company encountered problems, electronic mail interaction (and in the future audio and video support) and all that 24 hours a day, 365 days a year, builds customer confidence and retention. Monitoring how customers use this support information also provides insights on improvement areas in current products and the list of issues
encountered with products can be significant source of product feedback for the design of new products.
Customer Relationships
Electronic commerce systems will allow for more personalized relationships between suppliers and their customers, due to their ability to collect information on customer’s needs and behavioral patterns. The role of technology in learning about customers is its ability to record every event in the relationship, such as customers asking for information about a product, buying one, requesting customer service, etc. Throughout all these interactions, either over the phone, in person or online, the needs of the customer are identified and will feed future marketing efforts.
Becoming a trusted partner of a customer is key in maintaining these relationships. It can be achieved by providing him or her with valuable information. That proactivity is likely to generate additional sales volume.
Proactivity is the specific offers which would match his / her needs and buying patterns.
Example of such a strategy is currently used by Amazon, an electronic bookstore on the Web. Amazon allows its customers to program agents, which will send them relevant information. Let’s suppose you’re looking for a book on technology and strategy. Amazon will provide you with a list of the existing books, but also offer you to keep your request “in mind”, send you information on titles published as they arrive. This information is sent through electronic mail and links with the online bookstore.
New Business Models
Changing industry structures and electronic commerce systems allow for new business models, based on the wide availability of information and its direct distribution to endcustomers. Going further than new ones, we also see new business models are new forms of intermediaries, or information brokers. The examples are currently the directory providers or the search engines, such as Yahoo & Lycos.
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