CS507 - Information Systems - Lecture Handout 41

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E-Commerce

Electronic Commerce (e-commerce or EC) describes the buying, selling, and exchanging of products, services, and information via computer network, primarily the internet. Some people view the term commerce as describing transactions conducted between business partners. Ebusiness is a broad definition of EC, not just buying and selling, but also servicing customers, collaborating with business partners, and conducting electronic transactions within an organization.

Why E-Commerce?

Due to rapid expansion in business, and time pressures from customers, Efficiency in delivering products and information there to and addressing complaints is of paramount importance. Use of internet or web services can be a very effective tool in achieving this goal. It helps to achieve various business goals in the fastest possible way, e.g. sharing production schedules with suppliers, knowing customer demands for future in advance. These days almost almost all businesses have Ecommerce, from fast food chains to automobile manufacturers. Online orders can be placed along with online payment made. All this is possible with the use of E-commerce. According to Lou Gerstner, IBM’s former CEO,

“E-business is all about time, cycle, speed, globalization, enhanced productivity, reaching new customers, and sharing knowledge across institutions for competitive advantage.”

What does E-Commerce do?

E-commerce is what happens when one combines the broad reach of the Internet with the vast resources of traditional information technology systems. It uses the web to bring together customers, vendors, and suppliers in the ways never before possible. E-commerce presents abundant opportunities. Companies around the world already buy and sell over the Internet. They connect with customers, suppliers and each other. They do the business on the web, and consequently, they do more business. There are challenges like security, scalability and reliability.
They are real but they are surmountable. E-commerce is about web-enabling your core businesses processes to improve customer service, reduce cycle time, get more results from limited resources, and actually sell things.

In the age of global competition, e-commerce can play a critical role in helping organizations to boost sales at high margins due to the high economies of scale. It is something which is becoming need of the day.

E-Commerce vs. E-Business

Since both the terms are quite commonly used interchangeably, the scope is often confused likewise. All e-commerce is part of e-business. Not all e-business is e-commerce. E-business means using the internet and online technologies to create operating efficiencies, and therefore increase value to the customer. It is internally focused. Think swift integration of planning, sourcing, manufacturing, management, execution, and selling using IT infrastructure. Example, FedEx is a company incorporating e-business programs to improve efficiencies throughout the supply chain. For instance, moving the invoicing process online reduced costs as well as officers’ time spent on
paperwork. Now this would be seen as E-business not e-commerce. Concerns for e-business usually are which are broader than:

  1. Has e-business increased your effectiveness?
  2. Were our processes faulty before we moved them online?
  3. Are we gaining efficiencies in specific areas?
  4. Have relationships with suppliers or customers improved?
  5. Are our web-enabled systems assisting in decision making, or just providing access to information?
  6. Does our e-business strategy fit with our overall corporate strategy?

If there is a direct financial transaction involved with the electronic process using Internet technologies it is e-commerce. If there is a non-financial transaction with an electronic process using Internet technologies it is e-business. Any transaction with an electronic process using Internet technologies is e-business. For example, ordering a book on Amazon.com is e-commerce and e-business. Creating a map with directions from your home to the post office on google maps is e-business (no e-commerce involved). The above confusion is quite similar to what exists
between Marketing and sales. Sales is part of Marketing. Marketing includes other activities, such as Advertising which is not Sales. The most prevalent of E-Commerce models can be classified as

  1. Business to Consumer (B2C)
  2. Business to Business (B2B),
  3. Business to Employee (B2E),
  4. Consumer to Consumer (C2C) and
  5. E-Government
    • Government to Citizens/Customers (G2C)
    • Government to Business (G2B)
    • Government to Government (G2G

Business to Consumer (B2C)

All elements of physical shopping experience are present in the B2C Model. There is a store represented by a website known as store front. Potential customers browse through the storefront using web browser (like Netscape or Internet Explorer). If they like a product, they select it by adding it to your Shopping Cart. If the customer wants additional information from the vendor, he would do so by either investigating relevant links on product specifications, or by sending message through a ‘contact us’ or email section of the website. Finally, once you have selected your product, you pay for it using any of several payment methods, the most common of which is a credit card.
When the average citizen interact with a company through a website, buying shoes or books online or making inquires of products and services, we are doing so through the Business to Consumer model. The B2C model is similar to a customer visiting a store or shop, browsing at products on display, inquiring from the shopkeeper about a particular product, and then selecting and paying for the product or service. One of the major differences between a traditional shopping experience and B2C e-commerce Model is that all of this is done electronically, remotely through the internet, without you having to leave the comfort of your house or office. Customers and suppliers can be 10,000 miles apart, in different cities or countries, or even different continents, and yet do business as if they were located in same city or on the same street. Since the internet never sleeps or closes customer can do business 24- hours of the day, 365-days of the year. Bad weather, strikes or labor problem will not prevent the customer from visiting the store and placing their orders.

The real reason that B2C is flourishing in technologically advanced societies is that it has broken down ‘physical’ barriers to doing business. This has allowed even small, less financially sound and often suspicious entities, to represent and partner with brand name companies. Resultantly, when you visit a storefront on the web, you are not certain whether the vendor (whose site you are going to shop at) is in ‘control’ of the entire business cycle. In most cases, the storefront owner is just a small link in the complicated supply and distribution network that has been made possible through the Internet. Should the relationship between any of the intermediaries fall apart, the customers may not have too many options to address his complaints.

Business to Business (B2B)

Traditionally, because transactions between business partners is conducted by mailing or faxing documents like Purchase Orders, Delivery Note or Invoices. Business to Business (B2B) is a model to e-commerce where businesses conduct commerce amongst themselves over the Internet/Intranet. What this entails is two or more business partners entering into agreements, whereby instead of using paper documents to complete a transaction cycle, they do so through electronic means, sharing data over secure Internet or Intranet connections. While the volume in terms of number of transactions through this e-commerce model is smaller than that generated worldwide through B2C, the monetary turnover through B2B is significantly higher, especially on a per-transaction basis.

Example – B2B and B2C

A car manufacturer company receives an order for delivery of a car through internet. The payment is also made by the consumer through the internet using his credit card. On receiving the order the company may have to order manufacturing of the unit and certain principal parts may not available. In such a case, an online purchase order may be sent to all the vendors where ever they are located to seek the relevant parts. Hence the consumer, the vendor and the manufacturer all are linked through e-commerce.

Example – B2B

A car manufacturer (like Pak Suzuki for example) can mail or fax a purchase order formatted per its company’s requirements, to a steel supplier (like Pakistan Steel Mills), and conduct a purchase transaction. Under the B2B Model however, industry standards (such as Electronic Data Interchange) are used for transmitting data related to commercial transactions between the manufacturer and the supplier. Pak Suzuki, therefore, will be required to pre-format its purchase order data as per the standard, while Pakistan Steel Mills will setup their systems to accept the PO data per the expected standards. Any deviation form these standards could make the transaction null and void.

Electronic Data Interchange (EDI):

EDI is a set of standards for structuring information to be electronically exchanged between and within businesses, organizations, government entities and other groups. The standards describe structures that emulate documents, for example purchase orders to automate purchasing. The term EDI is also used to refer to the implementation and operation of systems and processes for creating, transmitting, and receiving EDI documents.

Business to Employee (B2E)

Companies are finding many ways to do business with their own employees electronically. They disseminate information to employees over the intranet. For example, they also allow employees to manage their fringe benefits and take training classes, electronically. In addition, employees can buy discounted insurance, travel packages, and ticket to events on the corporate intranet, and they can electronically order supplies and material needed for their work. And many companies have electronic corporate stores that sell a company’s product to its employees, usually at a discount.

Consumer to Consumer (C2C)

An increasing number of individuals are using the Internet to conduct business or to collaborate with others. Auctions are so far the most popular C2C e-commerce activity. Some other C2C activities are:

  1. Classified: Individuals used to sell items by advertising in the classified section of the newspaper. Today, they are using the Internet for this purpose. Some classified services are provided for free.
  2. Personal Services: A variety of personal services are offered on the Internet, ranging from tutoring and astrology to legal and medical advice. Personal services are advertised in the classified areas, in personal web pages, on Internet communities’ bulletin, and more. Be very careful before you buy any personal services. You need to be sure of the quality of what you buy.
  3. Peer-to-Peer and file exchange: An increasing number of individuals are using the P2P services of companies. Individuals can exchange online digital products, such as music and games.

E Government

E-Government / electronic government / digital government, or online government. The terms refer to government’s use of information and communication technology (ICT) to exchange information and services with citizens, businesses, and other arms of government. E-Government may be applied by legislature, judiciary, or administration, in order to improve internal efficiency, the delivery of public services, or processes of democratic governance. The primary delivery models are

  1. Government-to-Citizen or Government-to-Customer (G2C)
  2. Government-to-Business (G2B) and
  3. Government-to-Government (G2G).

Government to Citizen (G2C)

Government-to-Citizen (abbreviated G2C) is the online non-commercial interaction between local and central Government and private individuals. Many government entities in pakistan are making it more convenient for the citizens to interact with them. For example

  1. CBR offering services regarding (www.cbr.gov.pk)
    • Online verification
    • Sales tax registration status
    • Online availability of tax returns
  2. NADRA registration system (www.nadra.gov.pk)
    • NIC registration process
    • Bill Payment Kiosks
    • Guidance notes
    • Contact information
    • Complaints section for applicants

Government to Business (G2B)

Government-to-Business (abbreviated G2B) is the online non-commercial interaction between local and central government and the commercial business sector. The basic difference between the G2C setup and G2B set up is that government is dealing with private individuals (citizens) in case of G2C and commercial sector in case of G2B. For Example, trade development authority of Pakistan, formerly Export Promotion Bureau (EPB). (www.epb.gov.pk), providing

  • Facilitation for exporters
  • Exporters’ database
  • Guidance on regulations
  • Registration and complaints procedures

Government to Government (G2G)

Another category of electronic commerce is government to government E-Commerce. G2G form refers to Procurement transactions between government to government agencies.

Other Forms of E-Commerce

Intra-business E-Commerce – E-Commerce can be done not only between business partners, but also within organizations. Such activity is referred to as intra-business EC or, in short intrabusiness. E-Commerce between and among units within the business – large corporations frequently consist of independent units, or strategic business units (SBUs), which “sell” or “buy” materials, products and services to and from each other. Transactions of this type can be easily automated and performed over the intranet. An SBU can be considered as either a seller or a buyer. An example would be company-owned-dealership.

E-Learning

E-Learning is the online delivery of information for purposes of education, training, knowledge management, or performance management. It is a web - enabled system that makes knowledge accessible to those who need it, when they need it – anytime, anywhere. E-learning is useful for facilitating learning at schools.

Conflicts within click-and-mortar organization

When an established company decides to sell direct online, on a large scale, it may create a conflict within its existing operation. Conflict may arise in areas such as pricing of products and services, allocation of resources (e.g. advertising budget) and logistics services provided to the online activities by the offline activities (e.g. handling of returned items purchased online). As a result of these conflicts, some companies have completely separated “clicks” (the online portion of the organization) from the “mortar” (the traditional brick and mortar part of the organization). This may increase expense and reduce the synergy between the two.

M-Commerce

Electronic commerce has gradually shifted to a modern form in the name of Mobile commerce.
M-Commerce (mobile commerce) refers to the conduct of e-commerce via wireless devices.
These devices can be connected to the Internet, making it possible for users to conduct transactions from anywhere. The employees need to collaborate and communicate with office employees and to access corporate data, rapidly and conveniently. Such a capability is provided by m-commerce. Two main characteristics are driving the interest in m-commerce: mobility and reach ability. Mobility implies that the Internet access travels with the customers. M-commerce is appealing because wireless offers customers information from any location. This enables employees to contact the office from anywhere they happen to be or customer. Reachability means that people can be contacted at any time, which most people see as a convenience of modern life.
These two characteristics – mobility and reachability break the geographical and time barriers. As a result, mobile terminals such as PDA or cell phone with Internet access can be used to obtain realtime information and to communicate from anywhere, at any time.

Security Concerns

With all its benefits, e-commerce is still faced with a lot of concerns from security point of view.
Physical details of the products are not available in case of internet shopping than in case of walking around. In case they are available, they need to be accurate and supported with images of the product. That is lack of physical feel of the product should be electronically supported. Once you enter your personal information and credit card details on a vendor website, you have no control on where that information is going, or to whom it is being transmitted to or shared with.
Although the links are secured for privacy purposes but information may be leaked out deliberately by any of the connected parties e.g. supplier. Although there are means of increasing security of digitally transmitted transaction data (such as using encryption technology and digital certificates), the threat of hackers getting at your personal information is always a real one – perhaps not from your computer, but may be from vendors or his business partners systems.

E-Business Opportunities

E-business through the Internet offers significant opportunities to businesses. These opportunities are similarly available to the competition and hence also represent concomitant risks.

Competition: Through the creation of a website, a business can compete locally in traditional industries, as well as regionally, nationally and globally. The Internet permits the entity to effectively target niche markets or areas of specialty and service broad markets in a cost-effective manner. The Internet also permits both economies of scale to become a high-volume global supplier with low costs and economies of scale through product specialization.
Even businesses that decide not to actively participate in e-business will still be affected, because customers may embrace e-business and seek new sources of supply through the Internet, or suppliers may demand e-business capabilities and only deal with e-enabled enterprises.
With the exception of certain national and international retailers and suppliers, traditional marketing has been locally or regionally focused. Until recently, marketing efforts have been focused on traditional media, such as television and newspapers for consumer products and trade magazines or trade shows for industrial products. Through the Internet, marketing can be targeted to selected customers based upon customer registration information, past purchase history or other criteria.

Through the Internet, e-business can offer new and innovative marketing alternatives, such as:

  • streaming video to demonstrate products or services.
  • detailed catalogues and user manuals to identify products, sub-components and parts – such as pictures, part numbers and prices – to alleviate tedious manual searches for specific items.
  • cross-selling of products and services – e.g., when a tap is purchased through the Internet, the provision of detailed installation instructions and a list of other products required (washers, Teflon tape, valve sealing, and tools, such as pipe wrenches, etc.)
  • In many cases, an e-commerce company will survive not only based on its product, but by having a competent management team, good post-sales services, well-organized business structure, network infrastructure and a secured, well-designed website. Such factors include.

Cost Reduction: E-business facilitates implementation of new business models, including supply chains, service and support arrangements and the creation of cost-effective alliances. It also offers profit-enhancing changes through cost reduction, such as:

  1. virtual warehousing – e.g., upon the receipt of a customer order, the vendor orders the goods from the manufacturer and has them shipped directly to the customer. The vendor can carry less or no inventory, and thereby reduce warehouse, insurance and financing costs for inventory while being able to offer a greater selection of products.
  2. vertical integration – e.g., upon the receipt of an order, by means of website connections, the vendor automatically arranges shipping, delivery, installation and after sales service through an expanded geographically based network of alliance partners. All members of the alliance benefit from membership and all participate in the “one-stop-shopping” convenience of the alliance partner integration available through the web.
  3. electronic delivery of goods and services – certain goods, such as greeting cards, music, textual materials, architectural drawings and computer software may be delivered electronically to customers globally, which thereby reduces delivery and insurance costs and increases the timeliness of delivery.
  4. automated order processing – customers and suppliers can execute electronic transactions efficiently based upon Internet standards similar to the EDI standards and even access or update each other’s data files to allow inquiries on the status of orders, including links with shippers and customs brokers, etc.
  5. Classic business approaches--- generally do not fit well with the new e-business models as described in the third section of this paper. These new models are increasingly centred on the customer or consumer. For example, many customers now expect goods and services to be delivered 24 hours a day from anywhere in the world. The ability to meet customers, discuss their needs with them, demonstrate products, and perform other activities that traditional businesses use to differentiate their services may no longer be available to the same degree.

E-Business IT Risks

Since e-business invariably involves the use of the Internet through IT, the most important risks associated with e-business are IT risks. However, it should be recognized that IT risks are inextricably related to the risks associated with the opportunities mentioned. The following IT risks can be distinguished: IT infrastructure, IT application, and IT business process risks.

IT infrastructure risks relate to the adequacy of the IT infrastructure for information processing.
For example, hardware may be susceptible to malfunction. IT infrastructure risks are addressed by a security concept geared to the needs of the entity and by technical and organizational controls defined on this basis. Typical IT infrastructure risks include:

  1. Inappropriate physical security measures that do not prevent theft, unauthorized access or improper disclosure of information
  2. Vulnerability to overheating, water, fire and other physical risks
  3. Inadequate or improper emergency plans and procedures
  4. Absence of adequate back-up procedures
  5. Inconstant monitoring of firewalls to detect attempted break-ins
  6. Inadequate PKI (Private Key Infrastructure)

IT business process risks arise where analyses of security and information processing do not extend to entire business processes, but merely to parts thereof. Such risks may arise from: lack of data flow transparency, inadequate integration of systems, or deficient reconciliation and control procedures in interfaces between subprocesses arising from the exchange of data between two subsystems within business processes. In this situation, there is a risk that IT controls, such as access rights or data back-up procedures, will only be effective for the subprocesses, but not for the aggregated processes.

Typical IT business process risks in an e-business environment include:

  • Transaction data are not transmitted completely or accurately from the e-business sub-system to the accounting application
  • Safeguards only protect a sub-system from unauthorized or unapproved transactions and thereby allow transaction data to be modified by one of the downstream IT sub-systems
  • Improper or inadequate access control mechanisms may make it difficult or impossible to effectively manage access controls for all IT sub-systems integrated into the e-business process
  • Access protection that responds to a single IT application integrated into the business process could be bypassed deliberately by manipulating the upstream or downstream IT sub-systems.
  • Backup measures are only effective for the e-business sub-system and hence for the sub-process, but not for the entire IT business process.
  • The design and implementation of interfaces between the e-business sub-system and downstream IT sub-systems may not be appropriate.

Legal Risks

Management of an enterprise is responsible for ensuring that e-business operations are conducted in compliance with applicable laws and regulations. Entities should be aware of variations in applicable laws and regulations across national boundaries, despite the best efforts of international rule-making bodies. Entities operating in global markets are often not up-to-date with respect to legal issues and governmental oversight in multiple jurisdictions. Without an understanding of regulations and the law as it is applied in different jurisdictions, enterprises may become subject to
fines and adverse judgements and may incur other costs, such as legal fees, to defend the enterprise. Some of the relevant legal issues include protection of intellectual property, including patent, copyright, and trademark laws, enforceability of contracts with Internet service providers, ownership of software by a software vendor or the right of a software vendor to sell software licenses.

Commercial legal risks also arise in connection with contract law and the purchase and sale of goods and services through the Internet across national boundaries. In particular, there may be problems in determining the appropriate
jurisdiction for legal actions with respect to cross-border Internet transactions. Furthermore, where the applicable jurisdiction for the transaction is unclear, the requirements for entering into a contract may also be unclear, for these may vary in certain respects among jurisdictions. Therefore in some situations, the question may arise as to whether
there is a legally binding contract.

In addition, it should be noted that certain commercial activities that are not regulated in one jurisdiction may be regulated in another. Management is responsible for ensuring that regulated activities are performed in compliance with the laws in those jurisdictions in which those activities are conducted.

Furthermore, risks in relation to tax law compliance may also arise from e-business activities. In particular, it is often unclear in which jurisdiction taxes may become payable in connection with to cross-border transactions (i.e., income or corporate tax and sales tax). A related issue is the documentation requirements for order processing and invoices in order to comply with tax legislation.

Management is also responsible for ensuring the privacy of personal information obtained as part of the enterprise’s e-business activities. To help ensure privacy of personal information, management can establish controls to limit the risk of breaches of web security.

Summary

E-business is a growing need of today, and organizations who want to earn a greater market share will have to give serious thoughts to becoming online.