12 May Case Study ? Hal?s Woodworking Hal Donovan started an ordinary hardware store, named Hal?s Hardware in Sandusky, Ohio, in 1988. He had

CHAPTER1INTRODUCTION TOELECTRONIC

COMMERCELEARNING OBJECTIVES

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

INTRODUCTION

In the late 1990s, electronic commerce was still emerging as a new way to do business; at that time, most companies were doing very little buying or selling online. They still were selling products in physical stores or taking orders over the telephone and by mail. However, a few companies had established solid footholds online. Amazon.com was a rapidly growing bookseller and eBay had taken the lead as a profitable auction site. The business of providing search tools for finding information online was dominated by a few well-established sites, including AltaVista, Hot Bot, Lycos, and Yahoo!. Most industry observers at that time believed that any new search engine Web site would find it very difficult to compete against these established operations. Search engines of the late 1990s provided results based on the number of times a search term appeared on Web pages. Pages that included the greatest number of occurrences of a user’s search term would be more highly ranked and would thus appear near the top of the search results list. By1998, two Stanford University students, Lawrence Page and Sergey Brin, had been working on a search engine research project for two years. Page and Brin believed that a search ranking based on the relationships between Web sites would give users better and more useful results. They developed search algorithms based on the number of links a particular Web page had to and from other highly relevant pages. In 1998, they started Google(Note: This typeface indicates a corresponding link to a related Web page in the book’s Web Links. Google’s URL is http://www.google.com) in a friend’s garage with about $1.1 million of seed money invested by a group of Stanford graduates and local businesspersons. Most industry observers agree that Google’s page ranking system, which has been continuously improved since its introduction, consistently provides users with more relevant results than other search engines. Internet users flocked to Google, which became one of the most popular sites on the Internet. The site’s popularity allowed Google to charge increasingly higher rates for advertising space on its Web pages. Marketing staff at Google noticed that another search engine, Goto.com (now owned by Yahoo! and operated as Yahoo! Search Marketing), was selling ad space on Websites by allowing advertisers to bid on the price of keywords and then charging based on the num-ber of users who clicked the ads. For example, a car dealer could bid on the price of the keyword“ car. “If the car dealer were the high bidder at 12 cents, then the car dealer would pay for the ad at a rate of 12 cents times the number of site visitors who clicked the ad. Google adopted this 4 keyword bidding model in 2000 and has used it since then to sell small text ads that appear on search results pages. This approach to selling advertising was, and continues to be, extremely successful. Combined with the highly relevant search results provided by the page ranking system, it led to Google’s continued growth. When the company went public in 2004 (raising $1.67 billion), its market valuation was nearly $23 billion. Today, Google is one of the most successful online companies in the world. The Web provides a quick path to potential customers for any businessperson with a unique product or service. Google’s improved page ranking system was available to anyone in the world the day it was introduced online.

THE EVOLUTION OF ELECTRONIC COMMERCE

The business phenomenon that we now call electronic commerce has had an interesting history. From humble beginnings in the mid-1990s, electronic commerce grew rapidly until 2000, when a major downturn occurred. The popular media published endless news stories describing how the “dot-com boom “had turned into the “dot-com bust.” Between2000 and 2003, many industry observers were writing obituaries for electronic commerce. Just as the unreasonable expectations for immediate success had fueled unwarranted high expectations during the boom years, overly gloomy news reports colored perceptions during this time. Beginning in 2003, electronic commerce began to show signs of a profound rebirth. Companies that had survived the downturn were not only seeing growth in sales again, but many of them were showing profits for the first time. As the economy grew, electronic commerce grew also, but at a faster pace than the overall economy. Thus, electronic commerce gradually became a larger part of the total economy. In the general economic recession that started in 2008, electronic commerce suffered far less than most of the economy. From 2003 through the present, as the general economy has expanded and contracted, electronic commerce has consistently expanded more in the good times and contracted less in the bad times than other economic sectors. The next section defines electronic commerce and describes its evolution from a novelty to its current place as an important component of global business activity.

Electronic Commerce and Electronic Business

To many people, the term “electronic commerce “means shopping on the part of the Internet called the World Wide Web (the Web). However, electronic commerce (ore-commerce) also includes many other activities, such as businesses trading with other businesses and internal processes that companies use to support their buying, selling, hiring, planning, and other activities. Some people use the term electronic business (ore-business) when they are talking about electronic commerce in this broader sense. For example, IBM defines electronic business as “the transformation of key business processes through the use of Internet technologies. “Most people use the terms “electronic commerce” and “electronic business “interchangeably. In this book, the term electronic commerce (or e-commerce) is used in its broadest sense and includes all business activities that use Internet technologies. Internet technologies include the Internet, the World Wide Web, and other technologies such as wireless transmissions on mobile telephone networks. Companies that operate only online are sometimes called

dot-comorpure dot-com businesses to distinguish them from companies that operate in physical locations (solely or together with online operations); however, online business activity has become so integrated with everyday life in much of the world that few people worry about these distinctions any longer. Categories of Electronic Commerce Categorizing electronic commerce by the types of entities participating in the transactions or business processes is a useful and commonly accepted way to define online business. The five general electronic commerce categories are business-to-consumer, business-to-business, transactions and business processes, consumer-to-consumer, and business-to-government. The three categories that are most commonly used are:•Consumer shopping on the Web, often called business-to-consumer (or B2C)•Transactions conducted between businesses on the Web, often called business-to-business (or B2B)•Business processes in which companies, governments, and other organizations use Internet technologies to support selling and purchasing activities A single company might participate in activities that fall under multiple e-commerce categories. Consider a company that manufactures stereo speakers. The company might sell its finished product to consumers on the Web, which would be B2C electronic commerce. It might also purchase the materials it uses to make the speakers from other companies on the Web, which would be B2B electronic commerce. Businesses often have entire departments devoted to negotiating purchase transactions with their suppliers. These departments are usually named supply management or procurement. Thus, B2B electronic commerce is sometimes called e-procurement. In addition to buying materials and selling speakers, the company must also undertake many other activities to convert the purchased materials into speakers. These activities might include hiring and managing the people who make the speakers, renting or buying the facilities in which the speakers are made and stored, shipping the speakers, maintaining accounting records, obtaining customer feedback, purchasing insurance, developing advertising campaigns, and designing new versions of the speakers. An increasing number of these transactions and business processes can be done on the Web. Manufacturing processes (such as the fabrication of the speakers) can be controlled using Internet technologies within the business. All of these communication, control, and transaction-related activities have become an important part of electronic commerce. Some people include these activities in the B2B category; others refer to them as underlying or supporting business processes.

Business Processes for more than 80 years, business researchers have been studying the ways people behave in businesses. This research has helped managers better understand how workers do their jobs and what motivates them to work more effectively. The research results have helped managers, and more recently, the workers themselves, improve job performance and productivity. An important part of doing these job studies is to learn what activities each worker performs. In this setting, a business activity is a task performed by a worker in the course of doing his or her job. For a much longer time—centuries, in fact—business owners have kept records of how well their businesses are performing. The formal practice of accounting, or recording transactions, dates back to the Middle Ages. A transaction is an exchange of value, such as a purchase, a sale, or the conversion of raw materials into a finished product. By recording transactions, accountants help business owners keep score and measure how well they are doing. All transactions involve at least one activity, and some transactions involve many activities. Not all activities result in measurable (and therefore recordable) transactions. Thus, a transaction always has one or more activities associated with it, butane activity might not be related to a transaction. The group of logical, related, and sequential activities and transactions in which businesses engage are often collectively referred to as business processes. Transferring funds, placing orders, sending invoices, and shipping goods to customers are all types of activities or transactions. For example, the business process of shipping goods to customers might include a number of activities (or tasks, or transactions), such as inspecting the goods, packing the goods, negotiating with a freight company to deliver the goods, creating and printing the shipping documents, loading the goods onto the truck, and sending payment to the freight company. One important way that the Web is helping people work more effectively is by enabling employees of many different kinds of companies to work at home or from other locations (such as while traveling). In this arrangement, called telecommuting or telework, the employee logs in to the company network through the Internet instead of traveling to an office.

Relative Size of Electronic Commerce Elements

Figure 1-1 shows the three main elements of electronic commerce. The figure presents a rough approximation of the relative sizes of these elements. In terms of dollar volume and number of transactions, B2B electronic commerce is much greater than B2Celectronic commerce. However, the number of business processes that are conducted using online technologies is far greater than the number of all B2C and B2Btransactions combined.

The large oval in Figure 1-1 that represents the business processes that support selling and purchasing activities is the largest element of electronic commerce. Some researchers define a fourth category of electronic commerce, called consumer-to-consumer (or C2C), which includes individuals who buy and sell items among themselves. For example, C2C electronic commerce occurs when a person sells an item through a Web auction site to another person. In this book, C2C sales are included in theB2C category because the person selling the item acts much as a business would for purposes of the transaction. Finally, some researchers also define a category of electronic commerce called business-to-government (or B2G); this category includes business transactions with government agencies, such as paying taxes and filing required reports. An increasing number of states have Web sites that help companies do business with state government agencies. In this book, B2G transactions are included in the discussions ofB2B electronic commerce. Figure 1-2 summarizes these five categories of electronic commerce.

THE DEVELOPMENT AND GROWTH OFELECTRONIC COMMERCE

Over the thousands of years that people have engaged in commerce with one another, they have adopted the tools and technologies that became available. For example, the advent of sailing ships in ancient times opened new avenues of trade to buyers and sellers. Later innovations, such as the printing press, steam engine, and telephone, have changed the way people conduct commerce activities. The Internet has changed the way people buy, sell, hire, and organize business activities in more ways and more rapidly than any other technology in the history of business.

Early Electronic Commerce

Although the Web has made online shopping possible for many businesses and individuals, in a broader sense, electronic commerce has existed for many years. Since the mid-1960s, banks have been using electronic funds transfers (EFTs, also called wire transfers), which are electronic transmissions of account exchange information over private communications networks. Initially used to transfer money between business checking accounts, the use of EFTs gradually expanded to include payroll deposits to employees ‘accounts, automatic payment of auto and mortgage loans, and deposit of government payments to individuals, such as U.S. Social Security System remittances. Businesses have also used a form of electronic commerce, known as electronic data interchange, for many years. Electronic data interchange (EDI)occurs when one business transmits computer-readable data in a standard format to another business. In the 1960s, businesses realized that many of the documents they exchanged were related to the shipping of goods, for example, invoices, purchase orders, and bills of lading. These documents included the same set of information for almost every transaction. Businesses also realized that they were spending a good deal of time and money entering this data into their computers, printing paper forms, and then reentering the data on the other side of the transaction. Although the purchase order, invoice, and bill of lading for each transaction contained much of the same information—such as item numbers, descriptions, prices, and quantities—each paper form usually had its own unique format for presenting the information. By creating a set of standard formats for transmitting the information electronically, businesses were able to reduce errors, avoid printing and mailing costs, and eliminate the need to reenter the data. Businesses that engage in EDI with each other are called trading partners. The standard formats used in EDI contain the same information that businesses have always included in their standard paper invoices, purchase orders, and shipping documents. Firms such as General Electric, Sears, and Walmart were pioneers in using EDI to improve their purchasing processes and their relationships with suppliers. The U.S. government, which is one of the largest EDI trading partners in the world, was also instrumental in bringing businesses into EDI. One problem that EDI pioneers faced was the high cost of implementation. Until the late 1990s, doing EDI meant buying expensive computer hardware and software and the neither establishing direct network connections (using leased telephone lines) to all trading partners or subscribing to a value-added network. A value-added network (VAN)is an independent firm that offers connection and transaction-forwarding services to buyers and sellers engaged in EDI. Before the Internet came into existence as we know it today, Vans provided the connections between most trading partners and were responsible for ensuring the security of the data transmitted. EDI continues to be a large portion of B2B electronic commerce and is growing steadily every year in number of transactions and dollar volume. You will learn more about EDI, VANs, and new B2B transaction technologies in Chapter 5. The First Wave of Electronic Commerce, 1995–2003Many researchers have concluded that the development of electronic commerce is a major change in the way business is conducted and compare it to other historic changes in economic organization, such as the Industrial Revolution. A growing number of business scholars have determined that major changes in economic structures do not occur as single events, but occur as a series of developments, or waves, that occur over an extended period of time. For example, the Industrial Revolution is no longer studied as a single event, but as a series of developments that took place over a 50- to 100-year period. Economists Chris Freeman and Francisco Louçã describe four distinct waves (or phases)that occurred in the Industrial Revolution in their book As Time Goes By(see the for Further Study and Research section at the end of this chapter). In each wave, they found that different business strategies were successful. Electronic commerce and the information revolution brought about by the Internet will likely go through a series of waves, too. This section outlines the defining characteristics of the first wave of electronic commerce. Subsequent sections of this chapter discuss the evolution of electronic commerce through its second and third waves. The first wave of electronic commerce was characterized by its rapid growth, often called a “boom,” which was followed by a rapid contraction, often called a “bust.” Between 1997 and 2000, more than 12,000 Internet-related businesses were started with more than $100 billion of investors ‘money. In an extended burst of optimism, and what many later described as irrational exuberance, investors feared that they might miss the money making opportunity of a lifetime. As more investors competed for a fixed number of good ideas, the price of those ideas increased. Many good ideas suffered from poor implementation. Worse, a number of bad ideas were proposed and funded. More than 5,000 of these Internet start-up firms went out of business or were acquired in the downturn that began in 2000. The media coverage of the “dot-com bust “was extensive. However, between 2000 and 2003, more than $200 billion was invested in purchasing electronic commerce businesses that were in trouble and starting new online ventures. This injection of financial investment was not reported widely in either the general or business media, but these investments quietly fueled a rebirth of growth in online business activity. This rebirth provided another chance at success for many good online business ideas that were poorly implemented in the early days of the Internet. The “Boom and Bust” Myth Despite the many news stories that appeared between 2000 and 2002 proclaiming the death of electronic commerce, the growth in online B2C sales actually had continued through that period, although at a slower pace than during the boom years of the late1990s. Thus, the “bust “that was so widely reported in the media actually turned out to be more of a minor slowdown than an all-out collapse. After four years of doubling or tripling every year, growth in online sales slowed to an annual rate of 20 percent to 30 percent starting in 2001, which is a very high rate of expansion. This growth rate continued through the recession of 2008–2009.The 2008–2009 global recession devastated many traditional retailers, particularly in the United States and Europe. Large Asian economies, such as those in China and India, were affected less and continued to expand. Around the globe, online sales overall continued to grow during that period, although at a lower rate than the 20 to 30 percent annual rates achieved earlier in the decade. As many traditional businesses remained mired in the aftereffects of that recession, online business activity picked up and was at the leading edge of economic growth. Online business growth in Asia continued at relatively high rates throughout the recessionary period, which boosted global online sales totals. In addition to the growth in the B2C sector, B2B sales online have been increasing steadily for almost two decades. The dollar total of B2B online sales has been greater than B2C sales because B2B incorporates EDI, a technology that accounted for more than $400billion per year in transactions in 1995, when Internet-based electronic commerce was just beginning. This book defines B2B sales as including companies ‘transactions with other businesses, with their employees, and with governmental agencies (for example, when they pay their taxes) because these business processes are all candidates for the application of Internet technologies. The dollar amount of these B2B transactions is substantial. Intel is one example of a company that sells its products to other businesses rather than to consumers. Intel accepts more than 98 percent of its orders (more than $50 billion per year) through the Internet. Intel also purchases billions of dollars’ worth of supplies and raw materials on the Web each year. The total volume of all worldwide business activities on the Web is expected to exceed $14.3 trillion by 2015. Figure 1-3 summarizes the growth of actual and estimated global online sales for the B2C and B2B categories.

The Second Wave of Electronic Commerce, 2004–2009The first wave of electronic commerce was predominantly a U.S. phenomenon. Web pages were primarily in English, particularly on commerce sites. The second wave was characterized by an expanding international scope, with sellers beginning to do business in other countries and languages. Language translation and currency conversion were two impediments to rapid global expansion of electronic commerce in its second wave. You will learn more about the issues that occur today in global electronic commerce later in this chapter, in Chapter 7, which concerns legal issues, and in Chapter 11, which concerns online payment systems. In the first wave, easy access to start-up capital led to an overemphasis on creating new large enterprises to exploit electronic commerce opportunities. Investors were excited about electronic commerce and wanted to participate, no matter how much it cost or how weak the underlying ideas were. In the second wave, established companies began using their own internal funds to finance gradual expansion of electronic commerce opportunities. These measured and carefully considered investments are helping electronic commerce grow more steadily, though more slowly. The Internet technologies used in the first wave, especially in B2C commerce, were slow and inexpensive. Although businesses typically had broadband connections, most consumers connected to the Internet using dial-up modems. The increase in broadband connections in homes is a key element in the B2C component of the second wave. In2004, the number of U.S. homes with broadband connections began to increase rapidly. Most industry estimates showed that about 12 percent of U.S. homes had broadband connections in early 2004. By 2009, those estimates were ranging between 70 and 80percent. Other countries, such as South Korea, began to subsidize their citizens Internet access, which led to an even higher rate of broadband usage. The increased use of home Internet connections to transfer large audio and video files is generally seen as the reason large numbers of people spent the extra money required to obtain a broadband connection during the second wave. The increased speed of broadband not only makes Internet use more efficient, but it also can alter the way people use the Web. For example, a broadband connection allows a user to watch movies and television programs online—something that is impossible to do with a dial-up connection. This opens up more opportunities for businesses to make online sales. It also changes the way that online retailers can present their products to Web site visitors. Although business customers, unlike retail customers, have had fast connections to the Internet for many years, the increasing availability of wireless Internet connections increased the volume and nature of B2B electronic commerce during the second wave. For example, salespeople using laptop computers could stay in touch with customers, prepare quotes, and check on orders being fulfilled from virtually anywhere. You will learn more about different types of connections in Chapter 2 and how connection speed can affect consumers online shopping experiences in Chapters 3 and 4.Electronic mail (or e-mail) was used in the first wave as a tool for relatively unstructured communication. In the second wave, both B2C and B2B sellers began using e-mail as an integral part of their marketing and customer contact strategies. You will learn about e-mail technologies in Chapter 2 and e-mail marketing in Chapter 4. Online advertising was the main intended revenue source of many failed dot-combusinesses in the first wave. After a pronounced dip in online advertising activity andrevenues near the end of the first wave, companies began the second wave with a renewedinterest in making the Internet work as an effective advertising medium. Some categoriesof online advertising, such as employment services (job-wanted ads) have grown rapidlyand have replaced traditional advertising outlets. Companies such as Google have devisedways of delivering specific ads to Internet users who are most likely to be interested in theproducts or services offered by those ads. You will learn about these advertising strategiesin Chapter 4.The sale of digital products was fraught with difficulties during the first wave ofelectronic commerce. The music recording industry was unable (or, some would say,unwilling) to devise a way to distribute digital music on the Web. This created anenvironment in which digital piracy—the theft of musical artists’intellectual property—became rampant. The promise of electronic books was also unfulfilled. The second wavefulfilled the promise of available technology by supporting the legal distribution of music,video, and other digital products on the Web. Apple Computer’siTunesWeb site is anexample of a second-wave digital product distribution business that is meeting the needsof consumers and its industry. You will learn more about digital product distributionstrategies in Chapter 3 and about the related legal issues in Chapter 7.Another group of technologies emerged in the second wave that made new onlinebusinesses possible. The general term for these technologies isWeb 2.0, and they includesoftware that allows users of Web sites to participate in the creation, editing, anddistribution of content on a Web site owned and operated by a third party. Sites such asWikipedia, YouTube, and Facebook use Web 2.0 technologies. Customer relationshipsmanagement software that runs from the Web, such as Salesforce.com, also uses Web 2.0technologies. You will learn about Web 2.0 business opportunities throughout this book and you will learn about the technologies used to implement them in Chapter 9.In the first wave of electronic commerce, many companies and investors believed that being the first Web site to offer a particular type of product or service would give them an opportunity to be successful. This strategy is called the first-mover advantage. As business researchers studied companies who had tried to gain a first-mover advantage, they learned that being first did not always lead to success (see the Suarez and Lanzolla article reference in the For Further Study and Research section at the end of this chapter). First movers must invest large amounts of money in new technologies and make guesses about what customers will want when those technologies are functioning. The combination of high uncertainty and the need for large investments makes being a first mover very risky. As many business strategists have noted, “It is the second mouse that gets the cheese. “First movers that were successful tended to be large companies that had an established reputation (or brand) and that also had marketing, distribution, and production expertise. First movers that were smaller or that lacked the expertise in these areas tended to be unsuccessful. Also, first movers that entered highly volatile markets or in those industries with high rates of technological change often did not do well. In the second wave, fewer businesses relied on a first-mover advantage when they took their businesses online. A good example of a company that was successful in the second wave by not being a first mover is illustrated in the opening case for this chapter about Google. The Third Wave of Electronic Commerce, 2010–Present

In 2010, a number of factors came together to start a third wave in the development of electronic commerce. Some of these factors include:•A critical mass of mobile users with powerful devices (smartphones and tablets) that, for the first time, allowed them to interact online with businesses along with proliferation of high-speed mobile phone networks throughout the world that provide useful connections among users and companies •Widespread participation in social networking platforms combined with businesses increased willingness to use them for advertising, promotion, and sales Increased online participation by smaller businesses in sales, purchasing, and capital-raising activities Highly sophisticated analysis of the large amounts of data that companies collect about their online customers Increased integration of tracking technologies into B2B electronic commerce and the management of business processes within companies Emergence of Mobile Commerce Since about 2001, industry analysts have been predicting the emergence of mobile telephone-based commerce (often called mobile commerce or m-commerce)every year. And year after year, they were surprised that the expected development of mobile commerce did not occur. The limited capabilities of mobile telephones were a major impediment until very recently. In the third wave of electronic commerce, mobile commerce is finally taking off with the increasingly widespread use of mobile phones that allow Internet access and smartphones. Smartphones are mobile phones that include a Web browser, a full keyboard, and an identifiable operating system that allows users to run various software packages. These phones are available with usage plans that include very high or even unlimited data transfers at a fixed monthly rate. Another technological development was the introduction of tablet computers. These handheld d

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