Electronic Commerce

Kennedy Waweru N.
Department of Information Technology and Computer Science.
St Paul’s University,
Kenya

Under the license of Creative Commons Attribution

 Definition of Terms
M-Commerce m-commerce or mobile commerce involves the use of wireless technology, e.g. mobile
phones or PDA/Blackberry devices to conduct business
Web client Machine that initiates internet request
Web server Machine that services internet request
Browser Software at the client side to interact with web data
Intranet Private version of the Internet whose main purpose to share company information and
computing resources among internal authorized users
Extranet Private network that strategic users outside the company can access therefore enabling
companies to collaborate with other companies. It requires security and privacy
Internet a global network of networks
World Wide Web A collection of documents that reside on computers and that can be accessed by other
computers on the Internet.
Multimedia Text, Images, Sounds, Drawings, Video
Hypertext Links to other documents on the www. Can also begin execution of a program
Pure-click/pure-play Companies that have launched a website without any previous existence as a firm.
Bricks-and-clicks Existing companies that have added an online site for e-commerce.
Click-to-brick Online retailers that later open physical locations to supplement their online efforts
EDI Electronic Data Interchange, means a way to exchange standard documents in intra or
inter organizations.
B2B Business to Business, means e-commerce transactions taking place between business to
business organizations.
B2C Business to Consumers means e-commerce transactions taking place between business
organizations and consumer directly.
C2C Consumers to consumers e-commerce, means e-commerce transactions taking place
between consumer to consumer.
B2E Business to employees e-commerce, means e-commerce transactions taking place between
business organizations to employees.
C2B Consumer to business e-commerce, means e-commerce transactions taking place between
consumer to business organizations.
Cyber Law Cyber law is that law which is used to deal with all cyber crimes, i.e., crimes done on
internet.

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 1 INTRODUCTION TO E-COMMERCE

1.1 Introduction to the Internet

A computer network is a collection of computers, printers and other networking devices that
are connected together so that they can communicate with each. A computer network can be a
simple connection of two computers to millions of computers connected together. The
Internet is a global network of networks which is used to provide various services including

i. Email (electronic mail): is a method of exchanging digital messages from an author to

one or more recipients.
ii. File transfer: process/method of transmitting electronic files (pictures, text files, music
files, video files) over the Internet
iii. Telnet: A network protocol (rules and procedures) that allows a user on one computer
to log on remotely to another computer which is in a different part of the same
network.
iv. Usenet newsgroups: An area on the Internet devoted to the discussion of a specified
topic.
v. Online chat: this is real time and direct transmission of text-based messages from
sender to receiver over the internet. There is minimal delay, if any, between the time
message is sent and is received therefore does not hamper the flow of communication.
vi. Voice over Internet Protocol (VoIP): you can use the internet to make a call to
someone as long as they are connected to the Internet. This is also called internet
telephony.
vii. Videoconferencing: through the Internet, it is possible to make a video call to someone
else in another part of the country or the world as long as they have a computer with a
webcam and a microphone.
viii. World Wide Web (the Web): is a collection of interlinked hypertext (text with
references to other text which you can click and it directs to the text pointed)
documents accessed through the Internet. Every time you access your email on the
internet, you are accessing the World Wide Web.
1.2 Electronic Commerce
Electronic commerce (e-commerce) is a concept that describes the process of buying and
selling or exchanging of products, services and information via computer networks including
the Internet. E-commerce is sometimes taken to have a different meaning from e-business
where the later is taken as the conduct of business on the Internet, not only buying and selling
but also servicing customers and collaborating with business partners. It includes customer
service (e-service) and intra-business tasks. M-Commerce (mobile commerce) on the other

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 hand involves the use of wireless technology, e.g. mobile phones or PDA/Blackberry devices
to conduct commerce (the process of buying and selling).

1.2.1 Origins and Growth of Commerce

E-commerce's history is short but fascinating. Over the course of a few decades, networking
and computing technology have improved at exponential rates. Powerful personal computers
linked to global information networks have powered a whole new world of intellectual, social
and financial interactions. And this is only the beginning. As far back as the 1960s, businesses
were using primitive computer networks to conduct electronic transactions. Using something
called Electronic Data Interchange (EDI), a company's computer system could share business
documents -- invoices, order forms, shipping confirmation -- with another company's
computer.

In the beginning, each company had its own standards for formatting these documents. But in
1979, the American National Standards Institute (ANSI) came up with something called ASC
X12, a universal standard for sharing business documents over electronic networks.

Prior to that, in the late 1960s, the military developed ARPAnet to ensure that crucial
communications were circulated in the event of a nuclear attack. The original ARPAnet
connected four large U.S. research universities and relied on huge, unwieldy computers. In
1971, researchers developed the Terminal Interface Processor (TIP) for dialing into the
ARPAnet from an individual computer terminal. But the greatest networking evolution came
in 1982, when ARPAnet switched over to Transmission Control Protocol and Internet
Protocol (TCP/IP), the same packet-switched technology that powers the modern Internet.

By the early 1980s, individual computer users -- still mostly at major research universities --
were sending e-mails, participating in listservs and newsgroups, and sharing documents over
networks like BITNET and USENET. CompuServe was one of the first popular networking
services for home PC users, providing tools like e-mail, message boards and chat rooms. In
the mid-1980s, Compuserve added a service called the Electronic Mall, where users could
purchase items directly from 110 online merchants. While the Electronic Mall wasn't a huge
success, it was one of the first examples of e-commerce as we know it today.

In 1990, a researcher named Tim Berners-Lee at the European Organization for Nuclear
Research (CERN, from its French name) proposed a hypertext-based web of information that
a user could navigate using a simple interface called a browser. He called it the
"WorldWideWeb". And in 1991, the National Science Foundation lifted a ban on commercial
businesses operating over the Internet, paving the way for Web-based e-commerce.

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In 1993, Marc Andreesen at the National Center for Supercomputing Applications (NCSA)
introduced the first widely distributed Web browser called Mosaic. Netscape 1.0's release in
1994 included an important security protocol called Secure Socket Layer (SSL) that encrypted
messages on both the sending and receiving side of an online transaction. SSL ensured that
personal information like names, addresses and credit card numbers could be encrypted as
they passed over the Internet.

In 1994 and 1995, the first third-party services for processing online credit card sales began to
appear. First Virtual and CyberCash were two of the most popular. Also in 1995, a company
called Verisign began developing digital IDs, or certificates, that verified the identity of
online businesses. Soon, Verisign switched its focus to certifying that a Web site's e-
commerce servers were properly encrypted and secure. Now let's take a closer look at the two
companies that transformed e-commerce in the mid-1990s: Amazon and eBay.

In July 1995, Jeff Bezos boxed up the first book ever sold on Amazon.com from his Seattle
garage. Within its first 30 days of business, the self-proclaimed "Earth's largest bookstore"
sold books to online shoppers in all 50 U.S. states and 45 countries.

With Amazon, Bezos tapped into a powerful new e-commerce market. Books, he had
realized, were cheap to ship and easy to order directly from publishers. Publishers had already
created vast digital archives of their titles on CD-ROM, something that could be uploaded to a
Web site. Amazon.com set the standard for a customer-oriented e-commerce Web site. Users
could search available titles by keyword, author or subject. They could browse books by
category and even get personalized recommendations. They could also purchase books
quickly and securely with the patented "one-click" checkout system.

But the most popular Amazon.com feature has always been the reader review option. On
Amazon, any registered member can write and publish a book review. And other users can
rank each review, creating a hierarchy of top Amazon reviewers. Amazon's online community
feel - in addition to the steep discounts on many books -- has contributed to the site's
popularity.

Amazon went public in 1997, and as the dot-com boom reached its pinnacle in 1999, Bezos
was named Time's "Person of the Year." Amazon has expanded its offerings beyond books. It
currently offers music, movies, electronics, toys, home and garden equipment, clothing,
jewelry, video games and digital downloads. Amazon runs seven different international Web
sites, has distribution and customer service centers in seven countries and employs more than
17,000 people worldwide. Yet despite its growth, Amazon hasn't always been a financial
powerhouse: It didn't post its first quarterly profit until 2001 and its first annual profit until

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 2004. But in the first quarter of 2008, Amazon announced a profit increase of 33 percent over
last year, an impressive achievement in tough economic times.

Back in 1995, when Bezos was shipping books from his garage, Pierre Omidyar, a software
programmer, started coding a simple Web site he called AuctionWeb. Omidyar was curious if
people would use the Internet to bid on each other's used items. Looking around for
something to sell, Omidyar picked up a broken laser pointer. Within a day, it had sold for
$14.83. Omidyar e-mailed the buyer to make sure the guy knew it was broken. The buyer's
response? "I'm a collector of broken laser pointers". Welcome to eBay.

eBay leveled the e-commerce playing field. You didn't have to be a Web entrepreneur or an
existing business to sell things online. All you had to do was raid your attic, post a listing, and
there was a good chance that someone, somewhere, would pay money for your old junk. In
1996, with two full-time employees, eBay sold $7.2 million worth of goods. By 1997, with
the help of Beanie Babies frenzy, eBay sold $95 million in goods. In 2007, eBay sold $52.5
billion in auctions, had more than 220 million registered users and 13,000 employees.

Both eBay and Amazon paved the way for today's e-commerce merchant. Consumers can buy
almost anything online, including shoes, home goods and even a real shark's tooth. Just type
"unusual items for sale" in a search engine, and see what comes up.

1.2.2 Dot Com Bubble

During the late 20th century, the Internet created a euphoric attitude toward business and
inspired many hopes for the future of online commerce. For this reason, many Internet
companies (known as “dot-coms”) were launched, and investors assumed that a company that
operated online was going to be worth millions.

But, obviously, many dot-coms were not rip-roaring successes, and most that were successful
were highly overvalued. As a result, many of these companies crashed, leaving investors with
significant losses. In fact, the collapse of these Internet stocks precipitated the 2001 stock
market crash even more so than the September 11, 2001 terrorist attacks. Consequently, the
market crash cost investors a whopping $5 trillion.

The dot-com bubble, also referred to as the Internet bubble, refers to the period between 1995
and 2000 when investors pumped money into Internet-based startups in the hopes that these
fledgling companies would soon turn a profit. The period was marked by the founding (and,
in many cases, spectacular failure) of several new Internet-based companies commonly
referred to as dot-coms. Companies could cause their stock prices to increase by simply

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 adding an "e-" prefix to their name or a ".com" to the end, which one author called
"prefix investing."

The collapse of the bubble took place during 1999–2001. Some companies, such
as pets.com and Webvan failed completely. Others lost a large portion of their market
capitalization but remained stable and profitable, e.g., Cisco, whose stock declined by 86%.
Some later recovered and surpassed their dot-com-bubble peaks, e.g., eBay.com,
and Amazon.com whose stock went from 107 to 7 dollars per share, but a decade later
exceeded 500.

A summary of reasons for the dot com bubble burst

i. Poor research or planning hence many had no clear and/or sound revenue model.
There also was no clearly defined exit strategy to investors. There was also poor
financial management (too much venture capital) and poor human resource
management (hired too many people or even worse, unqualified staff).

ii. Relied on spin and hype instead of sound marketing strategies. Many relied on the
mistaken notion that if they built the website, visitors would simply appear. Marketing
is essential, and it must be well conceived and implemented even before you launch
your site.

iii. Spent too heavily on brand identities at the expense of gullible investors.

iv. Devoted too much effort to acquiring new customers instead of building loyalty.

1.2.3 Traditional Commerce vs Electronic Commerce

The major difference is the way information is exchanged and processed:
1. Traditional commerce:
face-to-face, telephone lines , or mail systems
manual processing of traditional business transactions
individual involved in all stages of business transactions
2. E-Commerce:
using Internet or other network communication technology
automated processing of business transactions
individual involved in all stages of transactions
pulls together all activities of business transactions, marketing and
advertising as well as service and customer support
1.2.4 E-commerce I and E-commerce II

Early years of e-commerce e-commerce today

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 Technology-driven Business-driven
Revenue growth emphasis Earnings and profits emphasis
Venture capital financing Traditional financing
Ungoverned Stronger regulation and governance
Entrepreneurial Large traditional firms
Disintermediation Strengthening intermediaries
Perfect markets Imperfect markets, brands, and network effects
Pure online strategies Integrated, multi-channel bricks-and-clicks strategies
First mover advantages Strategic follower strength; complimentary assets

NB: There is talk that today we are in another bubble judging by social networks valuation vs
revenue. Read more on Facebook, Twitter, LinkedIn, Instagram etc, their revenue models and
Initial Public Offering (IPO).

1.3 Types of E-commerce

There are a variety of different types of e-commerce and many different ways to characterize these
types. Here, we distinguish different types of e-commerce by the nature of the market relationship -
who is selling to whom. The exception is P2P which is technology-based distinction.

i. Collaborative commerce (c-commerce): In this type of EC, business partners collaborate

electronically. Such collaboration frequently occurs between and among business partners
along the supply chain
ii. Business-to-Consumer (B2C) E-commerce: The type where online businesses attempt to reach
individual consumers. Within the B2C category, there are many different types of business models
including portals, online retailers, content providers, transaction brokers, market creators, service
providers, and community providers.

iii. Business-to-Business (B2B) E-commerce: in which businesses focus on selling to other businesses
and is the largest form of e-commerce. There are two primary business models used within the
B2B arena: Net marketplaces, which include e-distributors, e-procurement companies, exchanges
and industry consortia, and private industrial networks, which include single firm networks and
industry-wide networks.

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 iv. Consumer-to-Consumer (C2C) E-commerce: provides a way for consumers to sell to each other,
with the help of an online market maker such as the auction site eBay. In C2C e-commerce, the
consumer prepares the product for market, places the product for auction or sale, and relies on the
market maker to provide catalog, search engine, and transaction-clearing capabilities so that
products can be easily displayed, discovered, and paid for.

v. Consumer-to-business (C2B) E-commerce: Individuals sell services or goods to businesses.

Consumers (individuals) create value and businesses consume that value. For example, when a
consumer writes reviews or when a consumer gives a useful idea for new product development
then that consumer is creating value for the business if the business adopts the input. We can see
the C2B model at work in blogs or internet forums in which the author offers a link back to an
online business thereby facilitating the purchase of a product (like a book on Amazon.com), for
which the author might receive affiliate revenues from a successful sale. Elance was the first C2B
model e-commerce site.

vi. Business - to - Government (B2G) E-commerce: B2G model is a variant of B2B model. Such
websites are used by government to trade and exchange information with various business
organizations. Such websites are accredited by the government and provide a medium to
businesses to submit application forms to the government.

vii. Government - to - Citizen (G2C) E-commerce: Government uses G2C model website to approach
citizen in general. Such websites support auctions of vehicles, machinery or any other material.
Such website also provides services like registration for birth, marriage or death certificates. Main
objectives of G2C website are to reduce average time for fulfilling people requests for various
government services.

viii. Intra-business (intraorganizational) commerce. In this case an organization uses EC

internally to improve its operations. A special case of this is known as B2E (business to its
employees) EC.
ix. Peer-to-Peer (P2P) E-commerce: Peer-to-peer technology enables Internet users to share files and
computer resources directly without having to go through a central Web server. In peer-to-peer’s

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 purest form, no intermediary is required, although in fact, most P2P networks make use of
intermediary “super servers” to speed operations. Napster.com, which was established to aid
Internet users in finding and sharing online music files, was the most well-known example of peer-
to-peer e-commerce until it was put out of business in 2001 by a series of negative court decisions.
However, other file-sharing networks, such as Kazaa and Grokster, quickly emerged to take
Napster’s place. These networks have also been subjected to legal challenge.

Review Question: give local examples of B2B, B2C and C2C e-commerce.

1.4 Features of E-Commerce Technology

Electronic Commerce means better business communication and data interchange.
Information is essential for every business. The quality and quantity of information which a
business delivers to customers or use to make decisions can determine just how competitive
the business is. Application of electronic operations to commercial activities means better
business solutions. It greatly facilitates a firm to make better decisions, sale forecasts, prices
and other valuable information can be sent and received instantaneously. A business will
always have the information it needs faster, easier and more complete in the new system of
communication than ever before. There are 8 unique features of ecommerce that offer these
benefits to businesses:
1. Ubiquity: Because E-Commerce is ubiquitous, the market is able to extend its traditional
operating hours. Online the stores never close, it is available everywhere at anytime.
Ubiquity lowers transaction costs for the consumer/buyer.
2. Global Reach: Global Reach is a great feature of e-commerce. It takes the marketplace to
market-space. E-commerce extends local markets to global markets. The Internet and Web
sites allow international visitors all over the globe to access company Web sites, purchase
products and make business interactions. Ecommerce technology permits commercial
transactions to cross cultural and national boundaries far more conveniently and cost
effectively than is true in traditional commerce. Ecommerce technologies enable a
business to easily reach across geographic boundaries.
3. Universal Standards: Universal Standards are standards shared by the world. To use E-
Commerce features, Individuals, businesses and governments only use one set of
technological, media and Internet standards. So universal standards help simplify
interactions. Universal standards can greatly influence market entry costs. Consider the
cost of setting up a virtual, web-based store, verses a real store. Universal standard
benefits have forced traditional businesses into improving on their customer service.
4. Information Richness: Advertising and branding are an important part of commerce. E-
Commerce can deliver video, audio, animation, text etc. to introduce products. Individual
may see information richness if a post contains a video related to a product and hyperlinks
that allow him to look at or purchase the product and send information about the post via
text message or email.
5. Interactivity: Consumer can interact with the content. The Web offers a two way
communication process which was not afforded through traditional mediums such as
newspapers, magazines, radio and television. The Web allows consumers to control what
information will be presented, in what order, and for how long. A Web site can be

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 categorized according to the control of the consumer over the communication process;
therefore, different levels of interactivity may be found. E-commerce can collect
information from consumers more easily and efficiently with forms and surveys.
6. Information density: The total amount and quality of information available to all market
participants. The e-commerce technology reduces information costs and raises the quality
of information. It makes information accurate, inexpensive and plentiful.
7. Personalization and Customization: Technologies within E-Commerce allow for the
personalization and customization of marketing messages groups or individuals receives.
Personalization and Customization are tailoring messages and products to consumers
based on their preferences. Websites like MSN let you customize your homepage to all the
information you want and they also place advertising on your page based on your
preferences.
8. User-Generated Content: Social networks use E-Commerce technologies to allow
members, the general public, to share content with the worldwide community.
Consequently, consumers with accounts can share personal and commercial information
to promote a product or service.

1.5 Benefits of E-commerce

1. Overcome Geographical Limitations: If you have a physical store, you are limited by the
geographical area that you can service. With an ecommerce website, the whole world is
your playground.
2. Gain New Customers with Search Engine Visibility: Physical retail is driven by branding
and relationships. In addition to these two drivers, online retail is also driven by traffic from
search engines. It is not unusual for customers to follow a link in search engine results, and
land up on an ecommerce website that they have never heard of. This additional source of
traffic can be the tipping point for some ecommerce businesses.
3. Lower Costs: One of the most tangible positives of ecommerce is the lowered cost (lower
number of personnel, real estate, advertising and marketing). A part of these lowered costs
could be passed on to customers in the form of discounted prices.
4. Locate the Product Quicker: It is no longer about pushing a shopping cart to the correct
aisle, or scouting for the desired product. On an ecommerce website, customers can click
through intuitive navigation or use a search box to immediately narrow down their product
search. Some websites remember customer preferences and shopping lists to facilitate
repeat purchase.
5. Eliminate Travel Time and Cost: It is not unusual for customers to travel long distances to
reach their preferred physical store. Ecommerce allows them to visit the same store
virtually, with a few mouse clicks.
6. Provide Comparison Shopping: Ecommerce facilitates comparison shopping. There are
several online services that allow customers to browse multiple ecommerce merchants and
find the best prices.

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 7. Enable Deals, Bargains, Coupons, and Group Buying: Though there are physical
equivalents to deals, bargains, coupons, and group buying, online shopping makes it much
more convenient. For instance if a customer has a deep discount coupon for turkey at one
physical store and toilet paper at another, she may find it infeasible to avail of both
discounts. But the customer could do that online with a few mouse-clicks.
8. Provide Abundant Information: There are limitations to the amount of information that can
be displayed in a physical store. It is difficult to equip employees to respond to customers
who require information across product lines. Ecommerce websites can make additional
information easily available to customers. Most of this information is provided by vendors,
and does not cost anything to create or maintain.
9. Create Targeted Communication: Using the information that a customer provides in the
registration form, and by placing cookies on the customer's computer, an ecommerce
merchant can access a lot of information about its customers. This, in turn, can be used to
communicate relevant messages. An example: If you are searching for a certain product on
Amazon.com, you will automatically be shown listings of other similar products. In
addition, Amazon.com may also email you about related products.
10. Remain Open All the Time: Store timings are now 24/7/365. Ecommerce websites can run
all the time. From the merchant's point of view, this increases the number of orders they
receive. From the customer's point of view, an "always open" store is more convenient.
11. Create Markets for Niche Products: Buyers and sellers of niche products can find it difficult
to locate each other in the physical world. Online, it is only a matter of the customer
searching for the product in a search engine. One example could be purchase of obsolete
parts. Instead of trashing older equipment for lack of spares, today we can locate parts
online with great ease.
12. Lower entry costs: The cost of starting a business is lower online as compared with the
physical stores.
13. Increased flexibility of location

1.6 Challenges facing E-commerce

1.6.1 E-Commerce Challenges for Customers

1. Lack of universally accepted standards for quality, security and reliability.

2. Quality. While e-commerce makes everything easily accessible, a consumer cannot
actually touch products until they are delivered to the door.
3. Hidden costs. When making purchases, the consumer is aware of the product cost,
shipping, handling and possible taxes. Other costs may not be openly declared.

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 4. Delay in receiving goods. Although delivery of products is often quicker than expected,
delays happen. There is also a chance that your product may be lost or delivered to the
wrong address.
5. Need access to the Internet. Internet access is not free, hence not affordable to many.
6. Lack of personal interaction. While the rules and regulations of each e-commerce
business is laid out for you to read, there is a lot to read and it may be confusing when it
comes to the legalities. With large or important orders, there is no one you can talk to face
to face when you have questions and concerns.
7. Ethical issues, professional issues and legal issues

1.6.2 E-Commerce Challenges for Businesses

1. Security issues. While businesses make great efforts to keep themselves and the consumer
safe, there are people out there that will break every firewall possible to get the
information they want..
2. Credit card issues. Many credit card businesses will take the side of the consumer when
there is dispute about billing—they want to keep their clients, too. This can lead to a loss
for e-commerce business when goods have already been delivered and the payment is
refunded back to the consumer. There is also rising cases of credit card fraud.
3. Extra expense and expertise for e-commerce infrastructure. To be sure an online business
is running correctly, money will have to be invested.
4. Needs for expanded reverse logistics. The infrastructure of an online business must be on
point. This will be another cost to the business because money will need to be invested to
ensure proper handling of all aspects of buying and selling, especially with disgruntled
consumers that want more than a refund.
5. Sufficient Internet service. Although it seems that everyone is now on the Internet all the
time, there are still areas in which network bandwidth can cause issues.
6. Constant upkeep. When a business has started as e-commerce, they must be ready to make
changes to stay compatible. While technology grows, the systems that support the
business must be kept up to date or replaced if needed. There may be additional overhead
in order to keep data bases and applications running.
7. Integrating e-commerce software with existing software is still a challenge
8. Absence of Tax Laws and comprehensive cyber laws (discussed later)
9. Lack of Skills and Expertise
10. Lack of trust in
• unknowns on the other end of the transaction,
• integrity of the transaction itself, and

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 • electronic money that is only bits and bytes

1.7 Self Assessment Questions

i. What is e-commerce?
ii. Discuss various characteristics of e-commerce.
iii. Discuss various limitations of e-commerce.
iv. “E-commerce is the new way to do business. Justify the statement.
v. What is scope of e-commerce in country like Kenya?
vi. Discuss various types of e-commerce models.
vii. Discuss various challenges facing e-commerce in Kenya.
viii. What is future of e-commerce in Kenya?
ix. List some organizational, societal, and consumer benefits of EC (five each).

1.8 References

• http://money.howstuffworks.com/history-e-commerce.htm
• http://www.moneycrashers.com/dot-com-bubble-burst/
• http://money.howstuffworks.com/history-e-commerce.htm
• http://ecommerce.about.com/od/eCommerce-Basics/tp/Advantages-Of-Ecommerce.htm
• http://www.enkivillage.com/e-commerce-advantages-and-disadvantages.html

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