E- Commerce

Lectureslides – I I

© 2021 Er. Santosh Panth

 E-commerce Business Models
◼ Business model (business process)
❖ Set of planned activities designed to result in a profit in a marketplace

◼ Business plan
❖ Describes a firm’s business model

◼ E-commerce business model

❖ A business model that aims to use and leverage the unique qualities of
Internet and Web
Eight Key Elements of a Business Model

1. Value proposition
2. Revenue model
3. Market opportunity
4. Competitive environment
5. Competitive advantage
6. Market strategy
7. Organizational development
8. Management team
 1. Value Proposition
◼ “Why should the customer buy from you?”
❖ How a company’s product or service fulfills the needs of
customers
◼ Successful e-commerce value propositions:
❖ Personalization/customization
❖ Reduction of product search, price discovery costs
❖ Facilitation of transactions by managing product delivery
2. Revenue Model
◼ “How will you earn money?”
◼ Major types:
❖ Advertising revenue model
◼ A company provides a forum for advertisements and
receives fees from advertisers
◼ For example, Google, Yahoo (video advertising)
2. Revenue Model (cont.)

❖ Subscription revenue model

◼ A company offers its users content or services and charges a
subscription fee for access to some or all of its offerings
◼ For example, dating services (Match.com and eHarmony), video
games (Xboxlive.com), music (Rhapsody.com)

Slide 2-6
 2. Revenue Model (cont.)
❖ Transaction fee revenue model
◼ A company receives a fee for enabling or executing a transaction
◼ For example, eBay provides an online auction marketplace and
receives a small transaction fee from a seller if the seller is successful
in selling the item
❖ Sales revenue model
◼ A company derives revenue by selling goods, information, or services
2. Revenue Model (cont.)
❖ Affiliate revenue model
◼ A company steers business to an affiliate and receives a referral fee
or percentage of the revenue from any resulting sales
3. Market Opportunity
◼ “What marketspace do you intend to serve and what
is its size?”
❖ Marketspace: Area of actual or potential commercial value in which
company intends to operate
❖ Realistic market opportunity: Defined by revenue potential in each market
niche in which company hopes to compete
◼ Market opportunity typically divided into smaller
niches
4. Competitive Environment
◼ “Who else occupies your intended
marketspace?”
❖ Other companies selling similar products in the same marketspace
◼ For example, Priceline and Travelocity, both of whom sell discount airline tickets
online, are direct competitors because both companies sell identical products – cheap
tickets
❖ Includes both direct and indirect competitors
◼ For instance, automobile manufacturers and airline companies operate in different
industries,
◼ but they still compete indirectly because they offer consumers alternative means of
transportation
5. Competitive Advantage
◼ “What special advantages does your firm bring to the
marketspace?”
❖ Is your product superior to or cheaper to produce than your competitors’?
◼ Important concepts:
❖ Asymmetries
◼ Exits whenever on participant in a market has more resources than
other participants
◼ For example, financial backing, knowledge, information, and
power
5. Competitive Advantage (cont.)
❖ First-mover advantage
◼ A competitive market advantage for a firm that results from being the first into a
marketplace with a serviceable product or service
◼ If first movers develop a loyal following or a unique interface that is difficult to
imitate, they can sustain their firs-mover advantage for long periods
◼ For example e-sewa, Amazon, eBay
❖ Unfair competitive advantage
◼ Occurs when one firm develops an advantage based on a factor that other firms
cannot purchase
◼ For instance, a brand name (Coke) cannot be purchased and is in the sense an
unfair advantage
5. Competitive Advantage (cont.)
❖ Leverage
◼ When a company uses its competitive advantages to achieve more advantage in surrounding
markets
◼ For instance, Amazon’s move into the online grocery business leverages the company’s huge
customer database and years of e-commerce experience
❖ Perfect markets
◼ A market in which there are no competitive advantages or asymmetries because all firms have
equal access to all the factors of production
◼ However, real markets are imperfect, and asymmetries leading to competitive advantages do exist,
at least in the short term
6. Strategy Market
◼ “How do you plan to promote your products or services to attract
your target audience?”
❖ The plan you put together that details how a company intends to enter
market and attract customers
❖ For instance, Twitter and YouTube have a social network marketing strategy
that encourages users to post their content on the sites for free, build personal
profile pages, contact their friends, and build a community
7. Organizational Development
◼ “What types of organizational structures within the firm are
necessary to carry out the business plan?”
◼ Plan describes how the company will organize the work that needs to be
accomplished
❖ Typically, divided into functional departments (production, shipping,
marketing, customer support, and finance)
❖ As company grows, hiring moves from generalists to specialists
7. Organizational Development (cont.)
❖ For instance, eBay founder Pierre Omidyar started an online auction site, according to
some sources, to help his girlfriend trade

❖ But within a few months the volume of business had far exceeded what he alone could
handle

❖ So he began hiring people with more business experience to help out

❖ Soon the company had many employees, departments, and managers who were
responsible for overseeing the various aspects of the organization
8. Management Team
◼ “What kind of backgrounds should the company’s leaders have?”
◼ Management team: employees of the company responsible for
making the business model work
◼ A strong management team:
❖ Can make the business model work
❖ Can give credibility to outside investors
❖ Has market-specific knowledge
❖ Has experience in implementing business plans
Categorizing E-commerce Business Models
◼ No one correct way
◼ categorizes according to:
❖ E-commerce sector (e.g., B2B)
❖ E-commerce technology (e.g., m-commerce)

◼ Similar business models appear in more than one sector

◼ Some companies use multiple business models (e.g.,
eBay: B2C+C2C)
B2C Business Models
◼ E-tailer
◼ Community provider (social network)
◼ Content provider
◼ Portal
◼ Transaction broker
◼ Market creator
◼ Service provider
B2C Models: E-tailer
◼ Online version of traditional retailer
◼ Revenue model: Sales of goods
◼ Variations:
❖ Virtual merchant (online version of retail store)
❖ Bricks-and-clicks (online distribution channel for a company that also has
physical stores)
❖ Catalog merchant (online version of direct mail catalog)
❖ Manufacturer-direct (manufacturer uses online channel to sell direct to
customer)
◼ Low barriers to entry
B2C Models: Community Provider
◼ Provide online environment (social network) where
people with similar interests can transact, share content,
and communicate
❖ e.g., Facebook, LinkedIn, Twitter

◼ Revenue models:
❖ Typically hybrid, combining advertising, subscriptions, sales,
transaction fees, affiliate fees
B2C Models: Community Provider (cont.)
◼ Community sites such as iVillage make money through
affiliate relationships with retailers and from advertising
◼ For instance, a parent might visit RightStart.com for tips on
diapering a baby and be presented with a link to Huggies.com
❖ If the parent clicks the link and then makes a purchase from Huggies.com
❖ Rightstart gets a commission
B2C Models: Content Provider
◼ Distributes information (digital) content on the
Web
❖ News, music, video, text, artwork
◼ Revenue models:
❖ Subscription; pay per download (micropayment);
advertising; affiliate referral
❖ For example, Harvard Business Review – charge customers
for content downloads
B2C Business Models: Portal
◼ Gateways to the Internet
◼ Search plus an integrated package of content and services (news,
e-mail, instant messaging, calendar, shopping)
❖ For example, Yahoo, MSN and AOL
◼ Revenue models:
❖ Advertising, referral fees, transaction fees, subscriptions
◼ Portals do not sell anything directly
B2C Models: Transaction Broker
◼ Site that processes transactions for consumers that are normally
handled in person, by phone or by mail
◼ Process online transactions for consumers
❖ Primary value proposition—saving time and money
◼ Revenue model:
❖ Transaction fees
❖ Transaction brokers make money each time a transaction occurs
◼ Industries using this model:
❖ Financial services
❖ Travel services
❖ Job placement services
 B2C Models: Market Creator
◼ Builds a digital environment where buyers and sellers
can meet
❖ Display products, search for products, and establish a price for
products

◼ e.g., eBay

◼ Revenue model: Transaction fees

 B2C Models: Service
Provider
◼ Online services
❖ e.g., Google—Google Maps, Gmail, etc.

◼ Value proposition
❖ Valuable, convenient, time-saving, low-cost
alternatives to traditional service providers
◼ Revenue models:
❖ Sales of services, subscription fees, advertising,
Slide 2-27
sales of marketing data
B2B Business Models
◼ Net marketplaces
❖ E-distributor
❖ E-procurement
❖ Exchange
❖ Industry consortium

◼ Private industrial network

B2B Models: E-distributor
◼ A company that supplies products and services directly to
individual businesses
◼ Revenue model: Sales of goods
◼ e.g., Grainger.com (industrial equipment and tools),
Partstore.com (a major online parts retailer Consumer
Electronics)
 B2B Models: E-procurement
◼ Creates and sells access to digital electronic markets
◼ B2B service providers: sells business services to other firms
◼ Application service providers (ASPs): a company that sells access to
Internet-based software applications to other companies
◼ Revenue model: Service fees
◼ e.g., Ariba, PerfectCommerce
 B2B Models: Exchanges
◼ An independent digital electronic marketplace where
suppliers and commercial purchasers can conduct
transactions
❖ The greater the number of sellers and buyers, the lower the sales cost and
the higher the chances of making a sale
◼ Revenue model: Transaction, commission fees
◼ Create powerful competition between suppliers
 B2B Models: Industry Consortia
◼ Industry-owned vertical digital marketplace that serve
specific industries
❖ Such as the automobile, aerospace, chemical
◼ More successful than exchanges
❖ Sponsored by powerful industry players
❖ Strengthen traditional purchasing behavior
◼ Revenue model: Transaction, commission fees
◼ e.g., Exostar (an online trading exchange for the
aerospace and defense industry)
 Private Industrial Networks
◼ Digital network
◼ Used to coordinate communication among firms engaged
in business together
◼ The network is owned by a single large purchasing
firm
◼ e.g., Walmart’s network for suppliers – monitor the sales
of their goods, the status of shipments, and the actual inventory
level of their goods
 How the Internet and the Web
Change Business
◼ E-commerce changes industry structure by
changing:
❖ Rivalry among existing competitors
❖ Barriersto entry
❖ Threat of new substitute products
❖ Strength of suppliers
❖ Bargaining power of buyers
 How the Internet and the Web
Change Business (cont.)
❖ Rivalry among existing competitors
◼ Increase price competition
◼ Expands the market

❖ Barriers to entry
◼ Reduced barriers to entry in music

❖ Threat of new substitute products

◼ Streaming video replaces DVDs
◼ Cloud music replaces downloads
◼ Online reservation replaces agents
 How the Internet and the Web
Change Business (cont.)

❖ Bargaining power of suppliers

◼ Supplier power decreased in autos with online procurement systems
◼ Supplier power increased in airline-owned online systems
❖ Bargaining power of buyers
◼ Increased power of retail customers
◼ Decreased power of wholesale buyers in hotel reservation
 Firm Value Chains
◼ Activities that a firm engages in to create final
products from raw inputs
◼ Effect of Internet:
❖ Increases operational efficiency
❖ Enables product differentiation
◼ For instance, Amazon uses the Internet to provide
consumers with a much larger inventory of books to
choose from, at a lower cost, than traditional book stores
❖ Instantly available professional and consumer reviews
❖ Information on buying patterns of other consumers
 Firm Value Chains
◼ The value chain begins with inbound logistics, which involve process of
product manufacturing or acquisition and goes through service of the final
season.

◼ Following the inbound logistics processes, the flow moves into operations,
whereby the company conducts its major business activities in developing
or reselling products.
◼ Outbound logistics refers to the movement of products out of the firm to
the next step in distribution. Marketing and sales are performed to
generate customer demand.
◼ Service helps maintain relationships with key customers.
Firm Value Chains
 Electronic Data Interchange (EDI)
• the inter-process communication (computer application to computer
application) of business information in a standard electronic form
• In short, EDI communicates information for business transactions between the
computer systems of companies, government organizations, small businesses,
and banks
• Using EDI, trading partners establish computer-to-computer links that enable
them to exchange information electronically
• This allows businesses to better cope with a growing avalanche(too many) of
paperwork: purchase orders, invoices, confirmation notices,
2 shipping receipts, and
other documents

• With the aid of EDI, all these documents are in electronic form, which aliases
more work automation to occur and even alters the way business is done
 Electronic Data Interchange (EDI)
• Many industries see EDI as essential for reducing cycle and order fulfillment
times.
• In retailing, EDI can provide vendors with a snapshot of what stores are
selling, enabling them to recognize and meet their customer's needs much
faster than in the past
• In addition, it enables retailers and vendors to place orders and pay bills
electronically, reducing time and the expense of paperwork
• The primary benefit of EDI to business is a considerable reduction in
transaction costs, by improving the speed and efficiency of filling orders
• Studies show that it takes up to five times as long to process a purchase order
manually as it does electronically
 Electronic Data Interchange (EDI)
• despite these advantages, EDI is not (yet) widely used.
• It is estimated that out of millions of businesses in the United States, only
44,000 companies exchange business data electronically.
• Only about 10 percent of these companies use EDI for financial transactions
• Electronic commerce is often equated with EDI, so it is important to clarify that
electronic commerce embraces EDI and much more.
• In electronic commerce, EDI techniques are aimed at improving the
interchange of information between trading partners, suppliers, and customers
by bringing down the boundaries that restrict how they interact and do business
with each other
• Technically speaking, EDI is one well-known example of structured document
interchange which enables data in the form of document content to be exchanged
between software applications that are working together to process a business
transaction.
 Electronic Data Interchange (EDI)
Consider the difference between the traditional paper purchase order and its electronic
counterpart:
EDI Layered Architecture
• EDI architecture specifies four layers :
1. the semantic (or application) layer
2. the standard translation layer
3. the packing (or transport) layer
4. the physical network infrastructure
layer
EDI Semantic Layer
• The EDI semantic layer describes the business application that is driving EDI.
• For a procurement application, this translates into requests for quotes, price
quotes, purchase orders, acknowledgments, and invoices.
• This layer is specific to a company and the software it uses.
• In other words, the user interface is customized to local environments
 EDI Standard Layer
• The information seen at the EDI semantic layer must be translated from a
company-specific form to a more generic or universal form so that it can be
sent to various trading partners, who could be using a variety of software
applications at their end

• To achieve this, companies must adopt universal EDI standards that lay out
the acceptable fields of business forms.
• What complicates matters is the presence of two competing standards that
define the content and structure of EDI forms: the X12 standard, developed
by the American National Standards Institute (ANSI), and EDIFACT, developed
by United Nations Economic Commission for Europe (UN /ECE)
 EDI Transport Layer
• When the trading partner sends a document, the EDI translation software
converts the proprietary format into a standard mutually agreed on by the
processing systems.
• When a company receives the document, their EDI translation software
automatically changes the standard format into the proprietary format of their
document processing software so that the company can manipulate the
information in whatever way it chooses to.
Electronic Data Interchange versus E-mails
• EDI document transport is far more complex than simply sending e-mail
messages or sharing files through a network.
• These EDI documents are more structured than e-mail.
• What really differentiates EDI from messaging is its emphasis on the
automation of business transactions conducted between organizations.
• In addition, EDI messages have certain legal status.
• For instance, if a buyer sends a supplier EDI purchase orders that specify the
requirements, time of delivery, and quantity and the supplier does not uphold
its end of the contract, it can be taken to court with the 9EDI trading
agreements serving as evidence.
• Table below indicates some EDI properties which distinguish it from e-mail
Electronic Data Interchange versus E-mails

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Benefits of EDI
• EDI can be a cost- and time-saving system, for many reasons.
• The automatic transfer at information from computer to computer reduces the
need to rekey information and as such reduces costly errors to near zero.
• EDI transactions produce acknowledgments of receipt of data.
• Many firms are now finding that this acknowledgment can make the invoice
obsolete and save many efforts now devoted to acquiring, receiving, and
paying for goods
1. Reduced paper-based systems
2. Improved problem resolution and customer service
2
3. Expanded customer/supplier base
 Benefits of EDI
1. Reduced paper-based systems :
– EDI can impact the effort and expense a company devotes to maintaining
records, paper-related supplies, and to the personnel required to maintain all of
these systems.
– Electronic transactions takeover most of the functions of paper forms and through
automation drastically reduce the time spent to process them.
– EDI can also reduce postage bills because of the amounts of paper that no longer
need be sent

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Benefits of EDI
2. Improved problem resolution and customer service :
– EDI can minimize the time companies spend to identify and resolve inter-business
problems.
– Many such problems come from data-entry errors somewhere along the way, and
EDI can eliminate many of them.
– EDI can improve customer service by enabling the quick transfer of business
documents and a marked decrease in errors land so can fill orders faster and by
providing an automatic audit trail that frees accounting staff for more productive
activities.

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Benefits of EDI
3. Expanded customer/supplier base :
– Many large manufacturers and retailers are ordering their suppliers to institute an
EDI program.
– Today, when evaluating a new product to carry or a new supplier to use, the
ability to implement EDI is a big plus in their eyes.
– These same companies tend to stop doing business with suppliers who do not
comply with EDI

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EDI Applications in various fields of Business
• Although EDI was developed to improve transportation and trade, it has
spread everywhere.
• An examination of EDI usage in various industries provides insight into the
business problems that EDI is attempting to solve.
• We will present four very different scenarios in industries that use EDI
extensively
– International or cross-border trade
– Financial EDI or electronic funds transfer (EFT)
– Health care EDI for insurance claims processing
– Manufacturing and retail procurement
EDI Applications in various fields of Business
1. International or cross-border trade :
– EDI has always been very closely linked with international trade.
– Over the last few years, significant progress has been made toward the
establishment of more open and dynamic trade relations.
– These developments have meant the lifting of long-standing trade restrictions.
– Many countries, and in particular developing countries, have made significant
efforts to liberalize and adjust their trade policies.
– In this context, trade efficiency, which allows faster, simpler, broader and less
costly transactions, is a necessity.
– It is a widely held view that trade efficiency can be accomplished
7 only by using
EDI as a primary global transactions medium
EDI Applications in various fields of Business
2. Financial EDI or electronic funds transfer (EFT) :
– Financial EDI comprises the electronic transmission of payments and remittance
information between a payer, payee, and their respective banks.
– This section examines the ways business-to-business payments are made today
and describes the various methods for making financial EDI payments
– Financial EDI allows businesses to replace the labor-intensive activities associated
with issuing, mailing, and collecting checks through the banking system with
automated initiation, transmission, and processing of payment instructions.
– Thus it eliminates the delays inherent in processing checks
EDI Applications in various fields of Business
3. Health care EDI for insurance claims processing :
– Providing good and affordable health care is a universal problem.
– In 1994, the American public spent $1 trillion on health care, nearly 15 percent of
the gross domestic product (GDP).
– National health care expenditures have risen by 10.5 percent each year for the
past eight years — more than double the rate of increase in the consumer price
index.
– It is estimated that $3.2 billion in administrative savings are expected to be
achieved by switching from being paper-based to an EDI implementation.
– Employers could save $70 million to $110 million by using EDI
9 for enrollment and
to certify that a prescribed procedure is covered under the subscriber's health
insurance contract
EDI Applications in various fields of Business
4. Manufacturing and retail procurement :
– Both manufacturing and retail procurement are already heavy users of EDI.
– In manufacturing, EDI is used to support just-in-time. In retailing, EDI is used to
support quick response
– Just-in-Time and EDI : Companies using JIT and EDI no longer stock
thousands of large parts in advance of their use. Instead, they calculate how
many parts are needed each day based on the production schedule and
electronically transmit orders and schedules to suppliers every day or its some
cases every 30 minutes. Parts are delivered to the plant "just in time" for
production activity
– Quick Response and EDI : Taking their cue from the efficiencies
manufacturers have gained from just-in-time manufacturing techniques, retailers
are redefining practices through the entire supply chain 10
using quick response
(QR) systems. For the customer, QR means better service and availability of a
wider range of products. For the retailer and suppliers, QR may mean survival in a
competitive marketplace
 Security and Privacy issues of EDI
• Since in the case of EDI, we are dealing with trade between countries and
corporations, issues of legal admissibility and computer security are important.
• Companies that deal with EDI often retain the services of a lawyer during the
design of an EDI application so that the appropriate evidentiary/admissibility
safeguards are implemented
– Legal Status of EDI Messages
– Digital Signatures and EDI

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Security and Privacy issues of EDI
• Legal Status of EDI Messages :
– There has been considerable debate concerning the legal status of EDI messages
and electronic messages in general.
– Although a lot of work is being done on legal framework, nothing concrete has
come out these efforts.
– No rules exist that indicate how electronic messages may be considered binding
in business or other related transactions
– The establishment of such a framework is essential if EDI is to become
widespread
 Security and Privacy issues of EDI
• Digital Signatures and EDI :
– The cryptographic community is exploring various technical uses of digital
signatures by which messages might be time-stamped or digitally notarized to
establish dates and times at which a recipient might claim to have had access or
even read a particular message
– If digital signatures are to replace handwritten signatures, they must have the
same legal status as handwritten signatures (documents signed with digital
signatures must be legally binding).
– Digital signatures should have greater legal authority than handwritten signatures.
– For instance, if a ten-page contract is signed by hand on the tenth page, one
cannot be sure that the first nine pages have not been altered.
– If the contract was signed by digital signatures, however, a third party can verify
that not one byte of the contract has been altered.
Security and Privacy issues of EDI
• Digital Signatures and EDI :
– The cryptographic community is exploring various technical uses of digital
signatures by which messages might be time-stamped or digitally notarized to
establish dates and times at which a recipient might claim to have had access or
even read a particular message
– If digital signatures are to replace handwritten signatures, they must have the
same legal status as handwritten signatures (documents signed with digital
signatures must be legally binding).
– Digital signatures should have greater legal authority than handwritten signatures.
– For instance, if a ten-page contract is signed by hand on the tenth page, one
cannot be sure that the first nine pages have not been altered.
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– If the contract was signed by digital signatures, however, a third party can verify
that not one byte of the contract has been altered.