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Electronic Commerce: Business Models, Strategies, Investment and Implementation in the Network Economics August, 2008

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  1. Electronic Commerce: Business Models, Strategies, Investment and Implementation in the Network EconomicsAugust, 2008 Minder Chen, Ph.D. Associate Professor of Management Information Systems E-Mail: minder.chen@csuci.edu or minderchen@hotmail.com Web site: http://faculty.csuci.edu/minder.chen/

  2. Reference • EC Books  • Net Ready, by Amir Hartman and John Sifonis, McGRaw-Hill, 2000. • Now or Never, by Mary Modahl, Harper Business, 2000 • Designing Systems for Internet Commerce by G. Winfield Treese, Lawrence C. Stewart (May 1998) Addison-Wesley Pub Co; ISBN: 0201571676 • Net Results: Web Marketing that Works by Rick E. Bruner (Editor), Cybernautics, Usweb Corporation Hayden Books; ISBN: 1568304145  • E-Business : Roadmap for Success by Ravi Kalakota, Marcia Robinson, Don Tapscott  (June 1999)  Addison-Wesley Pub Co (C); ISBN: 0201604809  • Customers.Com: How to Create a Profitable Business Strategy for the Internet and Beyond by Patricia B. Seybold (Contributor), R. T. Marshak, Ronni Marshak 1 Ed edition (November 1998) Times Books; ISBN: 0812930371 • Net Success : 24 Leaders in Web Commerce Show You How to Put the Web to Work for Your Business by Christina Ford Haylock, Len Muscarella, Ron Schultz, Steve Case  (May 1999) Adams Media Corporation; ISBN: 1580621147  • Creating the Virtual Store: Taking Your Web Site from Browsing to Buying, by Magdalena Yesil, Published by John Wiley & Sons, November 1, 1996

  3. Course Description This course provides an overview of Electronic Commerce and Electronic Business based on new E-conomy (network economics) and unique characteristics of underlying web technologies. Topics covered include: electronic commerce overview, network economics, EC models and strategies, EC case studies, e-business components such as Enterprise Resource Planning and Customer Relationship Management from a reengineering process viewpoint; Internet and web technologies including web technologies, electronic payment systems, and Internet security. Critical success factors for building a successful EC will be discussed.

  4. Seminar Leader Dr. Minder Chen received a B.S. in Electrical Engineering from National Taiwan University in 1977, an M.B.A. from National Chiao Tung University in 1983, and a Ph.D. in Management Information Systems from the University of Arizona in 1988. He is currently Associate Professor of Management Information Systems and Decision Science and served as the Director of Technology Program (an Executive Master Program in Information Technology Management) in the School of Management at George Mason University. He has taught Executive MBA and undergraduate level courses in electronic commerce, as well as Business Process Reengineering and Change Management; Technology Assessment, Evaluation, & Investment; Global Information Technology Management at the Executive Technology Management master program. He is the President of Advanced Information Technology Consulting (U.S.A), a consulting firm specialized in business engineering, electronic commerce, and emerging technologies. He is also one of the founder and Chief Technology Officer of KITE E-Commerce Training and Consulting Inc. (Taiwan). His primary research interests are electronic commerce, computer-aided instruction, collaborative and organizational learning, information engineering and business reengineering, computer-aided software engineering, client/server computing, collaboration technologies (groupware), and object-oriented systems development methodology. He has published papers in Journal of Management Information Systems, Database, Journal of Organizational Computing, Expert Systems with Applications, IEEE Transactions on Knowledge and Data Engineering, IEEE Transactions on Systems, Man, and Cybernetics, Journal of Small Group Research, and IEEE Software.

  5. Continued ... He has been involved in studying methods and tools for business process reengineering and software reuse for DOD's Corporate Information Management Office. He has also worked with governments and private-sector businesses, such as Fairfax County Government, US Court, Industrial Technology Research Institute, DOD Center for Information Management, American Management Systems, and Wizdom Systems Inc. in their information engineering, client/server migration, and business reengineering efforts by providing them with training and consulting services. He has given presentations and one- to three-day business reengineering and electronic commerce and other advanced IT seminars in U.S., China (for Everbright Group), Taiwan (via National Taiwan University and Corporate Synergy Development Center), Singapore, and Hong Kong. Dr. Chen is also a well-known expert in systems development methodology, integrated CASE tools, and groupware. He has provided training courses such as HTML, DHTML, XML, JavaScript, Web Site Development and User Interface Design, IIS, ASP, ColdFusion, electronic commerce, CASE tools, Information Strategy Planning, Information Engineering methodology, client/server computing using PowerBuilder and Visual Basic for many firms, such as AT&T, Logicon, PSINet, KForce.com, TRW Inc., BDM, BTG, Lockheed Martin, International Monetary Funds, Computer Sciences Corporation, and Marriot Hotel. He is the co-guest-editor of the March 1992 IEEE Software special issue on Integrated CASE, a CASE minitrack coordinator of Hawaii International Conference on Systems Sciences for several years, a program committee member of Methods and Tools for Business Engineering 1995 Conference, an international program committee member of 1995 Pan Pacific Conference on Information Systems.

  6. Outline (I)  EC Introduction  Introduction  The cycle of electronic commerce  EC and Business Process  EC statistics  Network Economy and Dynamic Trade  Information rules  Network externality and network economics  New supply and demand curves  Dynamic trade  EC Strategies  4Cs strategy  Content, Community, Commerce  Revenue streams  E-conomy Map and EC Strategies  EC Business Models  B2C Virtual stores: physical and digital goods and services  Infomediaries: Seller-side  Informediaries: Buyer-side  Infomediaries: B2B marketspace  EC Case Studies:  B2B: verticalnet.com  Auction: eBay  Subscription web sites: monster.com  e-tailing: 1800flowers.com  Financial investment sites: E*Trade  Other interesting web sites

  7. Outline (II)  E-Business and Extended Enterprise  Defining e-business and extended enterprise  Supply Chain Management  Customer Relationship Management  Business-to-business analysis  Case Studies  Amazon.com  Dell  Federal Express  Cisco  Web Technology and EC Software Overview  Internet infrastructure and services  Web technology overview  EC software  Internet Security and Electronic Payment Systems • EC Implementation  Evolution of EC implementation  EC site life cycle  EC site design issues  Promotion and marketing  Net readiness evaluation • EC Investment and Opportunities  Internet / EC industry analysis  EC Firms and Stock market  EC investment pyramid

  8. EC Introduction • Introduction • The cycle of electronic commerce • EC and business process • EC statistics

  9. Electronic Commerce: Introduction E-Business E-Commerce Commerce Internet Commerce

  10. Electronic Commerce • Electronic commerce is broadly as the ability to execute business activities (transactions, contracts, and partnership) over a computer network. The execution of these activities lead to the exchange of goods, services, and money. • Online business activities are changing market dynamics and structures of various industries. • Electronic commerce adds a new dimension "information" to business activities involving information goods, information services, and electronic money.

  11. Market Relationships

  12. Travelocity Microsoft expedia Priceline.com

  13. The Low-Friction Market "[The Internet] will carry us into a new world of low friction, low-overhead capitalism, in which market information will be plentiful and transaction costs low." -- Bill Gates, The Road Ahead "Where there is a friction, there is opportunity!" -- Net Ready.

  14. The Cycle of Electronic Commerce Access Searches Queries Surfing Follow-on Sales Customers Online Ads Online Orders Standard Orders Distribution Online: soft goods Delivery: hard goods Electronic Customer Support

  15. Components of Electronic Commerce Processes Institution • Marketing • Sales • Payment • Fulfillment • Support • Government • Merchants • Manufacturers • Suppliers • Consumers Electronic Commerce Networks • Intranet • Extranet • Internet Source: adapted from David Kosiur, Understanding Electronic Commerce, Microsoft Press, 1997.

  16. Generic Framework of Electronic Commerce Electronic Commerce Applications Supply Chain Management Online Marketing and Advertising Procurement & Purchasing Online Shopping Audio and Video on Demand Online Financial Transaction Entertainment and Gaming Education and Research Common Business Services Infrastructure (Security/Authentication, Electronic Payment, Directories/Catalogs) Technical standards for electronic documents, multimedia contents, business transactions, and network protocols Public policy, legal, economical development, and privacy issues Multimedia Content & Network Publishing Infrastructure (Digital Video, Electronic Books, World Wide Web) Messaging & Information Distribution Infrastructure (EDI, E-Mail, HyperText Transfer Protocol) Information Superhighway Infrastructure (Telecom, Cable TV, Wireless, Internet) Adapted from: Kalakota and Whinston, Frontiers of Electronic Commerce, Addison Wesley, 1996, p. 4.

  17. EC and Business Processes Seller Customer Phone, fax, e-mail Send info Request info Provide Info Get customer Provide info Fulfill order Support Identify need Find source Evaluate offerings Purchase Operate, Maintain, Repair Data sheets, catalogs, demos Web surfing Web searches, web ads Web site Newsgroups Net communities Corporate Databases Demos, reviews Web site Credit cards, e-cash P.O.s EDI Deliver soft goods electronically Web site, phone, fax, e-mail, e-mailing list

  18. World Wide Internet Commerce Forester Research, Inc. June 1999

  19. Business Internet Commerce Trends B2C: Business to Consumer B2B: Business to Business Reference: http://cyberatlas.internet.com/

  20. Business-to-Business E-Commerce • International Data Corporation forecasts that business-to-business e-commerce revenue will jump from $80 billion worldwide in 1998 to $1.1 trillion in 2003. Forrester Research believes that number will go even higher to $1.3 trillion by 2003. • Business-to-Business -- Vertical Industries • Computing and Electronics: For this year, businesses will invest $50 billion in computers and other electronic equipment online. Increase to $319 billion by 2002. • Motor vehicles: Companies will spend $9 billion online to purchase fleets of cars and trucks this year. 2002—grow to $114 billion—more than a 1000% increase. • Online utilities: Online trades of $15 billion in 1999 will grow to $110 billion by 2002. • Food and agriculture: Expected to be about $3 billion in 1999--$20 billion by 2002. • Pharmaceutical and medical: Forecasted $1 billion this year. Increase 20-fold by 2002. (Source: Business 2.0, March, 1999 re: Forrester Research)

  21. Statistics • Holiday Season 1998 • 2.1 million households shopped online for the first time • Generated $2.3 billion • Virtually all (98%) of AOL shoppers said they would shop online again in the next 6 months (Source: Jupiter Communications) • By 2003 . . . • Consumers on the Web will spend more than $177 billion worldwide. • There will be an eight-fold increase in Web buyers worldwide to 143 million (International Data Corporation, March 1999) • In Europe, 43 million households will be online. (Source: Nua Internet Surveys 12/98 re: DataMonitor) • In Japan, buyers will spend one trillion Yen online. (Source: Nikkei Multimedia, 12/98) • 1% of 5 million US merchants are able to collect payments via the Internet in 1999. • 10% E-merchants by year 2003.

  22. Retailing Trends 1950s 1960s-1970s 1980s 1990s Malls Web Main street Superstores • Home Depot • CompUSA • Barnes and Nobles • Border

  23. AOL Findings • Buy brands • Seek convenience • Are increasingly time-starving • Are not solely motivated by price • Require simplicity

  24. Network Economy and Dynamic Trade • Information rules • Network externality and network economics • New supply and demand curves • Dynamic trade

  25. Changes in the Net Economy • Business environment • Local / Physical Global /Virtual • Business assets • Tangible Intangible • Business change • Periodic Continuous • Business production • Mass Production Mass Customization Mass Personalization

  26. Net Economy • 1940s - 1980s • Manufacturing to information economy • Local - regional - national - multinational • Tangible brick-and-mortar assets: offices, shops, service centers, and warehouse • 1990s - 21st Century • Net economy: • Information & Knowledge • Communication and interactions • Global and virtual • Business Focus: Information, channel, flow, customer loyalty, reliable service, relationship • Intangible assets: Knowledge, experiences, relationships

  27. Internet Economy Driving Forces • Changing customer demands • Globalization • Internet ubiquity • New technology • New marketplace and intermediacies

  28. Network and Information Economy • Information is costly to produce but cheap to reproduce. • Price information according to its value not its cost. • Managing intellectual property. • Maximize the value of your intellectual property, not the terms and conditions that maximize the protection. • Information as an “experience good” • Consumers must experience it to value it. • Brand and trust building is critical. • The economics of attention • A wealth of information creates a poverty of attention. Source: Information Rules

  29. Characteristic of Information Economy

  30. Information Commodity Market • Competition among sellers of commodity information pushes prices to zero. • Personalize your product and personalize your pricing • Know your customer • Differentiate your prices when possible • Use promotion to measure demands • Network effects lead to demand side economies of scale and positive feedback. • Information has its greatest value when it is fresh.

  31. Popularity Adds Value in a Network Virtuous cycle Positive Network Externality Vicious cycle Value to User • Networks • Real: LAN, Internet, Fax • Virtual: Virtual community, Chat room, Instant messenger Number of Compatible User

  32. Supply/Demand Flip Network Economy Supply Price Demand Quantity Classic Economics Demand Price Supply Quantity • In the network economy, the supply curves slope down instead of up and demand curves slope up instead of down. • The accelerating expansion of knowledge and technology simultaneously pushes up the demand curve while pushing down the supply curve. • Upward demand curves: Network externality • Downward Supply Curves: Compounded learning curve, Moore's Law

  33. The Internet Increases Apparent Supply Old apparent supply New apparent supply  Price  Actual supply  Quantity Internet increase apparent supply Apparent quantity rise Price fall Source: Now or Never, Mary Modahl, HarperBusiness, 2000

  34. Challenge • Consumers: Everything on the Internet should to be free. • Merchant: How can I make a profit if everything is free. • Examples: • Free web browsers: Netscape Communicator and Internet Explorer • Free email: Juno, mail.yahoo.com and hotmail.com • Free Internet Access: Freeserve in Britain • Free PC: eMachine and CompuServe; Free-PC • Free web hosting: Geocities, Angelfire, Zoom • Free ... All tangible and intangible items that can be copied adhere to the law of inverted pricing and become cheaper as they improve. Anticipate this cheapness in your pricing strategy and product/service development strategy Gilder's Law $250 Cost of a 3-minute Long Distance Call Price $0 1999 1930 Year

  35. Dynamic Trade: Perfect Market • Customer service is more important than product selling • Federal Express: Certainty • Real-time demand drives production • Dell: Build-To-Order • Pricing matches market conditions • Name your price (reversed auction): PriceLine.com • Auction: Ebay Leveraging technology to satisfy current customer demand and with customized response.

  36. Traditional vs. Dynamic Trade • Speed from engagement to transaction • Weeks vs. Minutes • Product distribution • Seller-selected vs. Buyer-selected • Pricing • Product price list vs. Market-determined price • Production • Pre-sale vs. Post-sale (Dell’s BTO) • Customer relationships • Standard vs. Targeted and Customized • Strategic asset • Location vs. Visibility and Customer Database

  37. Dynamic Trade Self-Test Rate each of the following criteria in your market.(3=high, 2=medium, 1=low) • Commodity market • Perishability of inventory • Capital intensity • Configurability of products • Customers' perceived investment level • Threat from new kinds of competition • Channel volatility TOTAL: _____________

  38. Electronic Commerce: Strategies and Business Models

  39. Moving Your Business Online • Companies are motivated by either fear or greed to move to their businesses to the net. • To .com your company is becoming an imperative. • They have to obsolete their current business models and work very hard to search a new business model. Your competitor is just one-click away

  40. Electronic Commerce Applications and the Cycle of Commerce Seller's Cycle of Commerce Service Sales Billing/Collections Marketing Production/Logistics Enterprise Information Server

  41. Electronic Commerce Applications and the Cycle of Commerce Buyer's Cycle of Commerce Procurement Operation Receiving/Logistics Shopping/Testing Payment Enterprise Information Server Time

  42. EC Strategies • 4Cs strategy • Content, Community, Commerce • Revenue streams • E-conomy Map

  43. EC Strategies: 4 Cs Customers Commerce Community Content

  44. Customers • Obsess over your customers • Remember that the Web is an infant • What do you have to offer that the physical world cannot in order to attract customers? • If you make one customer unhappy, he won't tell five friends -- he'll tell 5,000 on newsgroups, list servers, and so on. • "Word of mouth" factor gets amplified on the Net • The shifts of balance of power away from business and toward customer. - Jeff Bezos

  45. Self Assessment: Customer Caring What do your customers need? What requests do they make of you? How do you respond to customer’s requests? What kind of information can they get from you? What process do they go through? How do you produce and distribute it to them? What are the steps that your customers have to take to complete a purchase transactions? How do they get shipment status? How are exceptions handled? What do you need from customer? What do you know about customer preferences? What information could you use to better target your product and service offerings? What can you do to build relationships? How can you engage customers in an ongoing dialog? How can you continue to provide information, products, and services to reinforce your ongoing relationships?

  46. Consumers are increasingly engaged in an active and explicit dialogue with companies. • The role of the consumer is being transformed from passive buyer to active participant in co-creating value • The market is no longer a "target," but must be recognized as an ecosystem. It's a forum for value creation and extraction, and the company is part of an enhanced network--one that includes its suppliers and partners, and its customers. The network's fulfillment goes beyond business-to-business or business-to-consumer relationships to a consumer-to-business-to-business relationship. • Consumer Centricity at http://www.informationweek.com/781/prahalad.

  47. 5 Steps to Success in EC • Set strategy • Make it easy for customers to do business with you! • Focus on the end-customer • Identify end-customers and their needs • Distinguish from channel partners • Identify other internal and external stakeholders • Redesign customer-facing business processes • Wire your company for profit and success • Foster customer loyalty • Determine and prioritize objectives • Decide what to measure and how to measure • Measure profitability and other critical success indicators Source: Adapted from Customer.com by Patricia Seybold, 1998

  48. Foster Customer Loyalty • The key to profitability in EC • Achieving higher revenues via customer acquisition and customer retention • Acquisition costs • Base profit • Revenue growth • Cost savings • Referrals • Price premium • Benefits: • No-cost acquisition • Experienced customer • Strategies • Increase customer "inventory" • Increase customer "tenure"

  49. 8 Critical Success Factors • Target the right customers • Own customer's total experience • Streamline business processes that impact the customer • Provide a 360-degree view of relationships with your customers • Let customers help themselves • Help customers do their jobs • Deliver personalized services • Foster community