ELECTRONIC COMMERCE

Electronic commerce consists of the buying and selling of products and services via the Internet. It includes business-to-business, business-to-consumer, and consumer-to-consumer transactions. These transactions can include online retail sales, supplier purchases, online bill paying, and Web-based auctions. Electronic commerce utilizes a variety of technologies including electronic data interchange, electronic fund transfers, credit cards, and e-mail.

The term e-commerce is often used interchangeably with e-business. The common element is the effective implementation of business activities using Internet technologies. However, e-business is the broader, more encompassing strategy and related activities. In addition to retail sales it includes vendor-partner communication, electronic procurement, customer relationship management, data-mining, and numerous other business functions.

HISTORY

The development of the World Wide Web during the early 1990s dramatically changed the use of the Internet. The expansion of the Web, and along with it the Web browser, opened the Internet to anyone with basic computer experience and an online connection. As online activity increased, companies quickly saw the Internet's marketing potential. Subsequently, there was a rush to take products and services into this expanding electronic realm, and to redefine business itself.

According to studies demonstrating the growth of the Internet and electronic commerce:

• Fewer than 40 million people around the world were connected to the Internet during 1996. By the end of 2002, more than 605 million were connected.
• Approximately 627,000 Internet domain names had been registered as of December 1996. By the end of 2004 the number of domain names had reached 48 million.
• Internet traffic doubled approximately every 100 days for three consecutive years in the late 1990s. It is expected to grow between 100 and 150 percent annually through 2007.

To meet this demand, representatives from numerous industries—including consumer electronics companies, media corporations, telecommunications companies, hardware suppliers, software firms, satellite system designers, mobile phone networks, Internet service providers, television broadcasters and cable companies, and electric utilities—made aggressive Internet-related investments.

The downside of this impressive expansion was the Internet stock market bubble of 1999–2000, which had a significantly negative impact on the development of e-commerce on the Internet. Hundreds of companies with an idea and a business plan were able to gain access to a tremendous amount of venture capital and initial public offer funding. This resulted in many poor ideas being sold as profitable businesses, including pet food and grocery delivery services, as well as numerous application service providers just to name a few. The expansion, hype, and subsequent crash cooled many on the power and value in e-commerce. Coupled with the recession that followed the September 11, 2001 terrorist attacks, it was not until nearly 2005 that the e-commerce market began to exhibit a more realistic, normal, and steady rate of growth.

MARKET SIZE/OPPORTUNITY BASE

According to Forrester Research, the U.S. e-commerce market for retail sales was more than $95 billion in 2003, with five-year projections exceeding $200 billion. In Europe the retail segment totaled $53 billion in 2004. This amount was projected to reach $177 billion. The European and Asian markets show significant growth potential. North America does as well, but at a slower rate. China is viewed as an especially lucrative market for Western companies to penetrate with goods and services, in spite of the potential hurdles and hazards.

Based on U.S. Department of Commerce data, in May 2003 the market research firm eMarketer revealed that business-to-business e-commerce revenues were at approximately $720 billion in 2003, and were projected to hit $1.3 trillion by 2005. Computers and peripherals, aerospace and defense, and health-care and pharmaceuticals were projected to be the largest industry segments.

Standard definitions of e-commerce must still be established. Current market research estimates of aggregate online retail trade generally purport to include only those transactions ordered and paid for online. However, they must rely on data supplied by individual companies that may not define it in the same way. Individual companies sometimes include as online sales transactions those that were conducted substantially online, but which also include a critical non-Internet component.

The Internet plays an important role in a much larger number of transactions than those completed online. In addition to the shoppers who choose items online but pay for them off-line, the Internet is an important source of research that influences off-line ordering and purchasing, particularly for big-ticket items such as automobiles. However, by the early 2000s, research indicated that consumers were beginning to visit brick-and-mortar stores and then go online to make their actual purchase. A September 2004 survey from the USC Annenberg Center for the Digital Future showed that approximately 69 percent of online shoppers browse traditional stores prior to making a purchase over the Internet.

STRATEGIES

One of the first challenges involved in moving to online commerce is how to compete with other e-commerce sites. A common problem in addressing this challenge is that e-commerce is often analyzed from a technical standpoint, not a strategic or marketing perspective. E-commerce provides several technical advantages over off-line commerce. It is much more convenient for the buyer and the seller, as there is no need for face-to-face interaction and Web-based stores are open 24 hours a day. Also, e-commerce purchasing decisions can be made relatively quickly, because a vendor can present all relevant information immediately to the buyer. These factors lend themselves to a transactional approach, where e-commerce is seen as a way to reduce the costs of acquiring a customer and completing a sale.

In contrast, most successful e-commerce Web sites take a relational view of e-commerce. This perspective views an e-commerce transaction as one step among many in building a lasting relationship with the buyer. This approach requires a long-term, holistic view of the e-commerce purchasing experience, so that buyers are attracted by some unique aspect of an e-commerce Web site, and not by convenience. Since consumers can easily switch to a competing Web site, customer loyalty is the most precious asset for an e-commerce site.

While the primary focus of most Internet activity is on the business-to-business and business-to-consumer facets of e-commerce, other transaction methods are included. The success of eBay and its consumer-to-consumer portal for auction-based transactions has dramatically changed how people and companies conduct business. In addition to having a significant effect on business-to-business transactions, retailers are beginning to tap into this new and dynamic approach to commerce. In a 2004 Marketing article, Amanda Aldridge reported that while eBay's revenue from collectibles was $1.4 billion, its total revenue was $2.2 billion.

BARRIERS TO SUCCESS

Despite the growing number of e-commerce success stories, plenty of e-commerce Web sites do not live up to their potential. There were three primary causes of e-commerce failures during the early 2000s.

First, most Web sites offer a truncated e-commerce model, meaning that they do not give Web users the capability to complete an entire sales cycle from initial inquiry to purchase. As analyzed by Forrester Research, the consumer sales cycle has four stages. First, consumers ask questions about what they want to buy. Second, they collect and compare answers. Third, the user makes a decision about the purchase. If the purchase is made, the fourth phase is order payment and fulfillment (delivery of the goods or services). The problem is that many Web sites do not provide enough information or options for all four phases. For example, a site may provide answers about a product, but not answers to the questions that the consumer has in mind. In other cases, the consumer gets to the point where he or she wants to make a purchase, but is not given an adequate variety of payment options to place the actual order.

The second problem occurs when e-commerce efforts are not integrated properly into the corporate organization. A survey by Inter@ctiveWeek magazine found that in most companies e-commerce is treated as part of the information system (IS) staff's responsibility, and not as a business function. While sales and marketing staff generally assist in the development of e-commerce Web sites, final profit and loss responsibility rests with the IS staff. This is a major source of breakdowns in e-commerce strategy because the units that actually make products and services do not have direct responsibility for selling them on the Web. One promising trend is that more companies are beginning to decentralize the authority to create e-commerce sites to individual business units, in the same way that each unit is responsible for its part of a corporate intranet.

SUCCESS FACTORS

After studying many aspects of electronic commerce, several consulting and analytic firms created guidelines on how to implement and leverage it successfully. In particular, two organizations have developed lists of critical success factors that seem to capture the state of thinking on this topic. First is the Patricia Seybold Group, which publishes trade newsletters and provides consulting services related to using information technology in corporations. This firm identified five critical e-commerce success factors:

1. Support customer self-service. If they so desire, Web users should be enabled to complete transactions without assistance.
2. Nurture customer relationships. Up-front efforts should focus on increasing customer loyalty, not necessarily on maximizing sales.
3. Streamline customer-driven processes. Firms should use Web technology to reengineer back-office processes as they are integrated with e-commerce systems.
4. Target a market of one. Each customer should be treated as an individual market, and personalization technology should be employed to tailor all services and content to the unique needs of each customer.
5. Build communities of interest. A company should make its e-commerce Web site a destination that customers look forward to visiting, not simply a resource people use because they have to conduct a transaction.

American Management Systems, a Vienna, Virginia, IT consulting firm, developed a list of recommendations that reflect similar thinking:

1. Focus on relationships and relationship pricing (price to maximize overall revenue per customer, not to maximize each transaction).
2. Create innovative bundles of products and services (including bundling products and services from other companies).
3. Provide superior customer service.
4. Develop a compelling experience for customers (use diverse and interesting content to make each transaction interesting and pleasurable).
5. Customize and personalize.
6. Convince customers that they need to return (make the site an information and/or entertainment resource, as well as a business tool).
7. Make routine tasks simple (reengineer so that customers can complete basic transactions and tasks with minimal effort).
8. Strive to match constant increases in customer expectations (utilize cutting-edge technology and benchmark the e-commerce Web site against those of all other firms, not simply those of direct competitors).

A quick review of two successful e-commerce sites, the Amazon.com bookstore site and Dell Computer's Web site, illustrate how many of these principles combine to help develop a strategic e-commerce capability.

Amazon.com, which has one of the highest sales volumes of any Web-based business, has optimized its site for the nature of its products and the preferences of its customers. The site is highly personalized; each visitor to the site, once registered, is greeted by name. The site content also is customized. Using software based on pattern recognition, Amazon.com compares a particular customer's purchase history to its overall record of transactions and generates a list of recommended books that seem to fit his or her interests and tastes. The company has a very integrated customer service support system, so that any customer service representative can access all data on the transactions, purchasing information, and security measures of each customer. The system also supports communications using e-mail, fax, and telephone.

Finally, Amazon.com helps to build a community of users through its Associates Program. Under this program, a Web site can host a hyperlink directly to the Amazon.com site. Any time that a visitor to that site buys books through Amazon.com, the Web site owner receives a share of the transaction revenues. This is a very inexpensive way for Amazon.com to extend its marketing and advertising reach across the Web.

Dell Computer also uses personalization and customization tools. For every major corporate customer, Dell creates a special Premier Page, which shows all products covered under purchasing contracts with that firm, as well as the special pricing under those contracts. This ensures that employees of that firm always get the right price for each purchase. Ford Motor Company reports that by encouraging employees to buy PCs from its Premier Page, the company saved $2 million in one year.

Dell also has integrated its e-commerce Web site with all back-office systems, so that when a customer orders a custom-configured PC, that information is automatically transferred to the production system to ensure that the unit is built according to specifications. This also improves customer service; Dell will proactively notify any customer if a production problem or inventory shortage will delay delivery.

These cases and analyses reflect some common lessons learned about the right way to approach electronic commerce:

1. First, no company can be successful in e-commerce by itself. Oftentimes, a firm must integrate its Web site with those of its trading partners, including suppliers, customers, and sometimes even competitors. Thus, each firm must create its own "value Web" that delivers the maximum benefit to its customers.
2. Second, site content is as important as product quality for firms engaging in e-commerce. A visit to an e-commerce site should create a lasting experience and strengthen a company's relationship with the customer. This involves much more than simply discussing the advantages of a company's products and services.
3. Third, firms must take advantage of all opportunities to use e-commerce for reengineering systems outside of the Web. One interesting consequence of this is that increased automation of business processes increases the value of human contact. If customers are used to completing transactions without human intervention, rapid and personal assistance during a problem will be much more memorable and valuable.
4. Finally, personalization is becoming an expectation of Web users. This does not mean that each Web site should be all things to all people. Instead of designing a Web site that appeals to a generic customer or a broad demographic segment, firms should create dynamic content that can target itself to match the tastes of each visitor separately. This maximizes the opportunity to use each Web visit to build the relationship with a particular customer, even if that visit does not result in a sale.

Electronic commerce, as used by U.S. firms, has already undergone several generations of evolution. Early experiences helped to stabilize e-commerce technology and set the development path for more sophisticated and useful technologies. Later experiences provided guidelines on strategic approaches and operational models that will help to improve e-commerce success.

There are two other key areas where more progress is needed to ensure the healthy growth of e-commerce. First, the emergence of the so-called digital economy is dependent on the creation of a robust infrastructure for all e-commerce, which in turn requires the development of standards. Second, government policy is having an increasing impact on e-commerce activities, and therefore policy needs to begin to catch up with the latest technology. Some of the policy issues that governments must address in regulating e-commerce, as identified by the U.S. government, are:

1. Financial issues, including customs and taxation, as well as electronic payment systems.
2. Legal issues, including the uniform commercial code for electronic commerce, intellectual property protection, privacy, and security.
3. Market access issues, including telecommunications infrastructure and interoperability, content, and technical standards.

Three key issues will determine the long-term viability of electronic commerce. These are:

1. Technological feasibility, or the extent to which technology—bandwidth availability and information reliability, tractability, and security—will be able to sustain exponentially increasing demands worldwide.
2. Socio-cultural acceptability, or the extent to which different global cultures and ways of doing business will accommodate this new mode of transacting, in terms of its nature (not face-to-face), speed, asynchronicity, and unidimensionality.
3. Business profitability, or the extent to which this way of doing business will allow for profit margins to exist at all (e.g., no intermediaries, instant access to sellers, global reach of buyers).

As technology continues to develop and mature, the ability to assess the impact of electronic commerce will become more cogent. Moreover, the significance of privacy, security, and intellectual property rights protection as prerequisites for the successful world-wide diffusion, adoption, and commercial success of Internet-related technologies—especially in places with less democratic political institutions and highly regulated economies—is continually increasing. The differentiation between the Internet (the global network of public computer networks) and intranets (corporate-based computer networks that involve well-defined communities and potentially more promising technology platforms for fostering Internet-related commerce) became significant in the late 1990s and early 2000s. Intranet development has surpassed the Internet in terms of revenue—by 2005 more than half of the world's Web sites were commercial in nature.