E-commerce involves conducting business transactions using computers and telecommunications networks. E-commerce generally results in streamlined work processes and is a product from reengineering efforts. The major form of e-commerce is business-to-business, or B2B, e-commerce involving organizations conducting transactions electronically with one another. For example, a car manufacturer may order supplies electronically from its suppliers. In business-to-consumer e-commerce (B2C), individuals deal directly with a business. For example, you can order a PC directly from Dell or Gateway using their websites. Paper-based business processes are ideal candidates for e-commerce, since often businesses can see huge savings and efficiencies by using e-commerce. New e-commerce business models are emerging on the Internet.
Companies face a series of challenges when converting to e-commerce business processes. First is to define an effective e-commerce strategy and model. A second challenge is restructuring traditional distribution systems and work processes to be able to handle direct shipment of single units to customers. Traditionally, manufacturers or vendors ship bulk quantities to resellers who sell individual items to consumers. When selling directly to consumers from a website, companies need a distribution system that can handle split-case distribution, where cases of goods are opened, individual items are warehoused, and individual items are shipped and tracked. This process is often outsourced to companies like Fedex. As we started to see with the failure and bankruptcy of “dot-coms” at the end of the twentieth century, business to consumer e-commerce is difficult and risky even for companies that exist only on the Internet; therefore, the transition from a “bricks and mortar” business model to an e-commerce model can be expected to present many challenges.
Although there are variations, the most successful e-commerce models include 3 interconnected components: community, content, and commerce. It is important to build a loyal community of people who are enthusiastic about the company and what it sells. Community can be built through free e-mailed newsletters, message boards, “ask an expert” features, and chat rooms. Not only must the website’s content be timely, accurate, and useful in order to get people to return to the site, but content should be targeted to visitors’ interests to help build a sense of community. Commerce involves website visitors buying the offerings on your website. If visitors to your website feel they belong to a community and return for interesting or relevant content, they’ll be more likely to buy what you’re selling.
Although we hear more about B2C e-commerce, the B2B market is larger and expected to grow faster. B2B e-commerce allows even small startup companies to sell to a global marketplace, as well as to compare prices from global suppliers. B2C e-commerce is not as widespread and will grow more slowly. Many consumers still have concerns about the privacy and security of personal information, such as credit card numbers, provided for e-commerce. However, as we gain experience in B2C e-commerce, technology and policy should improve to overcome these fears.
There are a growing number of uses of both B2B and B2C e-commerce. We’ll briefly look at several applications in retailing, wholesale, marketing, investment, banking, and auctions.
E-tailing, or electronic retailing, is the direct sale of goods or services from businesses to consumers through electronic storefronts. Typically, these websites include electronic catalogs and shopping carts (or baskets). This model is used for both retail and wholesale selling. A cybermall is a web site that offer many products and services. Many cybermalls consist of links to affiliated retailers. Purchases of manufacturing, repair, and operations goods and services are an example of wholesale e-commerce. eCommerce software and processes can help streamline and improve processes for managing manufacturing, repair and operations.
E-commerce requires an extensive and reliable technology infrastructure. The technology includes the hardware, software and related technology underlying the business. The performance of the technology infrastructure can make or break an online business. Your competition is just a mouse click away – its easy to lose customers if your web site is loading slowly or if you lose customer orders.
A Web server platform – that is, a combination of hardware and operating system software – is the base of the technology infrastructure. The applications software the server will run, as well as the expected volume of e-commerce transactions, determines the computing power and capacity of the server. Since its hard to predict website traffic, a scalable platform – one that can be easily upgraded – is the best solution. Many new companies, especially small ones, choose not to host their own website, but to outsource it. They pay a monthly fee to a third-party, who provides web server capacity and a high-speed Internet connection. Not only does this decrease the firm’s initial capital outlays, but it also means that high-priced technical staff to keep the web server running 24 hours a day, every day, don’t need to be hired. In addition to a reliable platform and staff, the web server should be fault tolerant – that is, there should be an adequate hardware backup to avoid business disruptions if problems develop in the primary hardware.
E-commerce web servers also need to run systems software and utilities to perform a number of basic tasks. Access controls, such as passwords, are essential for intranets and extranets so that unauthorized individuals can’t access the firm’s resources. Web servers also support encryption in order to transmit private information securely. Since the main job of a web server is to respond to client requests using the HTTP protocol, server software includes programs to find the necessary web page and format it to send to the client. In dynamic web pages, the server must involve outside programs, get the results, and then format pages to send to the requestor. Whereas static web pages always contain the same information, dynamic web pages are built in response to a specific web site visitor’s request. Web servers maintain a Web log file that includes information about visitors to the site, such as the search engine they used to get to the site, and how long they visited the site. The log file can be analyzed to improve the site.
E-commerce software must support 5 basic tasks. Companies selling a variety of products need an interactive catalog delivering customized content to users’ screens. Catalog management software accesses product data stored in a database on a different computer and formats it for delivery to the user. Product configuration software is used when a product or service has many components and options. Customers use the software to build their product with little or no help from salespeople. For example, at the Dell and Gateway websites, you can use product configuration software to design your computer. Most e-commerce sites use shopping cart software to track items customers select, let users remove and add items, and click the checkout button to purchase the items. E-commerce transaction processing software then calculates the total cost of the items purchased, applying appropriate discounts, taxes and shipping costs. In companies that outsource inventory management and order fulfillment, the transaction processing software then routes the order to a shipper, such as FedEx. Web traffic data analysis software analyzes data stored in the web log and produces reports with information to improve web site performance.
Since e-commerce requires data to be sent from one location to another, reliable, secure networks are essential. The Internet, intranets, extranets and value-added networks using packet-switching technology can all be used for e-commerce. Routers guide the packets to their destination, based on the receiver’s address in the packet. Routers select the quickest route, based on line condition and traffic. When choosing a network for e-commerce, cost, availability, reliability, redundancy and security issues should all be considered. Not only must initial cost of the network be considered, but also ongoing operational and support costs. Availability is the amount of time a network is scheduled to be available, whereas reliability refers to the percentage of available time the network must be operational. Typically reliability must exceed 99% of the time available. Redundancy refers to the fault tolerance of the network; that is, its ability to operate if components fail. Security is the capability to keep messages from being intercepted.
Electronic payments are an important and rapidly growing part of the e-commerce infrastructure. Payments are made in a variety of ways, including electronic cash and credit cards. Security is handled through user authentication and encryption.
Authentication technologies help e-businesses confirm the user’s identity before providing access to services, information, or assets. A digital certificate helps to authenticate a user or website. A digital certificate is data embedded in a website or attached to an e-mail and verifies the buyer’s identity or the Web site. Digital certificates are issued by third parties called certificate authorities (CA), who guarantee that the individual or organization granted the certificate. The secure sockets layer, a communications protocol which can handle data encryption, is used in virtually all e-commerce transactions.
To use electronic cash, an individual opens an account with a bank that offers the service and deposit money in the account. Whenever the person wants to use electronic cash to make a purchase, he accesses the account over the Internet. The bank authenticates the consumer’s identity, usually through a digital certificate, and issues the electronic cash. Or the account holder can buy merchandise or services over the Internet using electronic cash at sites that accept it. After the merchant validates it authenticity and ships the goods, he presents the electronic cash to the issuing bank for payment. There are two types of electronic cash. Identified electronic cash includes information about the identity of the person withdrawing the cash. Banks can also trace this type as it moves through the economy, identifying what was bought, where and when it was purchased, and how much it cost. Digital cash works more like paper cash – once it is withdrawn from an account, it can be used without leaving a transaction trail or identifying the user. Some of the companies providing electronic cash include CyberCash, Mondex and Visa. Electronic wallets can streamline the online purchasing process. CyberCash and American Express are just two sites offering electronic wallets. An electronic wallet holds personal information, such as name, shipping address, and phone number; credit card information; and electronic cash. When a purchaser places an order online, the electronic wallet can complete all necessary information, making on-line transactions quick and easy. Most on-line shoppers use credit, debit or charge cards to pay for on-line purchases. Charge cards, such as American Express, have no preset spending limit and must be paid in full monthly. Credit cards have a spending limit, but partial payments can be made. Debit cards quickly deduct the amount spend from your bank account. Smart cards look like credit cards, but have an embedded microchip. The memory and processing capability provided by the microprocessor allow data, such as insurance, credit card numbers, or health information, to be stored, as well as monetary values that can be spent. Smart cards are not as widely used in the United States as they are in other parts of the world.
Intellectual property refers to items such as music, paintings, books or inventions that are protected by patents, copyrights or trademarks. There are continual lawsuits being filed over numerous issues – such as business formats, website services or music files. Lately everyone’s attention has turned to the music industry’s lawsuits involving MP3 and Napster. The outcomes of these lawsuits will shape the future of the music industry. Because of the anonymity and accessibility of the Internet, consumer fraud is rampant. When conducting business on the Internet, you need to know the merchant or business is legitimate. Looking for the Better Business Bureau’s Online Reliability seal is is one way to judge the trustworthiness of an on-line company. Most on-line auction fraud occurs between 2 individuals on an online auction site, where the details of payment and delivery are determined by the individuals. These transactions aren’t brokered or guaranteed by the auction site. There are sites, however, that ensure the quality and delivery of items, and some that hold payments until the merchandise is received and accepted. Spam is the junk mail of the Internet – unsolicited e-mail offering deals sent in mass to groups of people or Usenet groups. It’s best to delete and ignore spam – if you reply and ask that your name be removed from the mailing list, the sender knows your e-mail address is valid. Most e-mail providers or ISPs encourage their users to report spam so that the senders can be barred from further activities. Pyramid schemes work by new members paying their recruiters a fee to join the bottom of the pyramid. Part of the fee gets channeled to people higher up the pyramid. Each member supposedly can get rich by recruiting new members. Sooner or later new members can no longer be recruited and the pyramid collapses. Many online pyramid schemes, called multi-level marketing companies, also involve a product. However, the members’ fees remain the primary source of revenue, since the products are generally overpriced or unwanted. Financial scams are also easy to do on the Internet. Investment fraud generally involves the sale of unregistered or nonexistent investments. It’s also easy for anyone to spread rumors about a stock in chat rooms in order to influence its price to their advantage. You should always verify information from the Internet with a financial advisor or the company itself.
There are many issues a company must address to develop and maintain an effective website. We’ll briefly cover some of the issues involved in developing an effective web presence and getting people to your site.
When planning a Web site, its purpose and tasks must first be identified. Not only should the site be attractive, but it should also meet visitors’ needs. Although users’ needs will vary by audience type, this slide summarizes a few common ones. Visitors should be able to easily obtain not only information about products and services, but also general information about the organization, financial information for investment purposes, warrantee and service policy information, information on contacting the organization, and information about the organization’s views on social issues. Visitors should be able to buy the company’s products or services and get advice about using them. Websites should also provide visitors an opportunity to provide feedback about products or services or the organization’s views.
Although in the past organizations had no choice but to develop their own web site or to hire contractors to build the site. Today there are more options, and even the smallest company can have a Web site up and running quickly and relatively cheaply. Web site hosting companies such as Bigstep.com provide the tools necessary to set up a working Web site quickly and with little or no up-front cash outlay. With only a browser and ISP, you can access such a site, select a template for your business, add your products, and have your site open for business the same day. Most of these sites will host your store without cost. However, to accept credit cards, your business will need a merchant account, which will charge a fee. A storefront broker acts as a middleman between your Web site and on-line merchants with the products. You chose the products and display them on your site. Essentially your business is a virtual storefront that sells someone products stocked and shipped by another company. In addition to bringing resellers together with merchants, the broker handles the transactions, including distribution of funds, for a commission.
Companies need to act in order to attract customers to their Web sites. First, a business should select and register a domain name that describes it business, like “www.bookworld.com”. Next, there should be a meta tag included on your home page. Meta tags are special HTML tags containing keywords about your site’s content. Although not displayed on the Web page, meta tags are used by search engines when building indexes pointing to your site. Web site traffic analysis software can be used to log useful information about visitors to your site that can be analyzed. This data can tell you which search engines or other Web sites and what keywords are most used to access your site, so you can adjust your meta tags or submit your site to specific web pages.
Transaction processing systems handle routine business operations and maintain records related to those activities. Transaction processing systems typically transform large numbers of inputs to outputs, using simple processing logic and operations. Order entry, inventory control and accounts payable systems are all examples of transaction processing systems.
Transaction processing systems collect data, edit data, correct data, manipulate and store data and produce documents. Much of the data collected and maintained by transaction processing systems are used as inputs to other information systems in a company. Figure 9.1 compares transaction processing systems to other types of systems. Compared to other systems used in business, such as management information systems or decision support systems, transaction processing systems have far more inputs and outputs, perform more routine and simpler processing tasks, and are less targeted toward decision making and analysis purposes.
The first transaction processing systems used batch processing. That is, all transactions for a period of time would be collected in a group (called a batch), input & processed as a unit. This was normally done at regular intervals, such as every hour, day, or week. The biggest problem with batch processing is that the master file is never current. Although this is okay for some applications, such as processing end of semester grades or payroll, it is unacceptable for others, such as financial transactions. Think about the problems that would arise if your bank only processed deposits and withdrawals once a day! However, batch processing is fast and cost effective for many applications. Online transaction processing is interactive & each transaction is processed as it occurs. Files are always current when online processing is used. The drawback to OLTP is the high costs associated with the necessary security & fault tolerance features. When online entry with delayed processing is used, data is input as the transaction occurs and is stored online, but files are not updated. Files are updated later in batch. For example, orders taken over the phone may be entered into the system, but not processed until a slow time, such as at night.
Figure 9.2 shows the difference between batch and online processing.
Although the primary function of a transaction processing system is to capture, process and store data about the basic activities of a business, since transaction processing is so vital to organizations, there are additional common expectations of all transaction processing systems. Because transaction processing systems are the primary record keeping systems in business, it is imperative that they are accurate and that data & information integrity is assured. To avoid “GIGO” (garbage in, garbage out), it is important that there are controls to ensure that correct data is input. Controls must also be in place to ensure error free & secure transactions. Timely output is essential. For example, invoices should be paid when they're due, but not too early; paychecks must be produced on time.
In the early days of transaction processing systems, it was obvious that transaction processing systems could replace many people. Increased labor efficiency is still a huge advantage of transaction processing systems. In our increasingly service-oriented economy, outstanding customer service has become a goal of virtually all companies. Transaction processing systems can be very useful for improving customer service. For example, at a store website, a transaction processing system can check inventory and tell a customer an item is out of stock, or check production or other systems to tell the customer when the item will be in stock. Although transaction processing systems are the oldest type of business information system in use, most strategic systems are transaction processing systems or based on them.
Figure 9.4 summarizes a transaction processing system. First, data is input into the system to record a transaction. Then data is processed, that is calculations or other operations are done to change input into output. Files or databases are then updated with the results. Outputs of a transaction processing system include documents and reports.
Figure 9.5 shows the data processing activities in greater detail. The first step in all systems is data collection. That is, the necessary input data, such as a sales price or course number, must be captured. A trend in data capture is called source data automation: that is, data is collected as close to the transaction as possible, preferably in machine readable form (e.g. UPC codes can be scanned at grocery checkout). This speeds transaction processing. Data is checked for completeness & validity during data entry. For example, software rules won’t let a user can't enter letters into a "Quantity" field or a negative number in an “hourly wage” field. An error message or error report prompts the user to correct “bad” data, such as input the quantity or pay rate again. In data manipulation, calculations or other processing is performed to change input into output. For example, a system would extend & total all items on a bill, calculate sales tax, & calculate the total bill. In data storage, files & databases are updated with the information just processed. Finally, documents and reports are produced as outputs.
Since transaction processing systems are so fundamental to a business, it can be disastrous if they malfunction for any reason, such as power outages, hurricanes, or mechanical or human error. Business resumption planning is analogous to disaster preparedness. After threats are identified and measures are developed that will safeguard corporate data and keep the system running until normal operations are restored. When a business resumption plan is implemented, it is call disaster recovery. The most important item for disaster recovery is the presence of backup systems. Companies may maintain their own backup systems. Some companies, particularly in the financial sector, for instance, maintain fault tolerant systems as part of normal operations. That is, transactions are processed on two identical servers – often in different locations. Thus, if something happens to cause the main site to fail, the backup server can be used. Other organizations have agreements with third party vendors called “hot sites”. In an emergency, a hot site provides the facility, along with hardware, software and communications facilities identical to the firm’s own, so that a company merely moves in and starts working. A cold site provides the facility, but not the systems, so a company must have another agreement to obtain backup systems. Organizations should keep at least 2 current backup copies of all data – one stored onsite and the other stored elsewhere. After all, an onsite backup would do little good if your office building flooded in a hurricane. Because of the communications network, hardware, and software backups required, business resumption planning can be costly. Businesses must consider the trade off between cost and fault tolerance. The more dependent an organization is on transaction processing systems and data, the more money it will need to invest in fault tolerant systems and networks.
Transaction processing systems are audited to determine whether they fulfill the requirements for which they were implemented and are correctly used and controlled. Some audits are internal, where an internal auditor examines the system and its documentation. External audits are done by independent auditors and should be a priority in publicly held firms. Traditionally in audits, audit trails are used to trace outputs back to their source to ensure correctness, security, and validity of processing. For example, a payment to a vendor could be traced back to the invoice, which could be traced back to a shipping receipt that was traceable to a purchase order. As business processes become more automated, often audit trails are broken or destroyed, so auditors must use other means to ensure the security and validity of the system.
Although there are many different types of transaction processing systems, we’ll briefly look at three of the most common: order processing systems, purchasing systems, and accounting systems.
As you can see in Table 9.2, each transaction processing system is composed of many different programs performing different functions.
Enterprise resource planning (ERP) makes timely information easily available for analysis and decision-making in companies of all sizes. ERP systems monitor business functions in real-time to provide timely information in manufacturing, finance, distribution, sales or human resources. A strength of ERP systems is that they integrate data across all functions. For example, a manufacturing supervisor would be notified when raw material inventory falls below a set floor.
Current business conditions make enterprise-wide accessibility of information a key to success. ERP software offers that possibility. Deploying an ERP system allows a firm to replace numerous separate, sometimes isolated, inefficient legacy applications with a single set of integrated products. This improves the efficiency of systems and decreases the cost of maintaining old systems. This improves an organization’s ability to adapt to changing conditions. Implementing an ERP system also gives an enterprise the chance to upgrade and standardize hardware, software and databases, reducing support and operations costs. ERP systems are designed around the most effective and customer-oriented business practices found. Thus, deploying an ERP system will help an organization follow the industry’s best practices. Although the adoption of improved work processes can be beneficial, as noted on the next slide, this can also be a disadvantage. Often established processes must be re-engineered, possibly causing dissatisfaction or turnover among experienced employees. Since ERP systems maintain an integrated database, decisions can be made based on enterprise-wide data. This is far more efficient than trying to coordinate decisions across units.
However, ERP systems are time-consuming, expensive, and difficult to implement. Some companies have spent millions of dollars and many years implementing ERP systems – not always with successful outcomes. Many companies have also had problems making ERP systems work with existing systems, adding to the expense and difficulty of deploying ERP. After investing so many resources in implementing ERP, switching costs are very high, so an ERP vendor essentially holds a business that uses its system hostage. Even with these problems, however, many organizations are successfully using ERP systems.
SAP R/3 is the most widely used ERP system. All SAP programs share an integrated database, so there is little data redundancy. As shown in Figure 9.22, R/3 is based on a three-tier client server architecture – a database server, application servers, and client Clients request services from the applications servers, which in turn request data from a database server.
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