1

Chapter 7 Doing Business on the Internet

Managing and Using Information Systems: A Strategic Approach, 2nd ed.

by Keri Pearlson and Carol Saunders

Copyright © 2003 John Wiley & Sons, Inc.

2

Copyright John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond

that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is

unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley &

Sons, Inc. Adopters of the textbook are granted permission to make back-up copies for their own use only, to make copies for distribution to students of the course the textbook is used in, and to modify this material to best suit their instructional

needs. Under no circumstances can copies be made for resale. The Publisher assumes no responsibility for errors,

omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

3

INTRODUCTION• E-business occurs when buyers and sellers

interact electronically.

• While this area is changing so rapidly that text-based materials are usually out of date before they are used, it is also a field that is too important to ignore.

• Chapter 7 therefore provides a basic understanding of the ideas used in discussions on current Internet activities.

4

OVERVIEW OF THE INTERNET

5

Some Definitions• Internet: Interconnected network of millions of

individual computers with no central computer.• World Wide Web: Popular method for accessing

Internet information, utilizes hypertext to link documents.

• Information Superhighway: High-speed, global communications network – arguably synonymous with the Internet.

• Intranet: Internet-style information used exclusively within an organization, inaccessible by outsiders.

• Extranet: A company’s inter-organizational information unavailable to users of its intranet or to the wider Internet community.

6

TCP/IP• TCP/IP (Transmission Control Protocol/Internet

Protocol) was the breakthrough technology making interoperability between networks possible and thus allowing the Internet to work

• Protocols “are the specifications for the interface between 2 computers, and they set standards to define how computers communicate with each other to accomplish specific tasks”

• IP “defines a connectionless service through which data is delivered from computer to computer”

7

TCP/IP Packet

HEADER DATA TRAILER

Computer Address of

Sender

Computer Address of Receiver

Packet Length

Data Checksum

 

Regular Mail

Return Address

Address Letter  

Figure 7.1 Comparison of Letter and TCP/IP Packet

8

E-Marketplaces• E-Marketplace: special type of network

that brings different companies together.

• Sometimes called net-markets, they are typically built by a consortium of businesses in a market, or by an e-business interested in providing the marketplace.

• Both vertical and horizontal e-marketplaces exist.

9

Marketspace

• Marketspace is a virtual market in which transactions are all based on information exchange, rather than trading goods and services.

• Firms in a virtual market typically have no inventory on hand and simply act as market-makers.

• Success in the marketspace varies with the firm, customer loyalty may be provided through context (e-Bay), content (Fisher-Price toys) or infrastructure (Time-Warner cable).

10

EVOLUTION OF E-BUSINESS

11

Electronic Data Interchange (EDI)• Is the direct computer-to-computer transfer

of business information between two businesses using a standardized format (e.g., ANSI X12)

• EDI automates the information flow (next slide) and facilitates management of a business process, such as purchasing, shipping and payment

• However, EDI never lived up to early growth projections due to the set-up effort required

12

Figure 7.2 Steps in an EDI transaction for a

purchase, shipment or payment Step 1 Buyer’s computer sends purchase order to seller’s computer

Step 2 Seller’s computer sends purchase order confirmation to buyer’s computer

Step 3 Seller’s computer sends booking request to transport company’s computer.

Step 4 Transport company’s computer sends booking confirmation to seller’s computer

Step 5 Seller’s computer sends advance ship notice to buyer’s computer

Step 6 Transport company’s computer sends status to seller’s computer

Step 7 Buyer’s computer sends receipt advice to seller’s computer

Step 8 Seller’s computer sends invoice to buyer’s computer

Step 9 Buyer’s computer sends payment to seller’s computer

13

Basic Internet Business Models

• B-to-B: targets other businesses• B-to-C: targets consumers• B-to-E (employee): companies provide

service to employees of other companies.• B-to-G: companies provide services to local,

state and national governments• C-to-C: Consumers interact with other

consumers.• Hybrid: combines B-to-B & B-to-C models

14

Stages of Web-based Business Evolution

I. Content Provider – an effective means of reaching millions of potential customers but without using the Web’s interactive and multimedia capabilities

II. Transaction Forum – focused on B2C but seen as a supplement to “bricks and mortar”

III. Integrator – integrate the entire chain of sales, order processing, etc. with legacy systems

IV. Catalyst for Industry Restructuring – the result of the transforming effects of the Internet on traditions forms of commerce

15

E-Channel Patterns• An e-channel is a chain of electronic

“relationships between companies and partners/resellers”

• They can lead to industry restructuring when there are massive changes brought about by:– e-channel compression

(disintermediation – next slide), and

– channel expansion (the adding of brokering functionality)

16

Figure 7.4 Example of Channel Compression * Adapted from Kalakota and Robinson, E-Business

2.0, 2001

Old Music Industry

Few Record Distributor Retailer Customer

Artists Company Pays

+$1 +$9 +$1 +$5 $16/Album

New Music Industry

Many Artists E-Business Website CustomerPays

Album: + $3 +$7 $10Song: +$.30 +$.70 $1

17

Value-added Networks (VANS)

• Are independent 3rd-party companies that provide connection and EDI transaction services to customer companies

• Have allowed many-to-many relationships to become a reality by linking many buyers to many sellers

18

FRAMEWORK OF ELECTRONIC COMMERCE

19

Fig. 7.5 Kalakota and Whinston’s E-commerce framework

Four key building blocks:1. Common business services infrastructure

2. Message and information distribution

3. Multimedia content and network publishing

4. The Internet (infrastructure)

Two supporting pillars:1. Public policy (“governance”)

2. Technical standards

20

Common Business Services Infrastructure

• The common business infrastructure for electronic commerce consists of four main elements:

– Security

– Authentication

– Encryption

– Electronic Payments

21

Authentication• Authentication is the security process of

verifying that a user is who he or she says they are.

• Passwords are the most common type of authentication.

• Digital signatures are now gaining popularity for authenticating transmitted information.

22

Authentication: Digital Signatures

• Digital signatures take the place of ordinary signatures in online transactions to prove that the sender of a message is who he or she claims to be.

• When received, the digital signature is compared with a known copy of the sender’s digital signature.

• Digital signatures are also sent in encrypted form to ensure they have not been forged.

23

Encryption• Encryption systems translate data into a secret code.• Encryption systems include 4 main components:

– Plaintext: the unencrypted message– An encryption algorithm: that works like the

locking mechanism to a safe– A key that works like the safe’s combination– Ciphertext is produced from the plaintext message

by the encryption function.– Decryption is the same process in reverse (like a

modulation/demodulation), but it doesn’t always use the same key or algorithm. Plaintext results from decryption.

24

Encryption Techniques• The two main encryption techniques now in

use:

– Symmetric encryption in which both sender and receiver use the same key.

– Asymmetric or public key encryption, which uses two separate keys, called public and private keys.

25

26

Symmetric Encryption• Symmetric or private key encryption,

uses the same algorithm and key to both encrypt and decrypt a message.

• Historically, this is the most common encryption technique.

• Since the key must be distributed, however, it is vulnerable to interception. This is an important weakness of symmetric key encryption.

• DES uses symmetric encryption.

27

Asymmetric or Public Key Encryption• A second popular technique is asymmetric or

public key encryption (PKE). • PKE is called asymmetric since it uses two

different “one way” keys:– a public key used to encrypt messages, and– a private key used to decrypt them.

• PKE greatly reduces the key management problem since the private key is never distributed.

• PGP (pretty good privacy) is a popular form of PKE available as shareware.

28

Secure servers• Secure Sockets Layer (SSL) is a standard

for secure interactions use on the Web. SSL, uses a combination of private key encryption (using a one-time session key) and digital signatures to enhance the security of transmission.

• Secure servers protect the privacy of the data they send and receive through encryption.

29

Firewalls

• Firewalls block intruders from entering a website or possibly blocking access to the outside by employees in a company.

• For example, an intruder (hacker) trying to attack a corporate website might encounter a firewall making it more difficult to get access to the servers.

• Likewise, an employee trying to get outside the corporate intranet might be block from doing so by a firewall.

30

Electronic Payments• Includes: credit cards, electronic checks, EFT,

smart cards, and e-cash. • Common types of e-payments systems are:

– Virtual terminals (“online equivalent to credit card swipe machine”)

– Transaction processors (www.itransact.com)– Internet checking services

(www.redicheck.com)– Electronic funds transfer– Digital Cash (www.digicash.com)

31

Figure 7.7 Traditional credit card

transactions Step 1 Merchant obtains a customer’s credit card number and expiration date, either manually (via transcription or a card imprint) or electronically (via a swipe machine)

Step 2 Merchant relays this information and the payment amount to credit card processor, either manually (e.g., mail) or electronically (via a phone line)

Step 3 Processor deposits purchase amounts into merchant’s bank account

32

Figure 7.8 Virtual terminals Step 1 Customer visits merchant’s website, selects a product or service to purchase, and enters credit card information

Step 2 This information is relayed to the merchant

Step 3 When convenient, merchant accesses virtual terminal and inputs or uploads the collected credit card information; this information is relayed to credit card processor

33

Figure 7.9 Transaction processors

Step 1 Customer visits merchant’s website, selects a product or service to purchase, and enters credit card information

Step 2 This information is automatically collected by the transaction processor and relayed to the credit card processor

34

Figure 7.10 Internet checking Step 1 Customer visits merchant’s website, selects a product or service to purchase, and enters check information (specifically, the ABA number printed at the bottom of the check)

Step 2 This information is used to generate an actual paper check, printed with the same information as the other checks in the customer’s checkbook. The customer’s name is printed on the signature line with a note that the customer has authorized the transaction

Step 3 The check is then processed exactly like any other check

35

Figure 7.11 Electronic funds transfer

(EFT) Step 1 Customer visits merchant’s website, selects a product or service to purchase, and enters check information: specifically, the ABA number printed at the bottom of the check. (Some EFT providers will also allow funds to be transferred from savings accounts.)

Step 2 Merchant relays this information to an EFT provider

Step 3 EFT provider verifies customer account information against an Automated Clearing House (ACH) database; funds are debited from customer’s bank account and credited to merchant’s bank account

36

Figure 7.12 Digital cash Step 1 Customer signs up with a digital cash provider and purchases a software “purse” of a given amount, which is stored on customer’s computer

Step 2 Customer visits website of merchant who accepts digital cash and agrees to pay via this method

Step 3 Payment amount is deducted from customer’s “purse” and deposited into merchant’s account

37

Directory and Search Engines• Directory services: ‘industrial strength’ databases

that keep track of who and what (servers, databases) is where on the Internet.

• Search engines: keeps track of information (files) on the world wide web (WWW) by allowing a user to enter key words that the engine then uses to index collected documents for easy review.

• Commercial Servers: a suite of software components designed to create and manage Web storefronts.

• Personalization: is the “selective delivery of content and services to customers and prospective customers”.

38

Messaging and Information Distribution Infrastructure

• Second building block of supporting framework for e-commerce. Used for moving messages over the Internet.– E-mail (including listserv)– Instant Messaging– Pt-to-pt file transfers (FTP)– Groupware (Lotus Notes, CU-SeeMe,

NetMeeting)

39

Multimedia Content• Third building block of supporting framework

for e-commerce. Includes standards for various multimedia file types. Examples of materials transported in this way include:– Video – Audio– Text/Electronic documents– Graphics & Photos– Realtime/Non-realtime applications (prioritization)

40

Internet Infrastructure• Fourth building block of supporting

framework for e-commerce. Includes data communications circuits over which information travels. Includes:– Packet-switched networking (telephony is circuit-

switched)– Packets contain overhead information including

addressing – They are also routed, like mail– All of this flows across Internet backbones– Newer Internet access technologies include

wireless access, cable access and DSL.

41

42

Public Policy• Public policy is one of two supporting pillars for e-

commerce. Public policy issues include: – universal access, – privacy, – information pricing, – information access.

• Privacy issues include what information is private and/or who should have the right to use/sell information about Internet users:– Requesting personal information on visiting a web site– Creating customer profiles– Leaving electronic footprints when visiting a web site

43

Technical Standards

• Standardization is the second supporting pillar for e-Commerce. Standards are critical for electronic interaction.

• Secure Electronic Transaction (SET) for secure payments of online credit card transactions is one of the most heavily promoted standards

• Other application standards include file transfer protocol (FTP), hypertext transfer protocol (HTTP), simple network management protocol (SNMP), post office protocol (POP), and multimedia internet mail extensions (MIME)

44

FOOD FOR THOUGHT 1: E-LEARNING

45

E-Learning• E-learning is using the Internet to enable learning

and is providing a major challenge to class-based traditional forms of teaching.

• In addition, the market for education is growing as businesses now want their employees to be continuous learners.

• If learning can be embedded within business processes executed by workers, then organizations can make major changes in their business strategy and their organization strategy.

46

Figure 7.14 Types of E-LearningComputer-based training (usu. not networked)

Distance learning (usually classes presented in a traditional format over telecom links)

Online learning (courses presented using networked computers)

Technology-based instruction (offline materials, such as computers, t.v. & audio/video tapes)

Web-based instruction: uses a series of linked web pages for teaching.

On-demand learning: learning broken into chunks delivered over the Internet.

47

Potential for E-learning

• E-learning is a relatively new concept enabled by the Internet.

• It is allowing many organizations to rethink how they disseminate knowledge, information and training in the workplace.

• This new form of teaching will also likely represent a major challenge to traditional schools and universities.

48

FOOD FOR THOUGHT II: IS THERE REALLY A “NEW

ECONOMY”?

49

Michael Porter’s Argument• The “new economy” is nothing other than

the old economy that has access to new technology

• By focusing on ‘e-Business’ as a separate entity and failing to integrate the Internet into their proven strategies, well-established businesses are unable to leverage the Internet’s capabilities

• Most companies can compete successfully only when they use the Internet to complement traditional ways of competing

50

END OF CHAPTER 7