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Creating a Winning E-Business, Second Edition 1-1

Chapter 1

Understanding E-Business

Table of Contents

Chapter Overview.........................................................................................................................1-2

Summary of Cases....................................................................................................................1-2Learning Objectives.................................................................................................................1-2Teaching Tips...........................................................................................................................1-3

E-Business Basics.........................................................................................................................1-3Quick Quiz...............................................................................................................................1-3

The Internet and the World Wide Web........................................................................................1-4What is the Internet?.................................................................................................................1-4A Brief History of the Internet.................................................................................................1-4A Brief History of the World Wide Web.................................................................................1-6Internet and Web Demographics..............................................................................................1-6Quick Quiz...............................................................................................................................1-7Discussion Questions...............................................................................................................1-7Projects to Assign.....................................................................................................................1-7Useful Links.............................................................................................................................1-7

E-Business and the Global Economy...........................................................................................1-8E-Business Advantages and Disadvantages.............................................................................1-9E-Business Value Chains.......................................................................................................1-10Quick Quiz.............................................................................................................................1-10Discussion Questions.............................................................................................................1-11Projects to Assign...................................................................................................................1-11Useful Links...........................................................................................................................1-11

E-Business Models.....................................................................................................................1-11Business-to-Consumer (B2C).................................................................................................1-12Business-to-Business (B2B)...................................................................................................1-12Business-to-Government (B2G).............................................................................................1-13Consumer-to-Consumer (C2C)..............................................................................................1-13Consumer-to-Business (C2B).................................................................................................1-13Quick Quiz.............................................................................................................................1-13Discussion Questions.............................................................................................................1-13Useful Links...........................................................................................................................1-14

Key Terms..................................................................................................................................1-15


Chapter OverviewCommerce, the exchange of valuable goods or services, has been conducted for thousands of years. Traditionally, buyers and sellers conducted the activities of commerce—selling products or services, making payments, exchanging information—in a physical marketplace. Today, commerce is more frequently taking place in a virtual marketplace—or marketspace—where buyers and sellers are connected electronically over the Internet.

Electronic commerce has forever changed some of the rules of the business game. For example, consumers have greater access to information with which to make informed buying decisions; businesses are targeting markets once out of reach because of geographic limitations; and business transactions of all types are conducted twenty-four hours a day, seven days a week.

In Chapter 1 of Creating a Winning E-Business, Second Edition, students will learn about the history of electronic commerce, the Internet, and the World Wide Web. Next, students will consider how conducting business activities electronically has altered the balance of marketplace power between buyers and sellers. Students will also explore the advantages and disadvantages of conducting business activities. Finally, students will investigate how access to a virtual marketspace has empowered businesses to modify their existing business models and create new ones.

Summary of Cases

Topic Title E-Business/Entrepreneur PagesIntroduction to e-business Scrambled Eggs Egghead.com 1, 28-29E-business and the global economy

Competing for Customers

Tattered Cover Book Store 9

B2B e-business Business.com Business.com 23-24

Learning Objectives After completing this chapter, the student should be able to: Discuss e-business basics. Describe the Internet and the World Wide Web. Discuss the role of e-business in the global economy. List e-business advantages and disadvantages. Explain e-business value chains and value activities. Identify e-business models.

Teaching Tips Opening Case: Direct students to read the “Scrambled Eggs” opening case. Remind


Scrambled Eggs

students that the resolution of this case appears at the end of the chapter.

Alternatively, have students read both the opening and closing case sections before beginning the chapter.

As students work through the chapter, they should keep in mind the business issues faced by Egghead Software in the early- to mid-1990s and consider why Egghead Software began selling its products online.

E-Business BasicsMany people use the terms “electronic commerce” or “e-commerce” to refer to the act of buying and selling products or services over a telecommunications network; others prefer the terms “electronic business” or “e-business.” In Creating a Winning E-Business, Second Edition, the term “e-business” is used to indicate the widest spectrum of commerce activities that use Internet and Web technologies. These activities include buying and selling, delivering information, providing customer services, and collaborating with business partners.

The initial development of e-business transactions began more than thirty years when banks began transferring money to each other using electronic funds transfer (EFT), and when large companies began sharing business information with their trading partners using electronic data interchange (EDI). Using EDI, companies electronically exchange information that is traditionally submitted on paper forms, such as purchase orders, receiving reports, invoices, payments, and so forth. These transmissions generally occur over private networks called value-added networks, or VANs. Unfortunately, for many small- and medium-sized businesses (SMBs), EDI systems are not an option because they are too costly to implement and maintain. Today, the Internet is a less costly e-business alternative to EDI and VANs for most SMBs as well as for larger companies.


The Internet and the World Wide WebGlobal access to the Internet and the World Wide Web (Web) has changed the way people communicate with each other, access information, and conduct business transactions. Today, almost a billion people worldwide access the Internet and the World Wide Web from home, the office, or the road to conduct a wide variety of personal and business activities. For example, using the Internet and the Web:

Consumers shop for and purchase products and services online. Businesses sell to their customers and offer customer service before and after the sale. Business partners exchange information and business transactions. Individuals get current news, upload and download electronic files, send personal and

business e-mail message, conduct research, and much more.To better understand the impact of the Internet and the Web on today’s business environment, it is useful for students to look briefly at their history and development.

What is the Internet? To understand the Internet, students should become familiar with networks. Use Figure 1-1 (see page 3) to describe a network as a group of two or more computers connected by some type of wired or wireless media.

Networks are generally classified by the type of area they cover: local, metropolitan, or wide. A business local area network (LAN) covers a single office, several offices in a single building, or several offices in a group of nearby buildings. Figure 1-1 illustrates a business LAN. A metropolitan area network (MAN) covers a larger geographical area, such as a city or region. A wide area network (WAN) spans the country or the globe. The Internet is a public WAN that connects private LANs, MANs, and WANs. Figure 1-2 (see page 4) illustrates the Internet.

A Brief History of the Internet The Internet originated in the late 1960s as an experimental network called ARPANET that was sponsored by the U.S. Department of Defense and developed at the Advanced Research Projects Agency (ARPA). Scientists at ARPA succeeded in sending data from a computer at ARPA to another computer at the University of California by breaking the data into small packets, sending the packets, and then reassembling the packets at the destination computer. This process is called packet-switching.

By December of 1969, computers at a handful of other universities were connected to the computers at ARPA, and the ARPANET was born. Scientists who played a major role in the early development of networking technologies include: J.C.R. Licklider (early conceptualization of interconnected computers and head of ARPA) Leonard Kleinrock (packet-switching technologies) Douglas Engelbart (hardware design)


Robert Kahn and Vinton Cerf (TCP/IP protocols, the common communication rules for networks)

Ray Tomlinson (first e-mail program)

By 1990, the Defense Department had spun off the military portion of ARPANET, and the National Science Foundation was overseeing the remaining portion of the network, now called the NSFnet. By law, commercial activity across the NSFnet was prohibited; in 1992, the United States Congress lifted the ban on commercial activity. In the mid-1990s, the National Science Foundation moved the original NSFnet backbone connections to commercial telecommunications providers, such as AT &T, and the Internet as we know it today was born.

Individuals and businesses generally connect to the Internet by contracting with an e-business, called an Internet service provider (ISP), which provides access to the Internet for a fee. America Online, EarthLink, NetZero, Netscape Network, and Road Runner (Time Warner Cable) are examples of ISPs. Very large businesses, government agencies, colleges, and universities may have a computer network connected directly to the Internet.

The power of the Internet lies in its ability to enable people and businesses to communicate quickly and inexpensively.

Service Description

E-mail Electronic messages sent by one computer user and received by another.

Instant messaging Online messages exchanged instantaneously between two parties who are simultaneously connected to the Internet.

Newsgroups and Web-based discussion groups

Electronic “bulletin boards” or discussion groups where people with common interests post, read, and reply to messages.

Mailing lists E-mail on a specific topic that is periodically mailed to a list of interested parties.

Chat Online conversations in which participants type messages and receive responses on their screen within a few seconds.

FTP Service based on the File Transfer Protocol (FTP) that enables users to upload or download electronic files from a server on the Internet.

VoIP telephony Telephone calls transmitted over networks using Internet technologies.

Peer-to-peer file sharing

Service that allows music and other files on a user’s computer to be listed and shared with other Internet users.

World Wide Web Multimedia documents stored on Web servers so that their content can be accessed and downloaded.


Service Description

Weblogs or blogs Web-based diaries kept by participants who write their thoughts about specific topics and make them available for visitors to read on an ongoing basis.

RSS Really Simple Syndication or Rich Site Summary; a communication standard that syndicates Web-based content such as news headlines.

A Brief History of the World Wide Web Although some people use the terms “Internet” and “World Wide Web” or “Web” interchangeably, it is important to note that they are not the same thing. The World Wide Web is a subset of the Internet and consists of computers called Web servers where linked multimedia documents are stored. These documents are called Web pages. A group of related Web pages is called a Web site.

A Web page may be connected to other pages at the same Web site or to pages at different Web sites by hyperlinks. Hyperlinks are text or images associated with the path and filename of a document. Web pages are accessed and viewed by using a software program called a Web browser. The two most commonly used Web browsers are Internet Explorer and Firefox. Other browsers include Netscape, Opera, and Deepnet Explorer.In 1989, Tim Berners-Lee, a software engineer and programmer at CERN in Switzerland, developed the technologies necessary to store, access, and view hyperlinked documents. These technologies included the Hypertext Markup Language for creating Web pages, a Web browser for viewing Web pages, and the Hypertext Transfer Protocol, or HTTP, communication rule that allows Web servers to “serve up” pages upon request by a browser. Berners-Lee named his new creation the “WorldWideWeb.”

The first widely used Web browser, called Mosaic, was developed in 1993 by Marc Andreessen, Eric Bina, and others at the National Center for Supercomputing Applications at the University of Illinois. Andreessen was also involved in developing the first widely used commercial Web browser, Netscape Navigator, when he joined with Jim Clark to co-found Netscape Communications in 1994.With the restriction on commercial use of the Internet lifted and the advent of an easy-to-use commercial Web browser, an increasing number of business Web sites appeared. Today, the Internet and the World Wide Web are essential channels for conducting all types of business activities.

Internet and Web Demographics Because of the explosive growth of Internet users over the past ten years, determining the number and types of people accessing the Internet for personal or business use can be difficult. Estimates, such as those posted on the Internet World Stats Web site, can be used to understand the rapid growth of Internet access around the world. For example, the Internet World Stats Web


site estimates that more than 223 million people in North America and 939 million people worldwide had Internet access by 2005—an increase of 160 percent since its previous estimates in 2000.It is equally difficult to count the number of Web sites that currently exist. In 2004, Netcraft estimated that the number of Web sites was more than 50 million and growing!

Useful Links Remind students to check out the student online companion for links to topics related to the history of networking and the Internet.

Web Site URLInternet World Stats www.internetworldstats.com/stats.htmPBS: Nerds 2.0.1 www.pbs.org/opb/nerds2.0.1/Tim Berners-Lee Biography www.w3.org/People/Berners-Lee/

E-Business and the Global EconomyThe widespread linking of individuals and businesses has created a global economic environment in which: Time and space are no longer limiting factors for businesses and their customers. The business value of information is more important than ever before. Business information is more accessible than ever before. Traditional business intermediaries are being replaced by businesses selling directly to

consumers and by new types of intermediaries.

Internet and Web technologies have created a virtual marketplace (marketspace) where businesses, which once served only local customers, can now serve customers located anywhere in the world twenty-four hours a day, seven days a week; where consumers are empowered by access to information; and where SMBs that could not afford to use EDI can now exchange information electronically with suppliers and distributors.

Greater access to information about competing products or services enables buyers to increase their power in the marketplace. Consumers can easily access information about competing products and services from individual Web sites or from Web sites, such as Shopzilla or NexTag, that provide comparison shopping at multiple online stores. As such, consumers now have high expectations for quick and convenient access to online information and online transaction processing.

A good example you can use to illustrate how access to consumer information has empowered buyers is the process of shopping for a car or truck. Although buyers typically buy new and used vehicles by visiting a physical location, many buyers now shop online before they make their


purchase. You may choose to make a strong distinction between shopping and buying at this point.

Widespread consumer access to the Internet and the Web has encouraged some sellers to redefine the marketplace by allowing consumers to bypass traditional industry intermediaries and purchase products or services directly from the sellers. This process is called disintermediation. You can discuss disintermediation in the IT industry by providing Dell, Inc. as an example. Dell was one of the first companies to sell personal computers directly to consumers rather than through a computer store.

Another good example you can use to illustrate disintermediation is the travel industry. In the past, most individuals and businesses made their travel arrangements (airline tickets, hotel accommodations, auto rentals, and so forth) through offline travel agents. Now, many people make their travel arrangements directly with the airline, the hotel, or the auto rental company at each company’s Web site—bypassing the traditional offline travel agent. Additionally, traditional offline intermediaries—bookstores, insurance agents, and others—must compete with their new online equivalents.

E-Case:Competing for

Customers

Ask students to read the “Competing for Customers” case. You can break students into groups to discuss the following

questions: What changes in operation has the Tattered Cover Book Store made as a result of greater consumer access to the Internet and the Web? Why were these operational changes necessary?

Students can then visit the Tattered Cover Book Store Web site.

Some sellers have redefined their marketplace by becoming a new type of intermediary, one that aggregates information for consumers. Good examples of information aggregators include Hotels.com (accommodations) and The Internet Truckstop (hauling opportunities and trucking industry information).

E-Business Advantages and Disadvantages Both sellers and buyers benefit from the global e-business economy.

Advantages for Sellers:

Increased sales opportunities Decreased costs Able to operate twenty-four hours a day, seven days a week Access to narrow market segments Access to global markets Increased speed and accuracy of information delivery Data collection and customer preference tracking


Advantages for Buyers:

Wider product availability Customized and personalized information and buying options Able to shop twenty-four hours a day, seven days a week Easy comparison shopping Access to global markets Quick delivery of digital products and information Access to rich media describing products and services

Unfortunately, both sellers and buyers must overcome certain disadvantages to benefit fully from e-business.

Disadvantages for Sellers:

Growing competition from other e-businesses Rapidly changing technologies Greater telecommunications capacity or bandwidth demands Difficulty integrating existing business systems with e-business

transactions Problems inherent in maintaining e-business systems Global market issues: diverse languages, unknown political

environments, and currency conversions

Disadvantages for Buyers:

Difficulty differentiating between so many online sellers Unpredictable transaction security and privacy Dealing with unfamiliar, possibly untrustworthy sellers Inability to touch and feel products before buying them Unfamiliar buying processes and concerns about vendor reliability Issues with state sales tax charges and product returns

E-Business Value Chains The power to communicate over the Internet and the Web has encouraged many companies to reevaluate how they interact with suppliers, distributors, and customers. Use Figure 1-11 (see page 15) to explain the concept of a value chain—all the primary and support activities required to create a company’s products or services and distribute them to customers. Use Figure 1-12 (see page 16) to explain how the interlinking of suppliers, companies, distributors, and customers via the Internet and the Web is causing companies to rethink their value chains in terms of value networks.

Useful Links Web Site URL

CARFAX www.carfax.com/Center for Research in Electronic Commerce - University of Texas at Austin

cism.bus.utexas.edu/


E-Commerce Times www.ecommercetimes.com/Edmunds.com www.edmunds.comNetAcademy – Electronic Markets Journal

www.electronicmarkets.org/

The Internet Truckstop www.truckstop.com/Tattered Cover Book Store www.tatteredcover.com/VARBusiness Online – E-business Information

www.varbusiness.com/

E-Business ModelsA company’s business model is the way in which the company conducts business in order to generate revenue. Widespread access to the Internet and the Web has encouraged businesses to revamp their business models to include an e-business component or to create completely new e-business models. E-business models can be categorized in a number of different ways; the most common way is by customer. Many e-businesses follow a combination of e-business models.

Model Description ExamplesB2C Business-to-consumer: Business sells

products or services directly to consumers.

Amazon.comTattered Cover Book StoreeDiets.com

B2B Business-to-business: Business sells products or services to other businesses or brings multiple buyers and sellers together in a central marketplace.

AirParts.comJayde.comRackspace Managed Hosting

B2G Business-to-government: Business sells to local, state, and federal agencies or creates a marketspace to bring government agency buyers and sellers together.

B2GMarketScanPlanet.comSupplyCore

C2C Consumer-to-consumer: Consumers sell or trade directly with other consumers.

eBayAmerican Boat Listingswapvillage.com

C2B Consumer-to-business: Consumers submit bids for products or services that competing businesses accept or decline.

priceline.com

Business-to-Consumer (B2C) Businesses that conduct their activities from a physical location are called brick-and-mortar businesses. Many well-known brick-and-mortar retailers—such as Barnes & Noble, Sears, Best Buy, and Wal-Mart—have revamped their existing business model to add an online store. Businesses such as these are now called brick-and-click businesses or e-retailers. Pure-play e-retailers are those that do not have physical stores, such as Amazon.com, eBags, and Hometown Favorites.


The B2C category of e-business models includes e-retailers and other types of businesses that sell products or services directly to consumers online. Examples of these e-retailers include virtual malls (Web sites that host multiple online stores), catalog merchants (Harry and David), entertainment venue tickets (Ticketmaster), hotel rooms (Hotels.com), investments (E*TRADE), online publications (Consumer Reports), and nutritional counseling (eDiets.com).

Business-to-Business (B2B) Businesses whose customers are other businesses may follow a number of variations on the B2B business model. Examples of B2B businesses include online storefronts (Staples and Office Depot), information aggregators for a vertical market (Hotel Resource), technology providers (Rackspace Managed Hosting), business exchanges (Dairy.com and Elance), expert information exchanges (ATLA Exchange Expert), and forward or reverse auctions (HedgeHog).

E-Pioneers:Business.com

Ask students to read the “Business.com” case. What value would business customers find in the type of B2B

exchange originally envisioned by Business.com’s founders? What could be some of the reasons that Business.com’s e-business

model evolved from a B2B exchange to a B2B search tool? Students can visit the Business.com Web site.

Business-to-Government (B2G) Government agencies have millions of dollars to spend on products and services. Often it is difficult for SMBs to know which government agencies are accepting bids for products or services, or know how to submit their bids. B2G e-businesses can be especially useful to SMBs because they aggregate information about government agency purchasing and offer a virtual marketplace to bring sellers and government buyers together.

Consumer-to-Consumer (C2C) C2C e-businesses can operate forward auctions (eBay), offer a marketspace where consumers can exchange items, such as books, DVDs, and CDs, with other consumers (Title Trader), and offer an online venue for classified ads (TraderOnline).

Consumer-to-Business (C2B) C2B e-businesses create reverse auctions in which individual buyers submit bids to sellers for products or services. Priceline.com is the most well-known e-business following this model.


Useful Links Web Site URL

Business2.0 www.business2.com/b2/E-Business Research Center – CIO Magazine

www.cio.com/forums/ec/

IDC www.idc.com/research/reshome.jspManaging the Digital Enterprise – North Carolina State University

digitalenterprise.org/index.html

The Standard – B2B and B2C Industry Updates

www.thestandard.com/

VARBusiness Online – E-business Information

www.varbusiness.com/

Closing Case:Scrambled

Eggs

Remind students to review the “Scrambled Eggs” opening case, if necessary.

Direct students to read the “Scrambled Eggs” closing case. Select one or two students to lead a classroom discussion about the

case that focuses on Egghead Software’s move to e-business. What e-business model or models did Egghead Software follow as

Egghead.com? What e-business advantages did Egghead.com attempt to exploit? What e-business disadvantages may have made it more difficult for

Egghead.com to succeed? Why would Amazon.com purchase the failed Egghead.com assets? Note that the Egghead.com storefront at Amazon.com is now

Amazon.com Electronics.


Key Terms B2B: An e-business model in which the e-business sells its products or services to

other businesses or brings multiple buyers and sellers together. B2B exchanges: B2B e-businesses that bring multiple business buyers and sellers

together in a central marketspace. B2C: An e-business model in which the e-business sells its products or services

directly to the consumer. B2G: An e-business model in which the e-business sells its products or services

to local, state, and federal government agencies. brick-and-click: Business that sells products or services from a physical location

and on the Internet. brick-and-mortar: Business that sells products or services from a physical

building. C2B: An e-business model in which consumers name a price for a product or

service, and the targeted business accepts or declines that price. C2C: An e-business model in which consumers sell items or services directly to

other consumers. catalog merchants: Businesses that supplement a successful, traditional mail-

order business with an online shopping site, or move their catalog sales to an online store. e-business: A broad spectrum of business activities conducted on the Internet,

such as buying and selling products and services, providing customer service and support, collaborating with business partners, and enhancing internal productivity.

electronic commerce (e-commerce): The process of buying and selling products or services across a telecommunications network; see e-business.

electronic data exchange (EDI): The process of exchanging electronic data between trading partners over a private telecommunications network.

electronic funds transfer (EFT): The process of exchanging funds electronically between banks instead of exchanging paper money.

e-retail: E-business based on the B2C e-business model. e-retailers: Retailers who participate in B2C retail e-business by maintaining

online stores. extranet: A private network consisting of two or more intranets that are

connected via the Internet to allow participating business partners to view each other’s data and to complete business transactions.

forward auctions: Online marketspace in which many buyers bid on products or services offered by a single seller.

hyperlinks: Text or pictures appearing on a Web page that are associated with the location (path and filename) of another Web page.

hypertext: An organization scheme in which text on one page links or connects to text on another page.


Internet: A worldwide public network that connects many smaller private networks.

Internet service provider (ISP): An e-business that provides access to the Internet for a fee.

intranet: An internal company network that uses the Internet and Web technologies to allow employees to view and use internal Web sites that are not accessible to the outside world.

marketspace: An electronic marketplace where buyers and sellers come together to conduct e-business.

network: A group of two or more computers linked by cable, telephone lines, or other wired or wireless media.

pure-play e-retailers: E-businesses that offer traditional or Web-specific products or services only over the Internet. Also known as virtual merchants.

reverse auctions: Online marketspace where single buyer offers to purchase products and services from multiple competing sellers.

servers: Special computers that provide users access to shared resources, such as files, programs, printers, and communications lines.

subscription model: A business model followed by e-businesses that provide high-value content for a subscription fee.

trading partners: Business partners that exchange data electronically over a private telecommunications network.

value activities: The primary and support activities that make up a company's value chain.

value chain: All the primary and support activities performed to create and distribute a company’s goods and services.

value-added networks (VANs): Private telecommunications networks over which business or trading partners exchange data electronically.

vertical market: A specific industry in which similar products or services are developed and sold using similar methods.

virtual malls: B2C e-businesses that host many different online e-retailers. virtual merchants: See pure play e-retailers. Web browser: Software program used to access and view Web pages. Web pages: Linked documents that can contain text, graphics, video, audio, and

hyperlinks and are stored on Web servers and viewed in a Web browser. Web servers: Computers that store hyperlinked documents, also known as Web

pages. Web site: A collection of related Web pages. World Wide Web (Web): A subset of the Internet consisting of computers,

called Web servers, that store documents, called Web pages, that are linked together by hyperlinks.

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