ELECTRONIC COMMERCE:ELECTRONIC COMMERCE FRAMEWORKS

ELECTRONIC COMMERCE FRAMEWORKS

An apparent rationale for implementing electronic commerce is to reduce transaction costs related to manufacturing, distribution, retailing, and customer service. Many such uses involve automating ex- isting processes through the use of computers and networks. But more importantly, new technologies now enable economic agents to move from simple automation to process innovation and reengineer- ing. The complex web of suppliers, distributors, and customers doing business on the World Wide Web is allowing businesses to transform traditional markets and hierarchies into a new form called a network organization. Unlike hierarchies and centralized markets common in the physical economy, this structure based on networks allows a high degree of flexibility and responsiveness, which have become two pillars of the digital economy (see Section 2.3).

The Internet-based economy is multilayered. It can be divided into several layers that help us in grasping the nature of the new economy. Barua et al. (1999) have identified four layers of the Internet economy in their measurement of the Internet economy indicators. The first two, Internet infrastruc- ture and Internet applications layers, together represent the IP or Internet communications network infrastructure. These layers provide the basic technological foundation for Internet, intranet, and extranet applications. The intermediary / market maker layer facilitates the meeting and interaction of buyers and sellers over the Internet. Through this layer, investments in the infrastructure and appli- cations layers are transformed into business transactions. The Internet commerce layer involves the sales of products and services to consumers or businesses. According to their measurements, the Internet economy generated an estimated $301 billion in U.S. revenues and created 1.2 million jobs in 1998. Estimates of revenues and jobs contributions by each layer are presented in Table 1.

Economics of the Digital Economy

The digital revolution is often viewed as the second industrial revolution. But why does the Internet have such a great effect on business activities and the economy? How is the Internet-driven economy different from the previous industrial economy? Despite its obvious usefulness, a comparison to the industrial revolution is misleading—the digital revolution operates on quite different premises. In many respects, the digital revolution is undoing what we achieved in the previous age of indus- trial production. For example, the primary commodity of the digital age—information and other knowledge-based goods—behaves quite differently than industrial goods.

Industrial goods and production technologies that can churn out millions of an item with the least unit cost have been the hallmark of the modern economy. From ordinary household goods such as silverware and dishes to mass-produced industrial goods like automobiles and consumer appliances, increasing availability and decreasing price of these goods have brought an unimaginable level of mass consumption to the general public. Nevertheless, mass-produced industrial goods, typified by millions of identical Ford Model Ts, are standardized in an effort to minimize costs and as a result are unwieldy in fitting individual needs.

The characteristics of the industrial economy are summarized in Table 2. Business processes of an industrial firm are optimized for a supply-driven commerce, while the digital economy is geared toward customer demand. The economics of industrial goods has promoted least-cost solutions and a pervasive focus on costs that has become the limiting factor in both product choices offered to customers and manufacturing options open to producers. Values are created not from maximizing user satisfaction but from minimizing costs, not from flexibility in production but from production efficiency, which often disregards what the customers want and need. Value creation in the Industrial Age flows in a linear, rigid, inflexible, and predetermined stage of preproduction research, manufac- turing, marketing, and sales. The need to minimize costs is so overwhelming that firms apply the same cost economics to nonmanufacturing stages of their business, such as distribution, inventory management, and retailing.

Partly because of the economic efficiency achieved during the industrial revolution, manufacturing now rarely accounts for more than half of a firm’s total operating costs. Product research, marketing and advertising, sales, customer support, and other nonproduction activities have become major as- pects of a business organization. This trend towards a nonmanufacturing profile of a firm is reflected in today’s focus on business strategies revolving around quality management, information technology, customer focus, brand loyalty, and customization.

The Internet economy departs from the cost-minimization economics of the industrial age, but this transformation is not automatic simply because one is dealing with digital goods. For example, typical information goods such as news and databases are subject to the same economics as industrial goods as long as they are traded as manufactured goods. Cost minimization is still a necessary concern in the newspaper business. Limitations of the industrial age will translate into the Internet economy even when newspapers and magazines are put on the Web if these online products are nothing more than digitized versions of their physical counterparts. Many content producers and knowledge vendors may be selling digital goods but be far from participating in the digital economy if their products still conform to the cost-minimization economics of the industrial age.

Product and Service Customization

Knowledge is a critical part of economic activities in both industrial and digital economies, but they differ significantly in the way knowledge is utilized. While the main focus in generating and applying knowledge during the industrial age was on maximizing efficient production through lower costs, the use of knowledge in the digital economy focuses on providing customers with more choices. Instead of standardizing products, the digital revolution drives firms to focus on maximizing customer sat- isfaction by customizing products and meeting consumption needs.

To offer more choices and satisfaction to customers, business processes must be flexible and responsive. Web-based supply chain management, trading through online auctions, targeted marketing

and sales, and interactive customer service create values not simply by reducing costs but by allowing firms to be responsive to customers’ needs.

Flexible and Responsive Organization

Just as new products have been born from the technologies of the Internet, so has a new organizational form. The nonlinear technology of the Web makes it possible to have an organization that represents the highest level of flexibility. In this new form, defining or classifying virtual firms and markets based on traditional organizational structures such as a hierarchy or an M-form can be very difficult. Indeed, a very flexible organization may exist only as a network organization that defies any structural formula.

In physical markets, a firm is organized into a functional hierarchy from the top-level executive to divisions and managers on down the hierarchy. It may structure its divisions following various product groups that rarely intersect in the market. The markets are organized under the natural order of products and producers from materials, intermediate goods, consumption goods, distributors, and retailers. Firms operating in traditional physical markets organize their business activities in a linear fashion. After the planning and product selection stage, the materials and labor are collected and coordinated for manufacturing. The manufactured products are then handled by the distribution and marketing divisions, followed by sales and customer service activities. These functions flow in a chain of inputs and outputs, with relatively minor feedback between stages. The value embedded in the materials is increased in each step of the manufacturing and marketing processes by the added labor, materials, and other inputs. In a linear market process such as this, the concept of the value chain can be used to highlight the links between business processes.

On the other hand, a networked economy is a mixture of firms that is not restricted by internal hierarchies and markets and does not favor controlled coordination like an assembly line. Businesses operating in this virtual marketplace lack incentives to maintain long-term relationships—based on corporate ownership or contracts—with a few suppliers or partners. Increasingly, internal functions are outsourced to any number of firms and individuals in a globally dispersed market.

Rather than adhering to the traditional linear flow, the new digital economy will reward those that are flexible enough to use inputs from their partners regardless of where they are in the linear process of manufacturing. In fact, the linear value chain has become a ‘‘value web’’ where each and every economic entity is connected to everyone else and where they may often function in a parallel or overlapping fashion. Electronic commerce then becomes an essential business tool to survive and compete in the new economy.