Electronic Commerce: Trends and Opportunities

Juan de Dios Banda Jara, Jean Jerry Ralph Cadet, Chunyu Li, and Achyut Desai

University of Illinois at Chicago Information and Decisions Sciences Department Management Information Systems Masters Program

Introduction Once we have stated the importance of the presence of Internet, we will continue analyzing in the rest of the paper the impact In the last century the telephone caused of this on industries and markets. profound changes in the whole society because it helped to communicate people and consequently to redefine the way people The Evolution of Inter- made business. The use of telephones along organizational Systems with other technologies such as production machinery, transportation, electricity, and Back in 1966 the concept of inter- the telegraph produced the change from an organizational systems (IOS) appeared an it agricultural to an industrial economy. Even implies the possibility that networked com- more important, telephones and the other puters enable companies to share informa- technologies accelerate the shift from craft- tion; moreover, IOS involves the possibility based work to mass production, and the to make business electronically crossing in appearance of vertically integrated multi- this way organizational boundaries. nationals that replaced the small owner- operated firms. This crossing of organization boundaries through the IOS implied that new distri- Nowadays we live in a much more techno- bution channels can be created, and new logical world than a century ago. Technolo- information-based products can be deliv- gies today make possible that people from ered. Moreover, "Many IOS radically alter almost every remote spot in the world can the balance of power in buyer-supplier re- access information using the Internet, and lationships, raise barriers to entry and exit, like a century ago, this phenomenon will re- and, in many instances, shift the competi- define once again business models. tive position of industry participants" [1].

Similarly to the telephones in the past The pioneers in the use of IOS were two century, Internet does not represent an iso- companies. First, American Hospital Sup- lated technological discovery. Instead, In- ply Corporation (AHSC) that created a sys- ternet represents the integration of a whole tem that allowed the company to exchange collection of new and revolutionary techno- order-processing information with its cus- logical innovations that have evolved over tomers across telephone lines. And sec- the years and that now converge in a new ond, American Airlines (AA) that offered to business concept: electronic commerce. large travel agencies computerized reserva-

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tion terminals to simplify the airline reser- airlines that do not have the resources for vation process. developing systems, AA allowed those airlines to use SABRE converting this system in one of the two leading systems for airline IOS Evolution at American reservations. The other one, APOLLO from Hospital Supply and Ameri- United Airlines also absorbed great part of the market, and with SABRE became in can Airlines the most important systems for flight reser- vation. When with AHSC and AA released their systems, they did not intend to create a new Since neither AHSC nor AA controlled electronic commerce environment. For in- the public telephone networks, their sys- stance, AHSC initially installed its punch- tems only involved the customer half of the card system to enable better coordination market. Nevertheless, the electronic com- and management of its internal order en- merce activities have progressed and by the try, inventory control, and accounts payable mid-1980s the levels of proprietary owner- activities. However, the system success so ship had increased to include control of pro- promptly that many customers started to cesses, information, and networks. used it in order to manage better their in- ventories. Basically, a simple extension of the internal AHSC system allowed the hos- Evolution and Revolution: pital purchasing clerk to order supplies over Introduction of the Internet standard telephone lines [1]. Since the use of the Internet is not restricted AHSC made and intelligent move for in- to government, research, and educational troducing its systems because it gave the purposes, the number of users has increased punch-card readers and cards to the hos- rapidly. "In 1994, 3 million people, most pitals for free and trained their personnel of them in the United States, used the In- on the new electronic order process. Fortu- ternet. By 1997, 40 million people around nately for AHSC; within months, the inter- the world were connected; by early 1998 the nal savings were more than enough to off- number of people using the Internet had set the cost of the released technology and seared to 100 million. One expert predicted training. that 1 billion people would be connected to AA system started to play an important the Internet by 2006" [1]. The following role after the airline industry was deregu- chart graphically illustrates this increment lated back in 1978. By that time, AA al- in the usage of Internet. ready has had operating its flight reserva- tion system SABRE, so AA released its sys- Moreover, this expansion also affects the Internet-based electronic commerce. "By tem to travel agencies more than six months July 1997, approximately 1.7 million Inter- before that its main competitor United Air- net business sites had been registered, up lines. from approximately 600,000 one year ear- In order to warranty the maximum pen- lier. Consider this: etration of its systems, AA did not charge anything to the travel agencies for the in- • In 1996, Amazon.com, the largest In- stallation of its terminals. Moreover, AA ternet bookstore, recorded sales of less created contracts that apply penalties to than $16 million. In 1997, revenues in- those travel agencies that use systems from creased to $148 million. the competition. • Cisco Systems closed 1996 having Furthermore, in order to absorb other booked just over $100 million in sales 440 Juan de Dios Banda et al: Electronic Commerce: Trends and Opportunities

Figure 1: Source: Applegate 1999 [1].

on the Internet. By the end of 1997, were quickly adopted by suppliers and buy- its Internet sales were running at a S3.2 ers and soon became standards of their re- billion annual rate. spective industry.

• In 1997, Egghead Software announced Nowadays, the phenomenal success of the that it would close all of its retail out- Internet has boosted a much more afford- lets and begin selling all of its software able and standardized way of doing busi- from its Internet Web site" [1]. ness inside corporations. What started as a government project in the late 60s and "Cumulative, the technologies that make early 70s has mutated into a powerful and up the Internet have resulted in four key universal way to communicate. Corpora- features that are enabling some revolution- tions found quickly that this new commu- ary changes in the ways firms do business" nication channel was in fact applicable in- [1]. These features are presented in the fol- side their own business to improve all sort lowing table: of processes. The application of Internet- derived technologies is called an Intranet.

Intranets Intranet benefits Since the early 60s, companies have tried to integrate and coordinate the different parts Having a well-designed Intranet inside a of their business. Two of the most renowned corporation brings numerous benefits. The examples of such systems are those of first expected advantage from an Intranet is the American Hospital Supply (AHS) and an increase in employee productivity. The American Airlines (AA). Despite the fact migration of all paper-based transactions to that they were proprietary, by achieving electronic-based supported transactions has huge cost and time-saving, both systems an immediate time-saving effect throughout ACTA NOVA; Vol. 1, l\l°4, julio 2002 Universidad, Empresa y Sociedad 441

Traditional Electronic-Commerce Internet Electronic-Commerce Networks Networks Closed standards limit participation to Open standards enable global connec- individuals and/or companies that have tivity; anyone with a browser and In- access to proprietary software and net- ternet access can participate. works. Proprietary ownership of the network Shared ownership of the network; col- enables owner to set commerce stan- laboration is required to define and dards and policies. manage commerce standards and policies. Rigid software limits functionality and Modular, flexible software enables busi- flexibility. ness flexibility. The high cost, long time frame, and Lower cost and expertise, and shorter specialized expertise required to de- time frames to develop business solu- velop commerce solutions provide pow- tions increase the ease of developing a erful barriers to entry. competing system, which, in turn, low- ers barriers to entry.

Table 1: Source: Applegate 1999 [1],

the entire organization. Employees inside • It is easier to maintain because Lucent Corporation for example, use their databases, business, and validation Intranet to view and change their benefits, rules reside on the server side. Conse- look at their pay stubs, fill out time reports, quently, the client side is being reduced request refunds for expenses, and order of- to the browser itself. fice supplies. • It delivers better performance, reliev- On the financial side, an Intranet imple- ing the "fat-client" syndrome. mentation is the smartest use of existing networks infrastructure investment. The Intranet components and preliminary results from the International Data Corporations return on investment costs study of Netscape intranets found the typical R.OI well over 1000%, far higher than Because an Intranet is relying on exist- usually found with any technology investing network hardware and browsers, many ment. Considering the payback periods think that financial investment is limited. ranging from six to twelve weeks, the cost However, if initial Intranet costs are ranging of an Intranet is quickly recovered, mak- from $50,000 to several million dollars for ing the risk associated with and Intranet complex systems, the cost of maintaining project low. and extending the site for ongoing use could run from five to seven times that amount ac- On the software side, having a Corporate cording to estimates by the Gartner Group. Intranet permits the migration from the al- The biggest part of this sum comes from ready old client-server architecture to newer work related to content and maintenance. one bringing with it numerous advantages: More than often, companies do not include • It leads to wider varieties of client plat- those fees in return of the investment (ROI) forms. calculations. The decision to implement an 442 Juan de Dios Banda et al: Electronic Commerce: Trends and Opportunities

Component Minimum cost Maximum cost

TCP/IP Backbone $50/office TCP/IP Hubs $50/port Frame-Relay Circuits $1,200 one time, $500/month Servers $7,000 $15,000 Firewall $5,000 $50,000 Browsers Free $49/client Video Conferencing $100/client $250/client Email Package $50/user $100/user Web Page Creation/Authoring tool Free $500/copy PC Network Interface Cards $110 T-l Line $2,300/month + $5,900 start up Web Application Development $100/copy $500/copy Web Server Package Bundled w/OS $l,500/platform Routers $20,000 $50,000$

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Intranet inside a company is often tied with are investing a lot of money to get to their costs. The table below tries to summarize level. typical Intranet components and their rela- Penetration of a market is very crucial tive costs. to obtain a dominant position. AHSC and American Airlines were successful at Penetrate Quickly capturing dominance within their markets. For example, the American Hospital Supply Corporation (AHSC) and American Air- Being the first mover to enter a market lines (AA) created strong linkages to the with a product and/or service can result community by giving away the technology in significant benefits, especially if the new and training community members how to product and/or service is difficult to imi- use the technologies for free. They created tate. One main reason to act early is to es- strong links by creating value creation for tablish a brand name. For example, when the rest of the free industry. The reason Amazon.com first started selling books on- why they were successful was the strategies line, it's initial investment was tremendous. they used to penetrate the market. As hos- However, Amazon controls about 90% of pital customers and suppliers see the impor- the market share of online book selling tance of the technology, others within the (www.netregistry.com). Investors value same industry will follow. Amazon higher than all the other Ameri- can booksellers added together. Being the Another example in penetrating the mar- first mover, Amazon positioned themselves ket is with Microsoft and Netscape. Both as a market maker and leader. Most people of these giant companies were involved in today think of Amazon.com when wanting competition when they were giving their to purchase books, cds, or other products browsers away for free. Many start-up com- from the Internet. Amazon's competitors panies are taking advantage of being the ACTA NOVA; Vol. 1, l\l°4, julio 2002 Universidad, Empresa y Sociedad 443

first of its kind website. Another exam- Information Arbitrage in E- ple of this rapid penetration in the market Commerce what Yahoo and RealNetworks did. These companies have positioned themselves as an Information is the life source for e- "standard". An standard could be defined commerce and companies rely almost to- as a company that penetrates a particular tally on the quantity and quality of the in- market and gains the power to define rules. formation they acquire to accomplish their goals of penetrating and establishing themselves in the target market. One of the key success factors for an e-commerce company Internet Revenue is its ability to exploit the economic value of information.

The decision of an e-commerce company Many individuals hear of popular websites has to do with what strategies to imple- or portals sites that receive a certain ment in order to fully exploit the infor- amount of "hits" per specified amount of mations economic value usually linked with time. The reason why this is important a clear overview of the evolutionary stage is not only does it show the most visited the company is at. Generally speaking, sites, but it shows how the companies there are three evolutionary stages in the are receiving revenue. Websites receive a development process of an e-commerce com- specified amount per click to its site; this pany: Information Broker, Content Special- adds tangible business value to the firm. ist, and Electronic Market Facilitator. However, it depends on who is advertising on the site since websites make money on other companies who want to advertise Information Broker on their site. Below are some figures taken out from the following web address Most e-commerce companies start as an in- http://azeem.azhar.co.uk/presentations formation broker. They identify high-value /981125obs/img006.htm. information content in the market and use Applegate, McFarlan, and McKenney the information to satisfy unfulfilled needs show how the Internet generates revenue. of the customers. Here, the company is The formula looks like this: playing a role of "middle man" in the market and this role requires the company to have the strong abilities to accomplish two tasks at the same time. One, to identify the customers needs that are not fulfilled. Revenues — (# of visitors/day) x Two, to gather the information and satisfy (# of pages viewed/visit) x the customers needs.

(365 days/year) x NECX.com, a successful on-line home the sites ability to turn and office technology store, offers a full line of software and hardware technology ser- page views into revenues vices to the customers. When the company first started in the 80s, it was a company focusing on the management of information Advertising is not the only source of rev- in and around technology products. At that enue for firms on the Internet. They also time, the company realized the needs of get revenue from sales of products, transac- computer resellers for complete technology tion fees, subscription, commissions, etc. information for their sales and after-sales 444 Juan de Dios Banda et al: Electronic Commerce: Trends and Opportunities

Amazon.com Barnes and Noble.com BKS.com Q3 Revenues $153.7 million $17.2 million $12.5 million Operating Expense $21 million $20.5 million Customers 4.5 million 0.7 million Associates 40 K 30 K 25 K Annual Revenue $214 million $132 million $76 million Total page views 2757 million 992 million 728 million Total usage minutes 1117 million 434 million 271 million

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support. NECX experienced huge success sumers mind that through the years, as the in fulfilling computer resellers technology market leader, it is the most experienced needs and based on the success, it quickly on-line merchant and provides the most full- grew into an on-line store selling a full line line selling service. Amazon.com is success- of information technology products. ful to maintain its market leader position because it did not stay at the stage of in- 1-800-flowers.com is another successful formation broker but advanced itself rather example of a company that has been able to quickly to be a content specialist, which en- identify and satisfy the unfulfilled needs in abled itself to improve the customers loy- the market. As a major gifting company, 1- alty as well as attract many more new cus- 800-flowers.com fully understands the needs tomers. of the customers to get unique and mean- ingful gifts for their loved ones on time. As a content specialist, a company pays The customers needs are difficult to sat- careful attention to privacy rights, collects isfy through the traditional channels be- information on market transactions. It also cause of the obvious time and geographic creates organizational capabilities to make constraints. This gives the company the op- sense of information and uses it to add value portunity to utilize the information base it to products and services. One of the great has and provide in a timely manner the cus- features that make Amazon.com stand out tomers with commodities and services they among many other on-line booksellers is the need on every occasion. The company re- recommendation of other books it gives to cently launched another site on the web: 1- the buyers after their purchase. It also 800-candies.com which brings high-quality gives readers review about the book and chocolate and candy products around the also a star rating. All this is based on the globe all at the fingertips of the on-line cus- companys close tracking and bookkeeping tomers. All this strengthens the companys of the market transactions. Using its well- leading position in the on-line gift purchase established information system, the com- industry. pany is able to analyze the information and create new information-based products and services to the customers.

Content Specialist 1-800-birthday.com sells all kinds of birthday gifts on line, from historic pa- If one is trying to make a purchase of a book pers to flowers and balloons, all types of on-line, most probably he will choose to go gourmet foods, personalized teddy bears, to Amazon.com. This is because of the im- gag gifts, birthday-gram songs, and so on. pression Amazon.com has planted in con- As the business grows, it also starts to ACTA NOVA; Vol. 1, l\l°4, julio 2002 Universidad, Empresa y Sociedad 445

add its services like reminding a customer tomers almost all the merchandise they can of important birthdays, recommending gifts find in the store. During its massive ex- based on the customers previous purchases, pansion of its e-commerce presence, Wal- etc. All these information-based services Mart formed several important alliances improve the companys popularity by a large with other on-line companies to push it- margin and the company benefits on the self towards the role of electronic market bottom line. facilitator. On July 1, 1999, Wal-Mart announced that it had formed a strate- Information-based products and services gic alliance with Books-A-Million, the third have the properties of being reusable, cus- largest book retail chain in the U.S. This tomizable, time-valued, and productized. deal greatly expanded Wal-Marts book ti- More and more e-commerce companies tle base, which will now include the latest spend huge part of their attention on col- bestsellers, and set Wal-Mart up as an im- lection the digital information through their mediate threat to the book selling market market transactions and sell them to inter- share of Amazon.com, barnesandnoble.com ested parties to gain profits. and borders.com.

Electronic Market Facilitator Conclusion

Entering this third phase of its evolution, an e-commerce company builds a web of al- The pioneers in electronic commerce have liances to extend scale and scope of the com- spent hundreds of millions of dollars over munity, establishes closer links with com- several decades to develop and deploy the munity members and facilitates linkages electronic commerce software and networks among community members, and builds or- that would become the platforms for doing ganizational capabilities to deepen commit- business within their industries. But, once ment and loyalty of all community mem- in place, these systems and the skills and bers. capabilities that were developed in build- ing and deploying them provided tremen- Varsity.com, a relatively new on-line dous barriers to entry and significant pro- bookseller targeting on college students prietary advantage. Ownership of the sys- group, sells over 350,000 titles of textbooks, tems used to support electronic commerce study and reference guide, and best selling enabled firms like AHSC and AA to gain fiction and non-fiction books at up to 40 control over data, processes, information, percent off the distributors suggested price. and the network of business relationships After it has established itself as the ma- and, thus, to assume the powerful role of jor on-line book store for college students channel manager. who axe frustrated with their campus book- stores, Varsity.com expands its scope of ser- Moreover, we have seen that Intranets vices to include free e-mail service, scholar- bring a lot of positive points in a Corpo- ship opportunities, as well as job and career ration. It helps achieve tremendous cost- services all natural extensions of the core effective and time-saving communication business. The result of the expansion is the processes at relatively low cost. Never- higher level of acceptance among its target theless, an Intranet project has to be well customers, college students. thought before being implemented because of security issues and recurrent costs asso- Wal-Mart, the #1 retail store in the ciated with it. world, has been successful in bringing its offline power to on-line adventure. Its Finally, since 1998 the Internet has be- web site, wal-mart.com, offers to the cus- come a new arena in which companies can 446 Juan de Dios Banda et al: Electronic Commerce: Trends and Opportunities

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