The Digital Firm: Electronic Business and Electronic Commerce

Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-1

Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce

True-False Questions

1. Internet technology is the key enabling technology for the digital integration of the modern company.

Answer: True Difficulty: Easy Reference: p. 116

2. A complete change of mindset is required for firms to implement electronic commerce and electronic business successfully.

3. Transaction costs are higher in Internet business.

Answer: False Difficulty: Easy Reference: p. 117

4. One advantage of using Internet technology is that it provides the infrastructure to allow information to flow seamlessly from one part of the organization to another.

Answer: True Difficulty: Medium Reference: p. 117

5. The Internet can replace existing distribution channels or extend them.

6. The Internet breaks the traditional link between the flow of the product and the flow of product-related information.

7. Information asymmetry refers to the situation where the relative bargaining power of two parties in a transaction is determined by one party in the transaction possessing more information essential to the transaction than the other party.

8. The time and money spent locating a suitable product and determining the best price for that product defines location costs.

Answer: False Difficulty: Medium Reference: p. 118

9. The use of the Web has increased information asymmetry between sellers and buyers.

10. Before the Internet, businesses had to make tradeoffs between the richness and the reach of information. 4-2 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

11. The transaction broker Internet business model sells physical products directly to consumers or to individual businesses.

12. A banner ad opens automatically and does not disappear until the user clicks on it.

13. A major source of revenue for online communities is providing ways for corporations to target customers.

14. A portal is a graphic display on a Web page that, when clicked, takes the viewer to another Web page.

15. Some companies use internal portals to give employees streamlined access to specialized information resources.

16. The three major e-commerce categories are bricks-and-mortar, pure-play, and syndicators.

Answer: False Difficulty: Hard Reference: p. 122

17. A syndicator is a business that aggregates content or applications from multiple sources, packaging them for distribution, and reselling them to third-party Web sites.

18. Pure-play refers to business models based solely on the Internet.

19. Disintermediation provides major benefits to the distributor.

20. It is unusual for companies to use Web pages to analyze customer information.

21. Amazon.com uses Web personalization as a major marketing tool.

22. Because personal information is often gathered without the customer’s knowledge, it is illegal to use such information to personalize a Web page.

Answer: False Difficulty: Medium Reference: p. 125 Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-3

23. Customer self-service, while attractive to the customer, is expensive for the company offering it.

24. Web sites cannot currently provide customers with Web page/call center interaction.

25. A private exchange is a subset of a private industrial network.

26. Direct goods are those that are sent directly to the company, such as office supplies and products for maintenance and repair.

Answer: False Difficulty: Easy Reference: p. 129

27. Net marketplaces serve both vertical and horizontal markets.

28. Suppliers have been reluctant to participate in Internet exchanges because competitive bidding drives prices down without the normal benefits of cutting prices.

29. Digital credit card payments make credit cards safer to use on the Internet.

30. Accumulated balance digital payment systems allow consumers to make instant online payments to merchants and other individuals based on conventional credit card payments.

31. Peer-to-peer payment systems provide electronic checks with a secure digital signature.

32. Digital cash can be used for micropayments or larger purchases.

33. Digital checks are more expensive than credit cards but faster than paper-based checking.

34. Intranets are becoming the technology of choice for electronic business.

35. A principal use of intranets is to create online repositories of information that can be updated often and quickly.

Answer: True Difficulty: Easy Reference: p. 133 4-4 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

36. Intranets can be used to create enterprise collaboration environments linking diverse groups and activities in the organization.

37. Major uses of the intranet for the sales and marketing departments are on-line training and order tracking.

38. It is more difficult to develop intranets integrating manufacturing data under a uniform interface than to develop them in other functional areas.

39. Intranets and extranets can be used to electronically coordinate cross-functional processes inside and outside the organization.

40. Channel conflict can create negative repercussions, especially when commission sales to area sales representatives are involved.

Multiple- Choice Questions

41. The technology of the Internet has emerged as:

a. the major influence in bricks-and-mortar business. b. businesses have become more technology-literate. c. communications technologies have risen in importance. d. the key enabling technology for digital integration. e. All of the above

Answer: d Difficulty: Easy Reference: p. 116

42. Internet technology is providing the infrastructure for electronic business because:

a. it is less complex than traditional infrastructures. b. its technology and technology standards can also be used to make information flow seamlessly throughout the organization. c. it is easier to understand. d. the emergence of the digital firm has created so many new markets. e. All of the above

Answer: b Difficulty: Easy Reference: p. 117

43. The unbundling of information from traditional value chain channels is:

a. disrupting old business models. Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-5

b. creating new business models. c. making proprietary information unfeasible. d. Both a and b e. None of the above

44. An abstraction of what an enterprise is and how the enterprise delivers a product or service, showing how the enterprise creates wealth best describes:

a. business model. b. critical success factor. c. strategic plan. d. information systems plan. e. commerce plan.

Answer: a Difficulty: Medium Reference: p. 118

45. The time and money spent locating a suitable product and determining the best price for that product best describes:

a. location costs. b. search costs. c. research and development costs. d. alternative costs. e. variable costs.

Answer: b Difficulty: Medium Reference: p. 118

46. The Internet shrinks:

a. survival potential in banks. b. symmetrical relationships between businesses. c. information asymmetry. d. time and money factors in financing. e. the size of established companies.

Answer: c Difficulty: Medium Reference: p. 118

47. The detailed information the Internet makes possible between internal operations makes it easier:

a. for managers to coordinate more jobs and tasks. b. to understand material flows and manufacturing schedules. c. to arrange money transfers between departments. d. to analyze the cost factors in production. e. for everyone in the company to participate in decision making.

Answer: a Difficulty: Hard Reference: p. 119

48. A measurement of the depth and detail of information that a business can supply to the customer as well as information the business collects about the customer best defines:

a. reach. b. intensity. c. micromarketing. 4-6 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

d. richness. e. channel leveling.

Answer: d Difficulty: Medium Reference: p. 119

49. A measurement of how many people a business can connect with and how many products it can offer those people best defines:

a. reach. b. intensity. c. micromarketing. d. richness. e. channel descriptor.

50. A content provider:

a. provides product, pricing, and availability information to individuals and businesses. b. provides initial point of entry to the Web and specialized content and other services. c. provides online service for individuals and businesses. d. creates revenue by providing digital content over the Web. e. All of the above

51. Which of the following Internet business models provides a digital environment where buyers and sellers can meet, search for products, display products, and establish prices for those products?

a. Portal b. Virtual community c. Online marketplace d. Transaction broker e. Online service provider

52. Which of the following Internet business models does Amazon.com use?

a. Information broker b. Transaction broker c. Online service provider d. Virtual storefront e. Virtual community

53. Which of the following businesses utilizes the content provider Internet business model?

a. Amazon.com b. eBay.com c. CNN.com d. Motocross.com e. iVillage.com Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-7

54. Which of the following is an ad that opens automatically and does not disappear until the user clicks on it?

a. Banner ad b. Controlled ad c. Controlled display d. Portal e. Pop-up ad

Answer: e Difficulty: Medium Reference: p. 121

55. Online communities:

a. provide a place where people of like interests can exchange ideas regardless of their location. b. are providing the foundations for new businesses. c. allow members to post their own Web pages. d. All of the above e. None of the above

56. eBay is an example of:

a. a click-and-mortar business. b. consumer-to-consumer electronic commerce. c. business-to-consumer electronic commerce. d. an online community. e. online syndication.

57. Electronic retailing of products and services directly to individual consumers best describes:

a. business-to-business electronic commerce. b. consumer-to-consumer electronic commerce. c. mobile commerce. d. business-to-consumer electronic commerce. e. consumer networking.

58. Consumers selling goods and services electronically to other consumers best describes:

a. disintermediation. b. consumer-to-consumer electronic commerce. c. mobile commerce. d. business-to-consumer electronic commerce. e. consumer networking.

Answer: b Difficulty: Medium Reference: p. 122 4-8 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

59. The removal of organizations or business process layers responsible for certain intermediary steps in a value chain is called:

a. disintermediation. b. reintermediation. c. customer self-service. d. pure-play. e. dynamic provision.

60. The shifting of the intermediary role in a value chain to a new source is called:

a. disintermediation. b. reentrance. c. reintermediation. d. intermediary relocation. e. distributor displacement.

61. Web sites can gather information about customers’:

a. behavior. b. preferences. c. needs. d. buying patterns. e. All of the above

Answer: e Difficulty: Easy Reference: p. 124

62. Web sites providing product information lower costs by:

a. collecting information about their visitors. b. shortening the sales cycle. c. reducing time spent in customer education. d. All of the above e. None of the above

63. An organizational department responsible for handling customer service issues by telephone and other channels best describes:

a. customer support center. b. customer complaint desk. c. call center. d. customer training center. e. corporate service center.

Answer: c Difficulty: Easy Reference: p. 126

64. Sourcing goods and materials, negotiating with suppliers, paying for goods, and making delivery arrangements best describes:

a. procurement. Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-9

b. acquisition. c. supply chain management. d. electronic commerce. e. electronic business.

Answer: a Difficulty: Easy Reference: p. 127

65. Net marketplaces are:

a. owned by one central provider which facilitates transfer of information. b. more transaction oriented and less relationship oriented than private industrial networks. c. useful for determining fixed prices for goods. d. more relationship oriented and less transaction oriented than private industrial networks. e. mostly involved with indirect goods.

66. Net marketplaces serve:

a. vertical markets. b. horizontal markets. c. horizontal and vertical markets. d. individual Web sites in compatible industries. e. large industries more than smaller ones.

Answer: c Difficulty: Easy Reference: p. 128

67. Exchanges are:

a. always vertical markets. b. never vertical markets. c. the wholesalers of the Internet. d. third-party net marketplaces. e. common networks to reduce supply chain inefficiencies.

68. A third-party Net marketplace that is primarily transaction oriented and that connects many buyers and suppliers for spot purchasing best describes:

a. exchange. b. online distributor. c. syndicator. d. content provider. e. online marketplace.

69. The early Internet exchanges primarily performed:

a. exchanges requiring signed contracts. b. exchanges between long-term business partners. c. transactions involving complex customization. d. relatively simple transactions. 4-10 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

e. the same functions as today’s B2B marketplaces.

70. A system that enables users to make micropayments and purchases on the Web by accumulating a debit balance on their credit card or telephone bill best describes:

a. smart card. b. accumulated balance digital payment system. c. accumulated deferral system. d. digital cash. e. peer-to-peer payment system.

71. A credit card-size plastic card that stores digital information and that can be used for electronic payments in place of cash best describes:

a. digital cash. b. stored value payment system. c. microcard. d. smart card. e. cybercard.

72. Which of the following is an example of a digital wallet?

a. ECharge b. Gator c. Ecount d. PayPal e. Yahoo Bill Pay

73. Organizational benefits of intranets include:

a. connectivity. b. scalability. c. low start-up costs. d. easy to use universal Web interface. e. All of the above

Answer: e Difficulty: Easy Reference: p. 133

74. Intranets can be valuable for finance and accounting because they:

a. are more secure than traditional methods of record keeping. b. provide an integrated view of financial and accounting information online. c. are more flexible. d. are more accessible to middle management. e. are faster and more functional.

Answer: b Difficulty: Medium Reference: p. 134 Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-11

75. Manufacturing and production find intranets to be:

a. more complicated to implement than in other functional areas. b. less useful than in other functional areas. c. helpful in updating prices. d. All of the above e. None of the above

Answer: a Difficulty: Easy Reference: p. 135

76. Internet technology provides ______and ______tools to connect designers, engineers, marketing, and manufacturing employees.

a. collaboration; finance b. business; finance c. software; hardware d. communication; collaboration e. communications; software

77. Many new Internet business models:

a. go against traditional business methods. b. have yet to prove enduring sources of profit. c. require legal and legislative amplification. d. fit well into the traditional business environment. e. fail because of lack of technology ability and understanding.

78. Competition between two or more different distribution chains used to sell the products or services of the same company best describes:

a. channel conflict. b. marketing conflict. c. distribution conflict. d. supply chain conflict. e. customer conflict.

79. The Web provides an unprecedented ability to:

a. learn about and target customers. b. enable credit-card transactions. c. appeal to markets in third-world countries. d. level the playing field between large and small businesses. e. All of the above

80. Digitally enabling a firm for electronic commerce and electronic business requires:

a. a major financial investment in retraining. b. far-reaching organizational change. 4-12 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

c. CEO support. d. technological expertise and trained employees. e. cooperation from business partners.

Fill In the Blanks

81. A(n) business model is an abstraction of what an enterprise is and how the enterprise delivers a product or service, showing how the enterprise creates wealth.

Difficulty: Easy Reference: p. 118

82. Information asymmetry is the situation where the relative bargaining power of two parties in a transaction is determined by one party in the transaction possessing more information essential to the transaction than the other party.

Difficulty: Medium Reference: p. 118

83. Richness is the measurement of the depth and detail of information that a business can supply to the customer as well as information the business collects about the customer.

84. Reach is the measurement of how many people a business can connect with and how many products it can offer those people.

85. A(n) virtual storefront is the Internet business model that sells physical products directly to consumers or individual businesses.

86. Information broker is the Internet business model that provides product, pricing, and availability information to individuals and businesses on the Internet and generates revenue from advertising or from directing buyers to sellers.

87. The transaction broker Internet business model saves Internet users time and money by processing online sales transactions, generating a fee each time a transaction occurs.

88. The content provider Internet business model creates revenue by providing digital content over the Web, which is paid for by the customer or by having advertisers pay for placement or partner promotions.

89. The virtual community Internet business model provides an online meeting place where people with similar interests can communicate and find useful information. Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-13

90. Dynamic pricing is the pricing of items based on real-time interactions between buyers and sellers that determines what an item is worth at any particular moment.

91. A(n) banner ad is a graphic display on a Web page used for advertising that, when a person clicks on it, takes him to another Web site.

92. A pop-up ad is an ad that opens automatically and does not disappear until the user clicks on it.

93. A(n) portal is a Web site or other service that provides an initial point of entry to the Web or to internal company data.

94. A(n) syndicator is a business aggregating content or applications from multiple sources, packaging them for distribution, and reselling them to third-party Web sites.

Difficulty: Hard Reference: p. 122

95. A(n) pure-play business model is one based entirely on the Internet.

96. A(n) clicks-and-mortar business model is one where the Web site is an extension of a traditional brick-and-mortar business.

97. Business-to-consumer electronic commerce refers to the electronic retailing of products and services directly to individual consumers.

98. Business-to-business electronic commerce refers to the electronic sales of goods and services among businesses.

99. Consumer-to-consumer electronic commerce refers to consumers selling goods and services electronically to other consumers.

100 Mobile commerce is the use of wireless devices to conduct both business-to-consumer and . business-to-business e-commerce transactions of the Internet. 4-14 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

101 Disintermediation is the removal of organizations or business process layers responsible . for certain intermediary steps in a value chain.

102 Reintermediation is the shifting of the intermediary role in a value chain to a new source. . Difficulty: Medium Reference: p. 124

103 Web personalization is the tailoring of Web content directly to a specific user. . Difficulty: Easy Reference: p. 124

104 A(n) call center is an organizational department responsible for handling customer service . issues by telephone and other channels.

105 Procurement is the sourcing of goods and materials, negotiating with suppliers, paying for . goods, and making delivery arrangements.

106 A(n) private exchange consists of a large firm using an extranet to link to its suppliers and . other key business partners; the network is owned by the buyer and it permits the firm and its business partners to share product design and development, marketing, production scheduling, inventory management, and unstructured communication.

107 A(n) net marketplace is a single digital marketplace based on Internet technology linking . many buyers to many sellers.

108 A(n) exchange is a third-party Net marketplace that is primarily transaction oriented and . connects many buyers and suppliers for spot purchasing.

109 Electronic payment systems are the use of digital technologies to pay for products and . services electronically.

110 A(n) digital credit card payment system is a secure service for credit card payments on . the Internet that protects information transmitted among users, merchant sites, and processing banks.

111 A(n) digital wallet is software that stores credit card and owner identification information and . provides these data automatically during electronic commerce purchase transactions. Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-15

112 A(n) micropayment is a payment for a very small sum of money, often less than $10. . Difficulty: Easy Reference: p. 131

113 Accumulated balance digital payment systems enable users to make micropayments and . purchases on the Web, accumulating a debit balance on their credit cards or telephone bills.

114 A(n) stored value payment system enables consumers to make instant online payments . based on value stored in a digital account.

115 A(n) smart card is a credit card-size plastic card that stores digital information and that can . be used for electronic payments in place of cash.

116 Digital cash is currency represented in electronic form that moves outside the normal . network of money.

117 A(n) peer-to-peer payment system allows people to send money to vendors or individuals . who are not set up to accept credit card payments.

118 A(n) digital checking system extends the functionality of existing checking accounts so they . can be used for online shopping payments.

119 A(n) electronic billing presentment and payment system pays routine monthly bills, . allowing users to view their bills electronically and pay them through electronic funds transfers from banks or credit card accounts.

120 A(n) channel conflict is the competition that occurs when two or more different distribution . chains are used to sell the products or services of the same company.

Essay Questions

121. In what ways has electronic commerce changed the relationship between buyer and seller?

There is more information available to both buyer and seller—to the buyer, more information 4-16 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

about products and prices; to the seller, more information (and more quickly-gathered information) about the buyer and his/her needs. It is easier and less expensive for the buyer to change suppliers, so the seller must be more responsive. It is possible to customize both product and customer relationships, so the seller can change and tailor merchandise as needed. Because the entire transaction is faster, money flows more quickly through the system. Buyers and sellers are not limited in their geographic reach.

122. How has the Internet made possible the swift rise of electronic commerce?

It has provided a low-cost and easy way to link businesses and individuals through a common platform. This means that companies can use the technology to radically reduce their transaction costs through the intelligent use of supply chain management. Trading partners can communicate directly with each other, bypassing intermediaries and inefficient multi-layered processes. Some products and services can be more efficiently provided by the Internet than by traditional means. The Internet can replace existing distribution channels or extend them, thus creating outlets for attracting and serving new customers who otherwise would not patronize the company. Information on buyers, sellers and products is widely and instantly available 24/7. It is far less expensive to process an order electronically than with older paper-and-pencil methods.

123. “With the Internet, the traditional business model is no longer valid.” Describe the traditional business model and how the new business models differ. Do you agree, or disagree with the statement given here? Support your argument.

In the traditional business model, information about products and services was tightly linked to the physical value chain for those products and services. If a consumer wanted to find out about the features, price, and availability of an item, that person had to visit a retail store that sold the product. The cost of comparison shopping was high because people had to travel from store to store.

Once everyone is connected electronically, information about products and services flows on its own, directly and instantly to consumers. Customers can find out about products on their own on the Web and buy directly from product suppliers instead of using intermediaries such as retail stores. This unbundling of information about the product from the product itself has created vast changes in the way business works by decreasing information asymmetry and tends to knock out the middleman and all the expenses ascribed thereto.

Further, using the Internet means that businesses no longer must choose between richness and reach in their information about clients, consumers, customers, and their needs and desires. This decreases the costs of internal operations, and makes it easier for management to coordinate more jobs and tasks. The time and distance factors are drastically reduced, improving accuracy and timeliness of customer service.

There are several advantages specific to the Internet, notably the uses of dynamic prices, the rise of virtual communities, and the uses of portals.

124. List and define at least five of the new Internet business models discussed in the textbook. Which do you think will prove to be most profitable in the long run? Support your position.

Virtual storefront, information broker, transaction broker, online marketplace, content provider, online service provider, virtual community, and portal are the eight Internet business models presented in the textbook. A virtual storefront sells physical products directly to consumers. The information broker provides product, pricing, and availability information to individuals and businesses; it generates revenue from advertising and directing buyers to sellers. The transaction broker saves user money and time by processing Chapter 4 The Digital Firm: Electronic Business and Electronic Commerce 4-17

(for a fee) online sales transactions; it provides information on rates and terms. The online marketplace provides a digital environment where buyers and sellers can meet to do business. The content provider creates revenue by providing digital content (information) to interested parties willing to pay for it or to advertise on the site. The online service provider provides online services for businesses and individuals; it generates revenue from subscription or transaction fees, advertising, or by collecting marketing information from/about users. A virtual community provides an online meeting place where people with similar interests can communicate and find useful information. A portal provides an initial point of entry to the Web along with specialized content and other services.

125. List and describe the three categories of electronic commerce as defined by the participants in the transactions. Give an example of each one.

The textbook discussed business-to-consumer, business-to-business, and consumer to consumer. Business-to-consumer involves retailing products and services to individual shoppers. Barnes & Noble is an example. Business-to-business involves the sell of goods and services among businesses. Examples include Milpro.com and Milacron Inc.’s Web site for selling cutting tools, etc. Consumer-to-consumer electronic commerce involves consumers selling directly to consumers. eBay.com is an example.

126. Discuss the term “disintermediation” as it applies to business models affected by the Internet and the Web. Give examples from your reading.

In the traditional business model, the price of an item increases each time it passes through a layer of the sales and marketing chain. This means that the item, by the time it reaches the consumer, has doubled or tripled in “value” or “cost”. This is the use of “intermediaries”.

Disintermediation is the removal of organizations or business process layers responsible for certain intermediary steps in a value chain. The Internet accelerates disintermediation in some industries and creates opportunities for new types of intermediaries (reintermediation) in others.

127. Discuss the ability of the Web site owner to increase personalization of the site to his customers and the advantages this brings to the business.

The digital statistics generated by those who access a Web site, or who purchase from it, are far more quickly, accurately, and easily gathered than in the traditional paper-and-pencil environment of the traditional method. They are timely, up-to-the-minute, and accurate. They trace the customer’s thought processes and preferences as he/she moves through the Web site. This gives the site owner the ability to “tailor” the appearance of the Web page to the preferences of the returning viewer, which increases sales and efficiency. Amazon.com is a pioneer in this activity, which has been successful for the online bookseller.

128. List at least five examples of electronic payment systems.

Digital credit card payment systems, digital wallets, accumulated balance payment systems, stored value payment systems, digital cash, peer-to-peer payment systems, digital checking, and electronic bill presentment and payment are discussed in the textbook.

129. Channel conflicts can be a threat to the success of an electronic business. What is this problem, and how do you think it might be solved? Support your conclusions.

Channel conflicts arise when the Internet is used to sell a product more cheaply than its distributors can. A company’s sales force and other representatives might fear that their revenues will drop as customers make purchases directly, or that they will be displaced entirely. There are various ways in which companies try to deal with this. Some companies 4-18 The Digital Firm: Electronic Business and Electronic Commerce Chapter 4

are paying full commissions to sales representatives for online sales made in their territory, and others are limiting their online presence to only a portion of their product line.

130. Discuss the uses of Internet technology in the human resources environment.

Internet technology has led to efficiencies and cost savings in employee communication and training as well as the processing of basic human resources systems on intranets to deliver HR-related services such as enrolling in insurance and medical plans, maintaining employee savings plans, and applying for company jobs. Companies can realize productivity and publishing savings by using Web technology to deliver interactive employee training and human resources policy manuals and company directories. Human resources staff members can use intranets to access employee records from the firm’s basic human resources transaction systems.