Jaana Porra,Jaana Porra, Ph.D.Ph.D.University of HoustonUniversity of Houston

jaana@uh.edujaana@uh.edu

E-Vallankumous Kaupankäynnissä

Electronic Commerce Electronic Commerce Benefits the Economy Benefits the Economy

and the Mediaand the Media• Since 1995 the Internet seems to have surpassed

traditional computer network technologies in price, popularity and performance.

• Electronic Commerce is a Media Event and an Economical Development intertwined:

• The difference between appearances (what appears to be happening) and reality (what is happening) is blurred -- sometimes intentionally.

The Internet Explosion The Internet Explosion Started in the U.S. inStarted in the U.S. in

19961996• Hoffman, et.al., Vanderbilt University, 1996:

– Internet user profile shifted from a highly educated, young male to more mainstream

– An estimated 28.8 million people in the US who were 16 years and older had access to the Internet

– 16.4 million used the Internet– 11.5 million used the Web– 1.51 million had used the Web to purchase

something

The Internet Explosion The Internet Explosion was not as Obvious in was not as Obvious in

Most BusinessesMost Businesses• KPMG survey, Management Accounting-London, 1996:

– Top 100 UK companies (annual revenue > 200m) expected 1 in every 5 sales to come directly via the Internet by 2001 representing a total of 170 billion

– In 1996 more than 80% of the surveyed companies could not attribute any sales to the Internet

– Of their sales, not more than 2%-3% took place over the Internet

– But they expected 17% of the sales to take place over the Internet by 2001

– Only 59% of the companies had allocated marketing budget to the Internet

– 50% had a budget of less than 10,000

First Electronic First Electronic Commerce Doubts Commerce Doubts Surfaced in 1997Surfaced in 1997

• Fox, “Web Advertising a Slow Go,” CACM, April, 1997:

– “As the Web grows at an astounding rate and most Internet-related companies lose their start-up money at a furious pace, Web publishers, content providers, and search engine creators are looking for advertising revenue to keep them afloat.”

--The New York Times

Mixed Signals about Mixed Signals about Electronic Commerce Electronic Commerce

in the U.S. in 1997in the U.S. in 1997• Fox in “Mixed Signals,” CACM, July, 1997:

• Over 50% of respondents to a survey on how the Internet affected business said they used the net for business purposes– 25% planned to

– 25% had no plans to do so

• When respondents were asked to identify the major impact on their business, – 15% said increased productivity

– 16% said increased sales

– 19% said better communications with workers and customers

– 26% said decreased productivity

– 23% said impact unclear(source: U.S., Chamber of Commerce, 972 respondents)

Advertising: The Largest Advertising: The Largest Revenue Source in EC in Revenue Source in EC in

the U.S. in 1997the U.S. in 1997• Web advertising grew in 1996 to over $200 million, from $55 million in 1995

--Fox

• much of that spending came from within the industry itself --Jupiter Communications, a New York Research Firm

• The most popular sites for advertisers were the search engines like Yahoo, Lycos, and Excite, because they acted as hubs through which consumers

moved onto the Web --Fox

• Web advertising was mostly geared toward college educated men earning high incomes --Fox

• Optimistic projections estimated ad spending on the Web at around $5 billion by 2000, or only 2% of all U.S. advertising spending --Fox

• 1997 top Web advertisers: Microsoft, AT&T, and Excite

Sign of Times to Come? Sign of Times to Come? Internet Jobs Explode in Internet Jobs Explode in

the U.S. the U.S. • More than 189,000 new Internet jobs were estimated being

available in the U.S. in 1997 – Christian and Timbers, an executive search firm in Ohio

• In 1997, there were 4,690 Internet companies

• more than 50% of these were founded in 1996

• Other predictions of the times: Technology based companies like Microsoft will be starting new Internet divisions and Fortune 1000 companies will continue to hire managers to set up their own Internet business

• A poll of 5,606 IT executives shows that 72% plan to increase their staff over the next six months. -- Management Recruiters International, 1999

How Big is Electronic How Big is Electronic Commerce Today? Commerce Today?

Fortune, March 15 1999Fortune, March 15 1999

• “Consumers will spend $2.3 billion buying holiday gifts online in 1998” --Jupiter Communications

• “Online Grocery Sales to Reach $10.8 billion by 2003” --Forrester Research

• “B y 2000 46.5% of people online will be women --Jupiter Communications

• “By 2002, U.S. online advertisers will spend $7.8 billion or 14 times the $550 million it says they spent in 1997” --Forrester Research

• “By 2002 U.S. companies will spend $7.7 billion advertising online or eight times the $940 million it says they spent in 1997.--Jupiter Communications

How do We Know?How do We Know?Fortune, March 15, 1999Fortune, March 15, 1999

• “Jupiter informed the world in November 2nd about the $2.3 billion holiday spending.”

• “Within a month that prediction had been sited by 99 media outlets from the New York Times to Footwear News, from CNN to China Morning Post”

• “Message: Companies are making money. If yours isn’t one of them, you need help. ==> Internet forecasting is a great way to make money.”

• “Typically e-forecasts are just marketing tools, ways to get onto customer’s radar screens and into its pocket books.”

• “sometimes Internet predictions are just someone’s opinions put into a numeric format because people seem to like numbers”

More Media Hype than More Media Hype than Real Change in the Way Real Change in the Way Companies do Business?Companies do Business?

• Results show that most large corporations and multinationals are making little use of the Internet, treating it simply as a publishing medium. –Dutta and Segev, 1999

• Most customers are hitting web sites to browse. The conversion percentage for on-line retailers was no more than 8 percent (in a typical retail store is as high as 35 percent). – McKinsey,1999

• Internet may be cannibalizing other sales channels. –McKinsey, 1999

• Most Internet companies that have gone public in the past two years will never be profitable. – Willis, 1999

• But firms that are selling products or services on the Internet are often making money on their Internet operations. Many such firms report that their on-line business is “profitable beyond expectations.” – Porra and Parks, 2000

Old Corporate NetworksOld Corporate Networksin a Nutshellin a Nutshell

BACKBONE

BACKBONE

BACKBONE

BACKBONE

LANLAN LAN

ME

TR

OP

OL

IT

AN

AREANW

WIDE

AREA

NETWORK BACKBONE

BACKBONE

BACKBONE

BACKBONE

Corporation 1, Town 1 Corporation 2, Town 2

Intranet, Internet, Extranet = Intranet, Internet, Extranet = More Options, More More Options, More

Economical OptionsEconomical Options

INTRANET

INTRANET

INTRANET

INTRANET

INTERNET INTRANET

INTRANET

INTRANET

INTRANETE

X

T R

A

NE T EXTRANET

Modularizing The Firm -- Modularizing The Firm -- Porter’s Value Chain Porter’s Value Chain

RevisitedRevisitedOrganization’s Primary Activities May be Divided Between Partners

Inbound

logisticsOperations Outbound

LogisticsService

Sales and

Marketing

AutomatedWarehousingSystems

ComputerControlledMachiningSystems

Automated ShipmentSchedulingSystems

ComputerizedOrdering Systems

MaintenanceEquipment Systems

Modularizing The Firm -- Modularizing The Firm -- Porter’s Value Chain Porter’s Value Chain

RevisitedRevisited

Support Activities

Primary Activities

Administration and ManagementHuman ResourcesTechnologyProcurement

InboundLogistics

Operations OutboundLogistics

Sales and Marketing

Service

(Automatedwarehousingsystems)

(Computercontrolledmachining systems)

(Automated ShipmentSchedulingSystems)

(Computerized OrderingSystems)

(Equipment MaintenanceSystems)

Support Activities can be Outsourced to a Lowest Bidder

E-Commerce Causes Re-E-Commerce Causes Re-Evaluation of old Ways of Evaluation of old Ways of

OrganizingOrganizing

Operational level Operational level managers

Knowledge level Knowledge and data workers

Management level

Middle managers

Strategic levelSenior managers

SalesMarketing

Manu-facturing

Finance Accoun-ting

HumanResources

= Organization, management, employees and ISs have to be changed dramaticallyto gain competitiveedge

Supply Chain Revisited –Supply Chain Revisited –Are We Going Too Far?Are We Going Too Far?

Supplier Customer

1. Traditional delivery practiceInventory ==> delivery ========> Large Storeroom

2. Just-in-time supply methodBulk Storage==>More frequent ==> Smaller Storeroom deliveries

3. Stockless Supply MethodBulk Storage===>Daily Deliveries=>NO STOREROOM

Technological Shifts Cause Technological Shifts Cause Some Firms (and Industries) Some Firms (and Industries) to Fall off the Band Wagonto Fall off the Band Wagon

1840

Samuel Morse patented “Morse code”

1860

AmericanCivil War

1876

Alexander Graham Bell patented telephone

1930 1940

Telegraph Erahand generatedboth ends, direct lines

telextypewriter and printerswitched physicaldialable

Western Union sells all voice equipment to AT&T for a $1 to concentrate on“message” (data) business

1947

TelephoneEra begins

Technological Shifts Result in Technological Shifts Result in Business Failure and Novel Business Failure and Novel

Opportunity for New EntrantsOpportunity for New Entrants

• The main reason for organizational failure is inability to rapidly respond to the changing environment

• Changing environment is often caused by rapid advances in technology which effectively cause technological discontinuation points

• Because of its pace of change information technology pose a particular threat to organizations

• Examples:– from telegraph to

telephone

– from the 1980’s Information Systems to electronic commerce

Technological Shifts Technological Shifts Cause Cause Changing Attitudes Changing Attitudes about What IT Should Doabout What IT Should Do

1950 1960 1970 1980 1990 2000

IS necessary evil,bureaucratic requirement,electronic accounting machine

IS providesgeneral purpose support,MIS,information factory

IS providescustomized managementcontrol,DSS,ESS

IS is a strategicresource,competitiveadvantage,business foundation,strategic IS

ElectronicCommerce

Today we are living these twomajor shifts in what IT should do

The Recent Outsourcing Trend The Recent Outsourcing Trend May Be a Necessary Step in the May Be a Necessary Step in the on-going Technological Shifton-going Technological Shift

• The 1990’s “competitive advantage” technology shift caused an attitude change. IT that does not provide competitive advantage is best downsized and outsourced.

• “Electronic commerce” technological shift is again changing attitudes about what IT should do.

• In many firms e-commerce foregrounds IT. Electronic commerce information systems are the business. “When our site is down, it is like all our buildings burned down. It is like we no longer exist.”

While it Takes Time for While it Takes Time for Technological Shifts to Become Technological Shifts to Become

MainstreamMainstream(Survey: What is the Purpose of Corporate IT?)-Allnoch, 1997(Survey: What is the Purpose of Corporate IT?)-Allnoch, 1997

• 1. Aligning information systems goals with those of the company (80%)

• 2. Organizing and utilizing data (71%)• 3. Capitalizing on advances in IT (62%)• 4. Using IT for competitive breakthroughs

(62%)• 5. connecting to customers and/or partners

electronically (61%)– Computer Sciences Corporation 1997 edition of the critical issues of

Information Systems Management survey of 614 IS executives in the U.S.

For Some E-Commerce has Already For Some E-Commerce has Already Leveled the Play Field -- The Leveled the Play Field -- The

Competitive Forces Model RevisitedCompetitive Forces Model Revisited

The Firm Traditional Competitors

New Market Entrants

Suppliers

Substitute Products andServices

Customers

How Strategic is How Strategic is Electronic Commerce in Electronic Commerce in

2000?2000?• Many large corporations today believe that electronic

commerce is very important for their future. • But they do not yet see the need to aggressively compete

in this market place.• As with most new technologies, it may take 10-15 years

before electronic commerce is an essential part of corporate business.

• When this occurs, expect shifts in business comparable with the Western Union – At&T shift – those with superior e-commerce implementations survive.

Old Economy in a New Economy Old Economy in a New Economy LightLight

--Porra, 1999--Porra, 1999

Business-to-ConsumerElectronic Commerce

Business-to-BusinessElectronic Commerce

1. Traditional Industries

2. All-Digital Industries

2. Transitional Industries

Consumer-to ConsumerElectronic Commerce

How Is Electronic How Is Electronic Commerce Changing Commerce Changing

Business? Business? • Electronic commerce is changing the way

products are acquired, manufactured, marketed, ordered, paid for, sold and distributed == electronic commerce value chain

• Electronic commerce value chain means that traditional Industry order is renegotiated in cyberspace

• For example, buyer – seller relationships, intermediation relationships, product, service

Examples of the Examples of the Emerging Electronic Emerging Electronic

Commerce Value ChainCommerce Value Chain1. The Software Industry

A. The traditional software industry value chain:

Traditional Software Traditional Software Industry ModelIndustry Model

• Software Developer

• Software Publisher

• Software Distributor

• Software Retailer

• Software User

The traditional software industry value chain was based on

arrangements between involved parties:

Examples of arrangements:

new customers are for retailers;

existing customers for distributors;

retailers only sell new products not upgrades, etc.

Examples of the Examples of the Emerging Electronic Emerging Electronic

Commerce Value ChainCommerce Value ChainC. The possible permutations for the emerging electronic commerce value chain

Examples of the Examples of the Emerging Electronic Emerging Electronic

Commerce Value ChainCommerce Value Chain2. The Film Industry

Examples of the Examples of the Emerging Electronic Emerging Electronic

Commerce Value ChainCommerce Value Chain3. Digital Product Industry Structure

Electronic Software Electronic Software Commerce ModelCommerce Model

• In theory, all permutations between the software user and any sequences of Digital Product Developer, Digital Product Publisher, Digital Product Distributor, and Digital Product Retailer are possible

• Electronic commerce infrastructure needed

• An electronic commerce infrastructure is emerging at three levels of – Electronic commerce business models– Electronic commerce software applications– electronic commerce network

Electronic Commerce Electronic Commerce InfrastructureInfrastructure

Electronic Commerce Electronic Commerce InfrastructureInfrastructure

Building blocks for a successful electronic enterprise

Three Generations of Three Generations of Cyberspace Business Cyberspace Business

ModelsModels• Making money on product or service: First generation

Internet business models are product driven (companies sell products or services over the Internet)

• Making money on virtual community: Second generation Internet business models are community driven (companies sell access to their member base)

• Making money on information about product, service or member: Third generation Internet business models are information driven (companies sell information about products, services or members)

Future?Future?

• Shopping agents – Best product at a best price wins –Prices hyper-fluctuate. Firms are as good as their last trade. Firms are commodities.

• Internet juggernauts (instant strategic partnerships) -- Alliance can start competing in the market almost immediately by relying on each partner's special expertise. Hyper-temporary alliances. Strategically launched e-commerce wars.

• Corporate Nielsen ratings -- Internet is a television. Customers and partners review and view firms like television broadcast shows. Next firm is just a mouse click away. 

Future?Future?

• Supply chain racehorses -- Internet commerce means putting “the supply chain in front of the order-delivering racehorse.” Supply chains are commodities. They can be retired, trained and traded by supply chain brokers.

• Abrupt ends – Internet may be overused. What if the lights go out? Will your firm survive?

• Strategic alliances a’la Internet – portals for gourmet coffee, golf equipment and steel products.

• Internet Wall Mart – On-line Giga stores take it all.

Future Scenarios?Future Scenarios?

• Virus epidemics – eradicate firms maybe even economies.

• Internet Spin offs – New economy leaves the old economy -- to dust. -- Every firm must be an Internet firm.

• Internet wealth versus real wealth – “One of the few ways of creating real wealth on the Internet is to have a successful IPO, sell the inflated shares and buy other companies’ stock.”

• The Internet generation is loyal to the Internet not to the firms that use it.

Kiitos!Kiitos!

© 2000 Jaana Porra University of Houston