Navigating the World of E-business

7/30/2019 Navigating the World of E-business

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Navigating the Worldof e-Business4

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Even though the MSN

network offers a

dizzying array of

options, customers

can easily tailor the

service to their

personal preferences.

c h a p t e r

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CopyrightHoughtonMifflinCompany.

Define and explain the meaning of e-business.

Explore the basic framework of e-business.

Identify and explain fundamental models of e-business.

Understand the factors that influence an e-business plan.

Discuss the social and legal concerns of e-business.

Explore the growth, future opportunities, and challengesof e-business.


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General Electric: Americas Most Admired Company

i n s i d e b u s i n e s s

MSN: Gateway to the Internet

FOR ONLINE ACCESS to tickets, toys, and almostanything else, MSN is the gateway to the Internet formore than nine million people. Customers who pay$21.95 monthly for dial-up access over ordinarytelephone lines (more for high-speed broadband access)can move with a click from MSNs home page to contentand services provided by 10,000 other partners. Targetingfamilies, MSN also has arranged a partnership to offerchild-friendly Disney content and allow parents to checkon their childrens online activities.

As a unit of Microsoft, MSN can draw on the

parent companys technology expertise and deal-makingclout to fuel constant innovations from softwareupgrades to new services. Even though MSN offers adizzying array of options, customers can easily tailor theservice to their personal preferences. This means thatinvestors can have the latest stock market news come upin a prominent position when they log onto MSN, forexample, whereas sports fans can put current scoresfront and center. And MSN is increasingly internationalin scope, offering local content and services for thirty-four international markets, including Canada, China,Germany, and Japan.

Despite its growing popularity, MSN faces intense

competition from rival America Online (AOL), whichhas thirty-fivemillion customersand is the runawayleader in Internetaccess. Like MSN,AOL can use theconnections of itspowerful parentcompanyAOL

Time Warnerto forge alliances and bring in business.And both companies face similar challenges in boostingthe number of customers as well as squeezing morerevenue from advertising and other sources. In the past,MSN lacked the flexibility to create media-richadvertisements, and it was not particularly responsive toits advertisers needs. However, after recruiting a savvymagazine executive to direct advertising sales andbeefing up its technical capabilities to run moresophisticated ads, MSN has been able to attract moreadvertising dollars, even during periods when online

advertising was in a slump.Can MSN overtake AOLs huge lead in the Internet

access market? Not long ago MSN ran an advertisingcampaign encouraging AOL customers to switch toMSN. The campaign stressed the higher cost of AOLsdial-up service ($23.90 per month) and explained howeasily AOL users could become MSN users. MSN wasthen drawing 6,000 new customers daily. Weve neverbeen in a better situation to bring some heat toAmerica Online, said an MSN vice president. AOLscoffed at MSNs competitive moves. Last I checked,at its peak, eighteen people switched a day from AOLto MSN, said an AOL spokesperson. Based on that,

in the year 3000, they may well have caught up. Butthe battle forcustomers is farfrom over, andMSN clearly hasthe strength to bea formidablecompetitor overthe long run.1

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MSN is an example of a firm that can trace its history only as far back as the start ofcommercial activity on the Internet. Like other well-known e-business firms, such as

Yahoo!, e-Bay, and Amazon, MSN owes its very existence to the Internet. Quite sim-ply, without the Internet, there would be no MSN, Yahoo!, e-Bay, or Amazon.

Most firms, on the other hand, have developed or will develop an Internet pres-ence by transferring some of their business practices to the Internet. This was theroute taken by Disney, which found opportunities by placing some of its entertain-ment and information content online. For reasons we will examine more closely in

this chapter, virtually all businesses eventually will find themselves conducting a grow-ing proportion of their affairs on the Internet.

The fundamental division between businesses that invented themselves on the In-ternet, such as MSN, and previously established firms that have transferred only someof their activities to the Internet, such as the Gap, is a distinguishing characteristic ofe-business. Firms with no history but the one defined on the Internet make their busi-ness decisions with a clear focus on the online world. There is no concern for inter-fering with other established business activity. On the other hand, firms such as theGap are very concerned about how development on the Internet will affect their cur-rent retail store sales, costs, customer relations, and so forth.

This chapter examines the development of both types of businesses and providesa foundation for understanding how and why Internet activities will change the waybusinesses function in the future. We also take a closer look at how firms conduct

business on the Internet and what growth opportunities may be available to both newand existing firms. Before exploring this new and exciting arena for business competi-tion, however, lets begin by defining e-business.

Defining e-Business

In Chapter 1 we defined businessas the organized effort of individuals to produce andsell, for a profit, the products and services that satisfy societys needs. In a simple sensethen, e-business, or electronic business, can be defined as the organized effort ofindividuals to produce and sell, for a profit, the products and services that satisfy soci-etys needs through the facilities available on the Internet.And just as we distinguished be-tween any individual businessand the general term business, which refers to all suchefforts within a society, we recognize both the individual e-business, such as MSN, andthe general concept ofe-business. As you will see in the remainder of this chapter andthroughout this book, e-business is transforming key business activities, such as buy-ing and selling products and services, building better supplier and customer relation-ships, and improving general business operations.

Sometimes people use the term e-commerce instead ofe-business. In a strict sense, e-businessis used when one is speaking about all business activities and practices con-ducted on the Internet by an individual firm or industry. On the other hand,e-commerce is a part of e-business; the term refers only to buying and selling activi-ties conducted online. These activities may include identifying suppliers, selectingproducts or services, making purchase commitments, completing financial transac-

tions, and obtaining service.

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We generally use the term e-business because of itsbroader definition and scope.

Organizing e-Business ResourcesAs noted in Chapter 1, to be organized, a business must combine human, material, in-formational, andfinancial resources.This is true of e-business, too (see Figure 4.1), butin this case the resources may be more specialized than in a typical business. For ex-ample, people who can design, create, and maintain websites are only a fraction of thespecialized human resources required by businesses considering an Internet presence.

Material resources must include specialized computers, sophisticated equipment and

Part II Trends in Business Today


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e-business (electronicbusiness) the organizedeffort of individuals to produceand sell, for a profit, theproducts and services thatsatisfy societys needs throughthe facilities available on theInternet

e-commerce buying andselling activities conductedonline

1 Define and explain themeaning of e-business.

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software, and high-speed Internet connection lines. Computer programs that trackthe number of customers to view a firms website are generally among the specializedinformational resources required. Financial resources, the money required to start andmaintain the firm and allow it to grow, usually reflect greater participation by individ-ual entrepreneurs and investors willing to invest in a high-tech firm instead of con-

ventional financial sources such as banks.

Satisfying Needs OnlineLets start with two basic assumptions. First, the Internet has created some new cus-tomer needs that did not exist before the creation of the Internet. Second, e-busi-nesses can satisfy those needs, as well as more traditional ones. For example, amongthe products and services AOL offers its customers are Internet access, browsers, chat

rooms, databases, and exclusive Time Warner entertainment content. Amazon.comgives customers anywhere in the

world access to the same virtualstore of books, DVDs, and CDs.

And at e-Bays global auction site,customers can, for a small fee, buyand sell almost anything. In each ofthese examples, customers can usethe Internet to meet a specificneed.

Internet users also can accessprint media, such as newspapersand magazines, and radio and tele-

vision programming at a time andplace convenient to them. In addi-tion to offering such a wide selec-tion of content, the Internetprovides the opportunity for inter-action. In other words, communica-tion is now an active two-waystreet between the online programand the viewer. CNN.com andother news-content sites encourage


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f i g u r e 4 . 1

Combining e-Business ResourcesWhile all businesses use fourresources (human, material,informational, and financial),these resources typically aremore specialized when used

in an e-business.

INFORMATIONAL

RESOURCES

Customer tracking systems

Order fulfillment andtracking systems

Online content-monitoring

systems

FINANCIAL

RESOURCES

HUMAN

RESOURCES

MATERIAL

RESOURCES

Investors interestedin supportinge-business firms

Electronic payment fromcustomers

Web site designers

Programmers

Web masters

Computers

Software

High-speed Internet

connection lines

BUSINESS

Websites can be beautiful.While all businesses mustsatisfy the needs of theircustomers, some companieslike 1800-Flowers use 800phone numbers and theInternet to sell their products.Is it successful? You bet! Lastyear, 1800-Flowers soldproduct and services valued

at $500 million.

Source: Reprinted courtesy of 1800FLOWERS.com.


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dialogue among viewers in chat rooms and exchanges with the writers of articlesposted to the site. In contrast to the passive situation they encounter with traditionalmedia such as television or radio, customers can respond to Internet programming byrequesting more information about a product or posing specific questions, which maylead to purchasing a product or service.

Finally, the Internet allows customers to choose the content they are offered. Forexample, individuals can custom design daily online newspapers and magazines witharticles that are of interest to them. Knowing what is of interest to a customer allows

an Internet firm to direct appropriate,smart advertisingto a specific customer. For ex-ample, someone wanting to read articles about the New York Yankees might be a po-tential customer for products and services related to baseball. Displaying onlyadvertising that is likely to be of interest to the viewer has a greater chance of result-ing in a sale. For the advertiser, knowing that its advertisements are being directed tothe most likely customers represents a better way to spend advertising dollars.

Creating e-Business ProfitFirms can increase their profits either by increasing sales revenue or by reducing ex-penses through a variety of e-business activities.

Revenue Growth Each source of revenue flowing into a firm is referred to as arevenue stream. Since revenue streams provide the dollars needed to operate thefirm, identifying new sources of revenue is a major concern for any business. One

way to increase revenues is to sell merchandise on the Internet. Online merchantscan reach a global customer base twenty-four hours a day, seven days a week; the op-portunity to shop on the Internet is virtually unrestricted. The removal of barriersthat might keep customers from conventional stores is a major factor in increasingsales revenue potential for e-businesses, as firms like Amazon.com, Barnesandno-ble.com, and Landsend.com have demonstrated. And yet the simple redirection ofexisting revenue to an online revenue stream is not desirable. For example, shiftingrevenues earned from customers inside a real store to revenues earned by those cus-tomers online does not create any real new revenue for a firm. The goal is to find newcustomers and generate new sales so that total revenues are increased. To see how

Dell Computer increases revenues while helping customers get the right computer,read Talking Technology.

Intelligent informational systems also can help generate sales revenue for Internetfirms. Such systems store information about each customers purchases, along with a

variety of other information about the buyers preferences. Using this information, thesystem can assist the customer the next time he or she visits the website. For example,if the customer has bought a Shania Twain or Garth Brooks CD in the past, the systemmight suggest CDs by similar artists.

While some customers in certain situations may not make a purchase online, theexistence of the firms website and the services and information it provides may lead toincreased sales in the firms physical stores. For example, customers may use the Gap

website simply to obtain product information about clothing but delay their actualpurchases until they have had a chance to try on garments in a Gap retail store. Simi-

larly, Toyota.com can provide basic comparative information for shoppers so that theyare better prepared for their visit to an automobile showroom.

Typically, e-business revenue streams are created by the sale of products and serv-ices, by advertising placed on web pages, and by subscription fees charged for access toonline services and content. For example, Hoovers Online (www.hoovers.com), acomprehensive source for company and industry information, makes some of its on-line content free for anyone who visits the site, but more detailed data are availableonly by paid subscription. In addition, it receives revenue from companies that arecalledsponsors, who advertise their products and services on Hoovers website.

Many Internet firms that distribute news, magazine and newspaper articles, andsimilar content generate revenue primarily from advertising sponsors and commissions



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revenue stream a source ofrevenue flowing into a firm


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earned from sellers of products linked to the site.Online shopping malls now provide groups of re-lated vendors of electronic equipment, computerhardware and software, health foods, and fashionitems with a new method of selling their productsand services. And sites like Petco (www.petco.com) focus on the large market for pet supplies.

WebMD (www.webmd.com) and other health-

related sites provide information about remedies,diseases, and other health topics and issues. Inmany cases the vendors share online sales rev-enues with the site owners.

Expense Reduction Expense reduction is theother major way in which e-business can help in-crease profitability. Providing online access to in-formation customers want can reduce the cost ofdealing with customers. For example, most air-lines provide updated scheduling and pricing in-formation, as well as promotional material, ontheir websites. This reduces the costs of dealing

with customers through a call center operated byemployees and of mailing brochures, which maybe outdated within weeks or easily misplaced by customers. SprintPCS (www.sprint-pcs.com) is just one company that maintains an extensive website where potential cus-tomers can learn more about cell phone products and services, and current customerscan access personal account information, send e-mail questions to customer service,and purchase additional products or services. With such extensive online services,SprintPCS does not have to maintain as many physical store locations as it would


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Easy as Dellicon here

HOW DOES DELL DO IT? Competingagainst giant rivals such as IBM, the Austin-based com-puter company has captured a whopping 27 percentshare of the U.S. personal computer market and 15 per-cent of the global market. The key to Dells e-businesssuccess: using technology to customize products foreach individual buyer.

Rather than building computers in advance and sell-ing them as is, Dell invites customers to call a toll-freephone number or visit Dell.com and order computers

built to their personal specifications. For example, Dellhelped the information technology experts at the Bella-gio Hotel in Las Vegas meet a tight deadline for in-stalling high-speed servers built around a new computerchip. The tech experts had tested and decided on a chipthat was not yet available commercially. They also likedDell servers. So they talked with Dell, and as soon as thechip was in production, Dell put it into servers cus-tomized for the Bellagios needsthe first manufacturerto use the new chipand rushed the equipment to the

hotel. Thanks to Dells flexibility and responsiveness,the hotel met its schedule.

Dells use of technology to customize products is awin-win situation. Individuals and corporate customerscan order exactly the features and software they want andavoid paying for extras they cannot use. At the same time,making computers to order helps Dell gauge demand andplan accordinglya valuable early-warning system toprotect profits from sales fluctuations. When worldwidesales slowed not long ago, CEO Michael Dell observedthat we didnt get caught with inventory or the wrongcost structure. This technology also allows Dell to adapt

to customer preferences around the world. In Japan, per-sonal computer buyers like to try products before buying.Therefore, Dell set up a special website with detailedproduct information. It then put computer kiosks in localelectronics stores so that customers could browse the

website and follow up by testing the kiosks demonstrationcomputer before ordering. Although online buying is lesspopular in Japan than in the United States, Dells Japan-ese website now sells $500,000 worth of computers everydaya testament to the companys e-business prowess.

t a l k i n g t e c h n o l o g y

Dot-com closuresDot-com closures

Internet shutdowns and bankruptcies

declined dramatically in 2002compared with 2001.

Internet shutdowns and bankruptcies

declined dramatically in 2002compared with 2001.

2000200090

464126

20012001

20022002

Spotlight

Source:www.webmergers.com.


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without these online services. For more information on the advantages and disadvan-tages of e-business, look at Table 4.l.

We examine more examples of how e-business contributes to profitabilitythroughout this chapter, especially as we focus on some of the business models for ac-tivity on the Internet.

A Framework for Understanding e-Business

The Internet was conceived originally as an elaborate military communications net-work that would allow vital messages to be transmitted in the event of war. Before1994, the U.S. National Science Foundation, the agency that funded and regulateduse of the Internet, restricted its use to noncommercial activities, such as e-mail com-munication and the sharing of data among university researchers. However, as the po-tential commercial benefits of the Internet became increasingly obvious, a growing listof commercially interested groups demanded that the doors be opened to business ac-tivity. At about the same time, new technology emerged that simplified use of the In-ternet and allowed the addition of multimedia content. This multimedia environmentof audio, visual, and text data came to be known as theWorld Wide Web (or moresimply, the web).

The Internet can be envisioned as a large network of computers that pass small,standardized packets of electronic data from one station to another until they are de-livered to their final destination. In a sense, the Internet is the equivalent of the tele-

phone network that was created almost one hundred years ago. However, instead oftransmitting just voice communications, the Internet can transfer a variety of multi-media data at high speed around the world. To be transferred over the Internet, dataneed to be digitized, which means converted to a type of signal that computers andtelecommunications equipment that make up the Internet can understand.

Most firms involved in e-business today fall more or less into one of three primarygroups as defined by their e-business activities (see Figure 4.2):

Telecommunications and computer hardware manufacturers and Internet serviceproviders

Internet software producers Online sellers and content providers



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World Wide Web(the web) the Internetsmultimedia environment ofaudio, visual, and text data

digi t ized data that havebeen converted to a type ofsignal that computers andtelecommunications equipmentthat make up the Internet canunderstand

2Explore the basicframework of

e-business.


table 4.1 Advantages and Disadvantages of e-Business

Advantages Disadvantages

Increases productivity for both customers Requires specialized knowledge to useand employees by saving time and money

Allows for communications at a more User must have Internet accessconvenient place and time through e-mailand other software

Provides access to information anytime, May be perceived as an undesirableanywhere means of communications compared with

direct contact between people

Allows firms to profitably serve small markets May result in lost customers or sales ifonline sales experience is unsatisfactory

Facilitates online shopping to geographically Online promotional efforts such as e-maildispersed customers and pop-up advertising may be annoying

Inexpensive methods to promote the firmand its products to current and potentialcustomers


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In this section we examine these three groups and also look at how e-business facili-tates both global and small business operations.

Telecommunications and Computer HardwareManufacturers and Internet Service Providers

The telecommunications and computer hardware manufacturers that helped build theInternet, together with Internet service providers, supply the physical infrastructureof the industry today. Lucent Technologies, Cisco Systems, and Nortel Networks pro-duce most of the telecommunications hardware that allows the Internet to work.Companies such as IBM, Apple, Dell, Compaq, and Gateway produce many of thecomputers used by consumers, and companies such as Sun, IBM, and Hewlett Packardmanufacture servers that control corporate computer networks. For more informationabout how computer hardware manufacturers use specialized components in theirproducts, read Adapting to Change (on p. 114). Internet service providers (ISPs),

which buy their technological capability from the makers of telecommunications andhardware manufacturers, provide customers with a connection to the Internetthrough various phone plugs and cables. This last link to the Internet is the shortest,but typically the slowest, in the global electronic network. As phone lines are replacedby high-speed Internet access, speed for home users will improve gradually to levelsenjoyed by businesses in communities where the telecommunications infrastructurehas already been upgraded. AOL is the largest and best-known ISP, whereas MSN isranked second. And yet hundreds of smaller ISPs in both urban and rural areas alsoprovide access to the Internet. Furthermore, recent developments in technologiesusing wireless networks within office buildings and small clusters of buildings such ascollege campuses are helping to create a more readily accessible Internet using a vari-ety of communications devices.

Internet Software ProducersProducers of software that enable people to do things on the Internet are the secondprimary group of e-business firms. Searching the Internet, browsing websites, sendinge-mail messages, shopping, and viewing multimedia content online are activities thatrequire specialized computer programs. Browser software is the single most basic

Chapter 4 Navigating the World ofe-Business


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In ternet serviceproviders ( ISPs) providecustomers with a connection tothe Internet through variousphone plugs and cables

f i g u r e 4 . 2

The Three Primary Groups ofe-BusinessesToday, the activities of mosttechnology firms overlapinto more than one area ofe-business.

Telecommunications

and computer

hardware

manufacturers

and Internet

service providers

Online sellers and

content providers

Internet software

producers


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product for user interaction on the Internet. Currently, the dominant browser is Mi-crosofts Internet Explorer, followed well back by AOLs Netscape Communicator.

In addition to browser software, many people use search-engine software to find

information on the Internet. Popular search engines include msn.com, yahoo.com,google.com, altavista.com, aol.com, lycos.com, netscape.com, and hundreds of lesser-known sites that enable users to search the Internet for needed information. By enter-ing key words and phrases, users are guided to available online information that isranked according to the search-engine rules for listing search results. For instance,some engines will list sites according to how often users have selected them after theirsearch.

Today, e-mail is considered a standard communication software tool for all busi-ness people. Whether for internal or external communication, the low costs and ben-efits from using e-mail often make it the easiest Internet-based software solution torationalize. More advanced and complex communications solutions might includecustomer relationship and supply-chain management software. Several large firmsnow sell complete customer relationship management (CRM) software solutions

that incorporate a variety of methods that can be used to manage communication withcustomers and share important information with all of a firms employees. And just asCRM software solutions help firms create more efficient relationships with their cus-tomers, supply-chain management (SCM) software solutions focus on ways to im-prove communication between the suppliers and users of materials and components.By providing their production requirements and planning information directly totheir suppliers, manufacturers can reduce inventories, improve delivery schedules, andreduce costs, which can quickly show up as improved profitability. For example, DellComputers SCM software (https://valuechain.dell.com) virtually eliminates theneed for the firm to maintain any inventory because suppliers are tied directly intoDells new manufacturing facility in Round Rock, Texas. Manufacturing schedules and


customer relationshipmanagement (CRM)software software solutionsthat incorporate a variety of

methods that can be used tomanage communication withcustomers and share importantinformation with all of the firmsemployees

supply-chainmanagement (SCM)software software solutionsthat focus on ways to improvecommunication between thesuppliers and users of materialsand components

Behind the Scenes with Semtech

DO YOU KNOWwhat a transient voltage sup-pressor is? Or a silicon rectifier? These are only two of thesophisticated products produced by Semtech, based in

Camarillo, California. Neither the companys name norits products may be familiar, but if you use a laptop com-puter, cell phone, or personal digital assistant, chances areit contains a Semtech component. In fact, the companyplays a vital behind-the-scenes role in designing special-ized semiconductors for computers, telecommunicationsdevices, and many other consumer products.

A transient voltage suppressor protects an electronicsystem from being damaged by spikes in voltage. Manu-facturers like Dell Computer, Cisco, IBM, Motorola, andSony often incorporate such suppressors into their prod-ucts. In addition, computer makers buy Semtechs semi-conductors to regulate power supply and control touch-pad and touch-screen input. However, the company wasnot always so focused on the commercial market.

When Semtech was founded in 1960, it specialized inelectronic components for the growing military andaerospace markets. Because these customers set exactingstandards for product performance and timely delivery,

the company earned a reputation forboth quality and reliability. Ten yearsago, however, demand in these marketsslowed. In response, Semtech beganselling to the commercial market, which

now accounts for most of its revenues.At the same time, the company contin-ued offering military and aerospace cus-tomers older products such as the siliconrectifier, which changes alternating current to directcurrent so that the current will flow continuously one

way through an electronic device.To compete against Texas Instruments, National

Semiconductor, and other high-tech companies,Semtech is constantly designing new semiconductors forunique functions. It is also diversifying by acquiringsmaller tech firms experienced in serving particular seg-ments of the commercial market, such as automated testequipment. The company rings up almost $200 millionin annual sales and custom designs semiconductors forhundreds of products every year. Should sales begin toslow, Semtech can look to its past for clues about how toadapt for a successful future.

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parts orders are revised every two hours. Suppliers must keep an agreed-on level of in-ventory for Dell on hand at nearby local warehouses. As a result, 95 percent of DellsPCs are built and shipped to customers within twelve hours of their orders being en-tered into the system. The new software has improved productivity by 160 percentand reduced errors in orders by 50 percent.3

Online Sellers and Content ProvidersThe third primary group of e-businesses consists of all the firms that customers actu-ally interact with on websites. The Internet would still be limited to communicationbetween individuals and among groups of special-interest researchers were it not forthe activity of online sellers and content providers. In this area of e-business, we have

just begun to see the development of strategies for reaching out to existing and newcustomers.

As noted earlier, some e-businesses, such as MSN and e-Bay, owe their existenceto the Internet. They offer products and services that can be found only online. Incontrast, other firmsamong them the Gap, Nike, Restoration Hardware, andGearhave moved only some of their business practices to the Internet. These firmsuse the Internet to sell merchandise, provide information to customers, and supple-ment their regular retail sales efforts and other traditional business activities.

Although the Internet is constantly changing, it is clear that both ISPs and busi-nesses are scrambling to take advantage of the Internets ability to provide customerswith information. Time Warners decision to merge with AOL is a case in point. Byarranging for online distribution of interesting content that was formerly distributedthrough traditional magazines, radio, and television, Time Warner has found newopportunities for revenue growth. Similarly, traditional shopping behavior has beentransferred to a virtual environment in which cyberspace retailers can provide moreinformation to customers and have a greater degree of influence on the customersdecision.

The greatest opportunities for entrepreneurs on the Internet are in the produc-tion of a service or content. Anyone with a good idea that might appeal to a global au-dience stands a chance of successfully launching an e-business. As the short history ofthe Internet indicates, we are only at the beginning of new and exciting applications

that can be delivered online. According to Timothy Draper, an insider in the world ofe-business and the managing director of Draper Fisher Jurvetson, a West Coast ven-ture capital firm, The Internet hasopened the world up, and thatmeans everyones now going to bepart of the world economy.4



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Online auctions: A new way to sellunique art objects. Three years ago,Glenn King, owner of Sacramento,California-based Exotica Art & Fashion,

began using online auctions to reachnew customers and boost sales ofunique art items. Today, King, a formermanager for Wal-Mart, Clorox, andPepsi, says that online sales nowaccount for forty percent of his firmstotal revenue. In addition, contactsmade as a result of his online art saleshave enabled him to branch out into aline of imported clothing.


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Global e-BusinessAll three primary groups of e-business firms are in a race to capture global businessrevenues. Telecommunications firms are competing to build the infrastructure incountries all over the world, and in many cases, they are skipping technological step-ping-stones. For example, in poor countries where telephone poles have never existed,ground-based wireless systems are now providing instant state-of-the-art communica-tion. In many places ISPs and software producers such as AOL are competing against

better-known local firms. And online sellers and content producers are selling theirmerchandise and services to customers all over the globe.

The ability to customize content for individual customer needs makes the Internetan adaptable tool for global enterprise. Consider Berlitzs website (www.berlitz.com),

which allows anyone in the world to jump quickly to a website designed in the viewerspreferred language. By clicking on the appropriate icon, viewers can move forward to a

website created to meet their needs in their own language. Once there, the viewer canexamine Berlitzs wide range of products and services, including multimedia language-learning material, online translation services, and referrals to local Berlitz classroom-based instruction services. This global strategy, which reaches out to the world and yetallows for viewer customization, is at the heart of e-business.

Small e-BusinessBased on early experience, the Internet will continue to be a powerful tool for smallbusiness. According to a report by Access Markets International (AMI) Partners and

Inc. magazine, small-business online activity got off to a very quick start. Researchshowed that an estimated 400,000 U.S. small businesses sold their products and serv-ices on e-business sites in 1998, and this number jumped 50 percent to 600,000 in1999. During the same period, the dollar amount of online transactions grew morethan 1,000 percent, increasing from $2 billion to $25 billion. Interestingly, a signifi-cant number of small firmssix out of tenwere reluctant to sell their products on-line at the time because of security concerns, technology challenges, or the belief thattheir products were unsuited for online selling.5

However, despite these early concerns, online activity continues to grow. Accord-

ing to a recent American Express survey, 66 percent of small businesses had already in-tegrated the Internet as a tool to help them run their businesses, using it for makingtravel plans; purchasing office supplies, equipment, or other business services; con-ducting industry or market research; marketing or advertising; networking with otherentrepreneurs; purchasing goods from wholesalers; and managing accounts and mak-ing payments.6

Although large firms dominate e-business, the remarkable thing about the Internetis how accessible it is to small businesses. The relatively low cost of going online meansthat the Internet is open to thousands of small businesses seeking opportunities to selltheir services or products internationally. In some cases, small firms have found a nicheservice or product to sell online. Special online shopping malls bring shoppers a wideselection of unique crafts and artistic creations from small businesses. And many smallonline magazines, or e-zines, as they are often called, have recently found their special

audiences through the virtual world of online publishing. In fact, many small publica-tions that began online have gone on to create print versions of their e-zines.

Writers like Stephen King and recording artists like Sarah McLachlan have dis-covered that they can earn higher profits by dealing directly with customers onlinerather than through conventional middlemen such as wholesalers and retail distribu-tors. The Internet also has given unknown artists a new venue for finding an audience;after reading or listening to a sample of their work, newfound fans can order books orCDs directly or download and create their own copies. And software producers like

MP3 and Napster were quick to provide users with the technology they could use todownload copyrighted materials. Although both firms challenged the traditionalmethods of entertainment distribution, they also have been at the center of legal con-



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e-zines small online

magazines


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cerns over ownership of distribution rights to content on the Internet. More informa-tion about what firms in the publishing and music industries are doing about Internet-based distribution methods and protecting their property is provided later in thischapter.

Fundamental Models of e-Business

One way to get a better sense of how businesses are adapting to the opportunitiesavailable on the Internet is to identify e-business models. A business model repre-sents a group of common characteristics and methods of doing business to generatesales revenues and reduce expenses. For example, all large food stores share a similarbusiness model when it comes to their selection of merchandise, organizational struc-ture, employee job requirements, and often, financing needs. Each of the models dis-cussed below represents a primary e-business model. The models focus attention onthe identity of a firms customers.

Business-to-Business (B2B) Model

Many e-businesses can be distinguished from others simply by their customer focus.For instance, some firms use the Internet mainly to conduct business with other busi-nesses. These firms are generally referred to as having a business-to-business, orB2B, model. Currently, the vast majority of e-business is B2B in nature.

When examining B2B business firms, two clear types emerge. In the first type, thefocus is simply on facilitating sales transactions between businesses. For example, Dellmanufactures computers to specifications that customers enter on the Dell website.

The vast majority of Dells online orders are from corporate clients who are well in-formed about the products they need and are looking for fairly priced, high-qualitycomputer products that will be delivered quickly. Basically, by building only what isordered, Dell reduces storage and carrying costs and rarely is stuck with unsold inven-tory. By dealing directly with Dell, customers eliminate costsassociated with wholesalers and retailers, thereby helping re-

duce the price they pay for equipment.A second, more complex type of B2B model involves a

company and its suppliers, which often are numerous, geo-graphically dispersed, and difficult to manage. Althoughmanaging the activities between a firm and its suppliers is anestablished business strategy that existed before the Internetcame along, it is a focal point of e-business activity for manyfirms. Today, suppliers use the Internet to bid on productsand services they wish to sell to a customer, learn about thecustomers rules and procedures that must be followed, andso forth. Likewise, firms seeking specific items can now ask



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3 Identify and explainfundamental models ofe-business.


business model represents agroup of common characteristicsand methods of doing businessto generate sales revenues andreduce expenses

business-to-business(B2B) model firms thatconduct business with otherbusinesses

Whether your online business is treadingwater or riding a wave, Dell and Sprint canhelp! Because most small business owners donot have the expertise and time to deal withtechnology problems, they often turn to firmslike Dell and Sprint for solutions that areaffordable.


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for bids on their websites and choose from available suppliers through the online sys-tem. For example, the online leader in the auto industry, Ford Motor Company, links30,000 auto-parts suppliers and 6,900 dealers in its network, resulting in an estimated$8.9 billion savings each year on transaction costs, materials, and inventory. In addi-tion, Ford expects to earn approximately $3 billion from the fees it charges for use ofits supplier network.7 Similarly, the Internet-based supplier system at General Motorsis expected to eliminate the costs of processing more than 100,000 annual purchaseorders, which average $125 each.8

Savings for both automobile manufacturers come primarily from the eliminationof manual labor and the errors created by the repetitive entry of data by employees.For instance, under the old system, Ford might fax an order for parts to a supplier.

The supplier would fill out another order form and send a copy to Ford for confirma-tion. The data would have to be entered in each companys computer system each stepof the way. However, under the new system, the supplier has access to Fords inven-tory of parts and can place bids for parts online. Ford eliminates the labor costs of dataentry and much of the order-processing costs by connecting suppliers to the system.

Given the potential savings, it is no wonder that many other manufacturers andtheir suppliers are beginning to use the same kind of B2B systems that are used byFord and General Motors. As an added bonus, manufacturers that use B2B systemscan control their purchasing activities while allowing suppliers to become more in-

volved in the production process.

Business-to-Consumer (B2C) ModelIn contrast to the B2B model, firms like Amazon and e-Bay are clearly focused on in-dividual buyers and so are referred to as having a business-to-consumer, or B2C,model. In a B2C situation, understanding how consumers behave online is critical tothe firms success. Typically, a business firm that uses a B2C model must answer thefollowing questions:



118

business-to-consumer(B2C) model firms that focuson conducting business withindividual buyers

Using the Internet to increase

sales. Cornelius Martin ofMartin Automotive Group inBowling Green, Kentucky sellsa lot of automobiles. The ownerof sixteen dealerships thatgenerate annual sales revenuesin excess of $350 million ayear uses advertising, show-rooms, salespeople, and theInternet to increase sales. Doesit work? This years sales are upan amazing 35 percent whencompared to the previous year.According to Martin, a large

part of the increase is the resultof increased Internet activitythat attracts customers to hisdealerships.


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Will consumers use websites merely to simplify and speed up comparisonshopping?

Will customers purchase services and products online or end up buying at atraditional retail store?

What sorts of products and services are best suited for online consumershopping?

Which products and services are simply not good choices at this stage of onlinedevelopment?

Although an enormous amount of research has been done to answer these and otherquestions about consumer shopping behavior in traditional stores, relatively little hasbeen done to date about online consumer behavior. No doubt as more consumersmake use of online environments, an increasing amount of research will help to ex-plain how best to meet their needs. At the same time, the number and types of prod-ucts and services sold online also will expand.

In addition to providing round-the-clock global access to all kinds of productsand services, B2C firms often make a special effort to build long-term relationships

with their customers. The rationale for this approach is that customers should be val-ued not only for the immediate sale but also for future sales if they become repeat cus-tomers. Often firms will make a special effort to make sure that the customer issatisfied and that problems, if any, are quickly solved. While a little special attention

may increase the cost of doing business for a B2C firm, the customers repeated pur-chases will repay the investment many times over. Specialized software also can helpto build good customer relationships. Tracking the decisions and buying preferencesas customers navigate a website, for instance, helps management make well-informeddecisions about how best to serve such customers. This approach also can enhance in-

ventory decisions, buying selections, and decisions in many other managerial areas. Inessence, this is Amazon.coms selling approach. By tracking and analyzing customerdata, Amazon can provide individualized service to its customers.

Today, B2B and B2C models are the most popular business models for e-business.And yet, there are other business models that perform specialized e-business activitiesto generate revenues. Most of the business models described in Table 4.2 are modified

versions of the B2B and B2C models.



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table 4.2 Other Business Models that Perform Specialized e-Business Activities

Although modified versions of B2B or B2C, the following business models performspecialized e-business activities to generate revenues.

Advertising e-business model Advertisements that are displayed on a firms website inreturn for a fee. Examples include pop-up and banneradvertisements on search engines and other popularInternet sites.

Brokerage e-business model Online marketplaces where buyers and sellers are broughttogether to facilitate exchange of goods and services.Examples include eBay (www.ebay.com), whichprovides a site for buying and selling virtually anything.

Consumer-to-consumer model Peer-to-peer software that allows individuals to shareinformation over the Internet. Examples include MP3(www.mp3.com) and Morpheus (www.morpheus.com), which allow users to exchange audio, documents,photos, or video files.

Subscription and pay-per-view Content that is available only to users who pay a fee toe-business models gain access to a website. Examples include investment

information provided by Standard & Poors (www.standardandpoors.com) or business research provided by Forrester Research, Inc. (www.forrester.com).


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Creating an e-Business Plan

The approach taken to creating an e-business plan will depend on whether you are es-tablishing a new Internet business or adding an online component to an existing busi-ness. In this section we consider some important factors that affect both situations.

Starting Up a New Internet Business from ScratchFor a new Internet business, a good e-business plan should provide detailed answers tobasic questions. To begin, the planners need to determine if an Internet business willmeet the needs of a group of customers. Furthermore, the planning process shouldprovide planners with information that can help to identify and select groups of po-tential buyers, direct development of the online product or service, as well as the pro-motion, pricing, and distribution effort. The start-up planning also should indicate ifthe potential market will generate enough sales and profits to make the new venture

worthwhile. The answers to these questions will determine what type of businessmodel (B2B, B2C, or one of the specialized models described in Table 4.2) is appro-priate for the new Internet business. Sometimes more than one business model is ap-propriate. For example, British childrens author J. K. Rowling used the Internet to

launch her international marketing effort forHarry Potter and the Goblet of Fire. Thebook launch became an event, with advance sales of 5.3 million copies.9 Althoughmainly intended as a promotional effort to both bookstores and consumers, the web-site used both a B2B model and a B2C model. Eventually, many of these sales tookplace through Amazon.com and Barnesandnoble.com, as customers ordered onlineand had the books shipped as gifts to children for their summertime reading enjoy-ment. The website has grown since its inception and now serves as a site for ongoingmarketing and advertising of new titles.

Building an Online Presence for an Existing BusinessToday it is quite common for an existing business to add e-business activities. A busi-

ness that already has a physical location and a customer base generally looks at e-busi-ness as a way to expand sales to current customers and to add new customers who arebeyond the reach of the firms geographic location. For example, retail firms such asRadio Shack, Sears, and many others have turned to the Internet to sell more productsor to lead customers to physical stores in order to purchase products or services. Bothcustomers who are seeking the convenience of shopping online and those who aresimply using the website to view a retailers catalog of merchandise and promotionsbefore buying in a retail store can use the firms website to satisfy their personal shop-ping needs. Although developing an online presence may seem like a logical extensionof what a firm already does, there are important factors that must be considered be-fore using the Internet to sell products or services or provide information to cus-tomers. To see how starting a new Internet business differs from building an onlinepresence for an existing business, look at Figure 4.3. In the remainder of this section

we examine how these factors can change the way an existing business firm developsan online presence.

Are Online Customers Really Different? For an existing business, one of the firstconcerns is how an online customer differs from a customer who walks into its physi-cal stores. In some cases a firm may be reaching out to new markets that are geo-graphically dispersed and quite different in a variety of ways from the customers thefirm is used to dealing with in its physical stores. For example, customers who visit the

J.C. Penney website may be different from customers who visit a department store lo-cated in a shopping mall in a large metropolitan area. The online customers may live



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4 Understand the factorsthat influence ane-business plan.



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in a rural area, earn more or less money, and have different needs when compared withshoppers in a metropolitan area. If the customers are different with different needs,the task of developing appropriate strategies to meet their needs is more complex. Onthe other hand, if both types of customers are similar with similar needs, many of thesame methods used in the firms physical stores can be transferred to the web. Adver-tising, pricing, and shipping methods, for instance, that are already in place can be

used on the firms website.Generally, existing firms that want to sell products or services throughout the

world face additional problems when going online. For instance, besides the obviousdifferences in language, a website selling a product such as clothing or footwear mustprovide standardized sizes that are used in different nations around the world. In fact,designing a website that can successfully communicate to individual customers inother nations can be a challenge for online vendors that is far greater than eliminatinglanguage barriers or simply ensuring the display of proper size references to cus-tomers.

Complementing Existing Non-Internet-Based Plans The development of afirms e-business activities should be guided by one key objective: to complement theexisting non-Internet-based business plan. The e-business plan must be in line with

the firms overall goals and objectives. If customer satisfaction, for example, is consid-ered a weakness, providing information online and allowing customers to contact cus-tomer service employees by e-mail may reduce or eliminate the problem. But be

warned: Developing e-business activities that can be used to solve or reduce a firmsproblems can be a complex process that takes time. More information on how an e-business plan complements a firms other planning activities is presented throughoutthe remainder of this book.

Complexity and Time Concerns Every business must be prepared to allow suffi-cient time for customers, suppliers, and staff to adapt to the new methods of operation


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f i g u r e 4 . 3

Planning for a New InternetBusiness or Building an OnlinePresence for an Existing Business

The approach taken tocreating an e-business planwill depend on whether you

are establishing a newInternet business or addingan online component to anexisting business.

Is going online a logical way

to increase sales and profits

for the existing business?

SUCCESSFUL E-BUSINESS PLANNING

Starting a new

Internet business

Building an online presence

for an existing business

Will the new e-business provide

a product or service that meets

customer needs?

Who are the new firms

potential customers?

How do promotion, pricing,

and distribution affect the

new e-business?Will the potential market

generate enough sales and

profits to justify the risk of

starting an e-business?

Are potential online customers

different from the firms

traditional customers?

Will the new e-business

activities complement thefirms traditional activities?

Does the firm have the time,

talent, and financial resources

to develop an online presence?


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necessitated by the installation of e-business activities. Online solutions such asintroducing e-mail or a simple company website to help the staff communicatebetter with one another, customers, and suppliers can be developed and installedquickly without undue delay, cost, or disruption of current work responsibilities.However, as the complexity of the plan increases, so too does the amount of timerequired to design, install, and test the new solutionand then to train the staff touse it. All this is further complicated by the need to educate customers and suppli-ers, who will be expected to change to an unfamiliar method of placing orders,

making requests for information, and other typical business activities. Internetbanking, for instance, is growing in popularity, but it takes time for customers toget used to the procedures required to bank online. A strong customer supportsystem is critical to help those customers who may be confused about the onlinescreen menus, computer and connection problems, and anything else with whichthey may need assistance.

Social and Legal Concerns

The social and legal concerns of an e-business extend beyond those shared by all busi-

nesses. In addition to the issues presented in Chapter 2, e-businesses must deal withthe special circumstances of operating in a new frontierone without borders andwithout much in the way of control by government or any organization.

Ethics and Social ResponsibilitySocially responsible and ethical behavior by individuals and businesses on the Internetare major concerns. As discussed in Chapter 2, opportunity is a primary factor in de-termining whether people will behave unethically or illegally. Unfortunately, the In-ternet provides a shelter of anonymity and detachment for both individuals and firms.

These factors may explain why certain behaviors have surfaced. For example, an ethi-cally questionable practice in cyberspace is the unauthorized access and use of infor-

mation discovered through computerized tracking of users once they are connected tothe Internet. Essentially, a user may visit a web page and unknowingly receive a smallpiece of software code called a cookie. This connection may allow the sender to track

where the user goes on the Internet and to measure how long the user stays at any par-ticular website. Although a cookie may produce valuable customer information, it alsocan be viewed as an invasion of privacy, especially since users may not even be awarethat their movements are being monitored.

The special circumstances of social interaction in an online environment are alsoa matter of increasing concern. For example, in some cases, people engaging in on-line chat rooms will reveal personal information that they would never reveal in face-to-face settings. The online social environment, which encourages a false sense ofprivacy and security, tends to change an individuals behavior. People may buy things,say things, and do things they otherwise would not because of the effect of the virtual

environment. But none of this should be surprising. People behave differently whenthey are on vacation, at a party, or watching a baseball game in a stadium. The envi-ronment has an effect on us, whether it is a physical environment or one created incyberspace.

A number of issues about privacy and the distribution of questionable online con-tent, such as pornographic and hate literature, will remain issues of concern in theforeseeable future. Most ISPs and browsers allow users to block out websites identi-fied as adult in nature, and many chat rooms are supervised so that unacceptable lan-guage or behavior can be terminated. Nonetheless, given the openness of the Internetand the relative absence of regulation, online users will have to develop their ownstrategies for handling difficult ethical and social situations.



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5 Discuss the social andlegal concerns ofe-business.


cookie a small piece ofsoftware sent by a websitethat tracks an individualsInternet use


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Privacy and Confidentiality IssuesBesides the unauthorized use of cookies on users computers to track their online be-havior, there are several other threats to users privacy and confidentiality. Accordingto research by the University of Denvers Privacy Foundation Workplace SurveillanceProject, more than one-third of the forty million U.S. employees who work onlineabout fourteen millionare under continuous surveillance by their employers.10

Monitoring an employees log-file records, which record the websites visited,

may be intended to help employers police unauthorized Internet use on companytime; however, the same records also can give a firm the opportunity to observe whatotherwise might be considered private and confidential information. The PrivacyFoundation study suggests that at the very least, employers need to disclose and pub-licize the level of surveillance to their employees and consider the corporate motiva-tion for monitoring employees behavior.11

Some firms also practice data mining. Data mining refers to the practice ofsearching through data records looking for useful information. Customer registrationforms typically require a variety of information before a user is given access to a site.

When this is combined with customer transaction records, data-mining analysis canprovide what might be considered private and confidential information about individ-uals or groups. For example, suppose that a website offering free access to health in-formation requires users to fill out a detailed registration form before they are granted

a user identification and password. As a result of this voluntary disclosure, website op-erators can easily uncover correlations between users demographic factors, such asage and gender, and the specific health topics and issues that interest them. The web-site operators could then conceivably sell this information to pharmaceutical firms.

The information sold might suggest that there is a large group of potential customersover the age of 50 that have a high level of interest in a particular type of medicationthat the firm manufactures. Once this information is obtained, the pharmaceuticalfirm could begin a marketing campaign to educate potential customers about thebenefits of their product.

Advocates for better control of how information about users is collected and dis-tributed to interested third parties such as businesses point to the potential misuse ofinformationintentionally or otherwise. If an individual, for instance, frequents a

website that provides information about a life-threatening disease, an insurance com-

pany might refuse to insure this individual, thinking there is a higher risk associatedwith someone who wants more information about this disease.

The ability to collect and analyze personal data is critical for the industry if it isgoing to compete for advertisers spending, and so it must learn to do this ethically. Tohelp deal with this issue and to support industry self-regulation, the U.S. Federal

Trade Commission (FTC) approved the formation of the Network Advertising Initia-tive (NAI) in 1999. The NAI, which is made up of over 90 percent of Internet adver-tisers, including the industry leaders DoubleClick and 24/7 Real Media, wasestablished to set rules and guidelines for the collection and use of personal data. TheNAI prohibits the collection of personal data from health and financial services web-sites that individuals are likely to visit. However, the NAI permits the cross-referenc-ing of personal and web-collected data, provided that the user is informed that this istaking place and is allowed access to his or her records. By requiring the consent of

users and making the process somewhat more open to scrutiny, the NAI has helpedmake online data collection more ethical than it used to be and lends support to the ar-gument that the Internet can regulate itself without undue government interference.

Security Concerns and CybercrimeBecause the Internet today is often regarded as an unregulated frontier, both individ-ual and business users must be particularly aware of online risks and dangers. Accord-ing to research conducted by Computer Security Services, Inc., 85 percent of thefirms surveyed had detected online security breaches during the previous year.12



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log-f i le records files that

store a record of the websitesvisited

data mining the practice ofsearching through data recordslooking for useful information


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Computer viruses, which can origi-nate anywhere in the world, are soft-

ware codes designed to disrupt normalcomputer operations. Their potentiallydevastating effects have given rise to asoftware security industry. Nortons an-tivirus program, distributed by Syman-tec (www.symantec.com), is only one

of several well-known products thathelp to screen out incoming files con-taining unwanted viruses, such as theinfamous Love Bug. As long as unde-sirable data can be transmitted easily,

viruses and other forms of online ha-rassment will remain a security issueand a business opportunity for firms likeSymantec, which must continuously re-

vise its software to deal with newly is-sued viruses.

In addition to these risks, individualusers and businesses must watch for

criminal activities, including fraud and larceny. Because the Internet allows easy cre-ation of websites, access from anywhere in the world, and anonymity for users, it is al-most impossible to know with certainty that the website, organization, or individualsthat you believe you are interacting with are what they seem. Just for a moment, con-sider how easy it is to use the Internet to defraud someone. A crook intent on de-frauding someone can build a website that appears to be a legitimate charitableorganization dedicated to raising funds for a worthy cause. Through various onlinepromotional efforts such as e-mail campaigns and banner advertising, unsuspectingindividuals may be enticed to make a quick donation to the cause by entering theircredit card information in an online form that is conveniently displayed on the websiteor by putting a check in the mail, typically addressed to a post office box. If the indi-

vidual uses the website to make a donation by credit card, the crooks can use creditcard information to make unauthorized purchases. A second type of fraud occurs

when a website offers to sell products at an unbelievably low price but never deliversthe products, even though it collects the funds. By the time authorities are made awareof the fraud, the website operators usually have abandoned the site and set up a new

website and repeated the process. These scenarios are similar to older-style mail fraudbut are more complex and difficult to control because fraudulent websites can be setup anywhere in the world and often will be located in areas where the authorities arereluctant to interfere with the operators. As always, caveat emptor(let the buyer be-

ware) is good advice to follow, whether on the Internet or not.To alleviate consumer concerns about online purchasing, the major credit card

organizations such as MasterCard and Visa have instituted various programs to pro-tect cardholders against fraudulent use of their cards on the Internet. For example, thesecure electronic transaction (SET) encryption process, which was developed by

MasterCard, Visa, IBM, Microsoft, and Netscape, prevents merchants from ever actu-

ally seeing any transaction data, including the customers credit card number. TheSET encryption process is described in more detail in Chapter 17.

Digital Property and Copyright ConcernsA major concern for businesses that use the Internet to distribute content is the legalright to control content ownership, commonly referred to as copyrightlaws. Mostaffected by this issue are the music and publishing industries. Both have had to deal

with new technologies that have allowed individuals to make copies of their content.


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computer viruses softwarecodes that are designed todisrupt normal computeroperations

secure electronictransaction (SET) anencryption process developedby MasterCard, Visa, IBM,Microsoft, and Netscape thatprevents merchants from everactually seeing any transactiondata, including the customerscredit card number

copyright legal right tocontrol content ownership

Troops aboard the carrierTheodore Roosevelt sende-mails back home. The oldadage that loose lips sinkships has a new meaning nowthat deployed troops can sende-mails to friends and relativesback home. Concerned thatsensitive data might leak out,soldiers and sailors are toldnot to send detailed,operational information thatcould be used by an enemy.


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According to research conducted by Jupiter Media Metrix, the online music indus-try will be worth over $6 billion by 2006, suggesting that there is a huge market op-portunity for both large and small competitors.13 Now, with software provided bysuch firms as MP3 (www.mp3.com) and Kazaa (www.kazaa.com), any Internetuser can create a file of a song online and then send it to someone else, without everpaying the copyright owner. As far as the music industry is concerned, every copy ofa song passed along freely on the Internet represents lost sales revenue from a cus-tomer who otherwise would make a purchase. As a means of dealing with this prob-

lem, some music companies have begun to sign distribution contracts with firmssuch as MP3 in order to gain more control over the distribution of their content.Others have sought a solution by establishing a software mechanism of their ownmaking that allows the distribution of music online but prevents its free distributionby those who are unauthorized. For example, MusicNet (www.musicnet.com), aservice set up jointly by RealNetworks, AOL Time Warner, EMI Group, Bertels-mann AGs BMG, and Zomba, was established to control legal distribution of thefirms content.

In addition to problems in the music and publishing industries, available tech-nology makes it quite easy to copy and use a company name or recognized trade-mark, such as McDonalds golden arches, without permission. Most firms postinformation about how their names and trademarks may be used legally and under

what circumstances links to their sites can be made. However, there are many people

who see the Internet as an open and unregulated environment and believe that nogovernment or company should be able to control the distribution of informationonce it reaches the Internet. To combat this problem, most firms will take legal steps,if necessary, to protect their property, including brand names and trademarks, fromunauthorized use.

Government Regulation and TaxationFor the most part, government regulators have come to view the Internet as just anextension of regular business activity of firms operating in their jurisdictions. To theextent that online business activities resemble traditional business activities, the samerules and regulations apply whether businesses exist entirely or only partially online.

Therefore, when it comes to the collection of sales taxes on products and servicessold online, you would think that online firms would be responsible for collectingsales taxes and then remitting them to local and state governments. This is not thecase, and although state and local governments are working toward a uniform salestax policy for online sales, online vendors are legally treated like mail-order compa-nies, which collect sales taxes only if they have a physical presence in the customersstate. American buyers are expected to pay local use taxes on products bought in otherstates, but the responsibility for paying the use tax is the customers, not the sellingfirms.

Another area of concern is the sale and distribution of restricted products such asprescription drugs. In most areas, a person must present a doctors prescription to apharmacist to obtain restricted drugs. The Internet allows anyone to obtain medica-tions online and, in some cases, with only a claim to a prescription and a credit card. It

is, however, the legal responsibility of the online pharmacist to verify the validity ofthe order and to look for abusive patterns, such as doctors prescribing unusually largequantities of certain drugs for one patient. Nonetheless, the fact that prescriptiondrugs can be bought online with relatively little difficulty opens the way for theirbeing sold in the illicit drug market.

Although it should be emphasized that most firms attempt to ensure that their on-line activity is fair and legal, the Internet presents a great opportunity for illegal activ-ity in which profit is a major motivator. In the absence of stricter government control,legal and ethical issues in the online environment will become even more pronouncedas more firms move their traditional businesses to the Internet.



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The Future of e-Business: Growth, Opportunities,and Challenges

Since the beginning of commercial activity on the Internet, developments in e-busi-ness have been rapid and formidable. Before the abrupt slowdown in e-business activ-ity that began in 2000, Forrester Research, Inc., a research firm located in Cambridge,

Massachusetts, had predicted that global Internet commerce would soar to $6.8 tril-lion by 2004, up substantially from earlier growth estimates.14 However, by 2002,

worldwide B2B e-commerce estimates were only at $823.4 billion for the year, withstrong optimism for B2B trade to reach $2.4 trillion by 2004, according to eMarketersE-Commerce Trade and B2B Exchanges report.15 Clearly, the slowdown in e-busi-ness activity that began in 2000 continues to undermine confidence in such predic-tions. However, we can safely say that the long-term view held by the vast majority ofanalysts is that the Internet will continue to expand along with related technologies.

To date, only a small percentage of the potential global users have gone online.Current estimates suggest that perhaps between 400 to 500 million people use the

web on a daily basis. However, according to research by Ipsos-Reid, Inc., even amongthe most developed Internet markets in the world, such as the United States, Canada,Sweden, and the Netherlands, about one-third of the people who could use the Inter-

net choose not to do so. In fact, Ipsos-Reid found that only 6 percent of the worlds sixbillion people are online, suggesting great opportunities for growth if more peoplecan be persuaded that the benefits are worthwhile.16

Measurements of GrowthMeasurements of e-business growth not only illustrate the magnitude and scope ofhow much has happened in just a few short years but also indicate trends for the fu-ture. According to research by Jupiter Media Metrix, by 2006 there will be about 210million online users in the United States, up from the current level of about 157 mil-lion.17And research suggests that global Internet users spend an average of 7.6 hoursonline each month. Users from the United States and Canada spend the most time,

with a combined average of nearly 13 hours per visitor per month, whereas users inEurope spend, on average, just over 5 hours a month on the Internet.18More indica-tive of Internet usage, however, are the data from Nielsen/NetRatings surveys show-ing that monthly average use was 13 hours online at home and 31 hours at

worksuggesting the importance of the Internet as a work-related tool.19

The popularity of websites varies depending on the country and the researchfirms methodology. Because users preferences change over time, these ratings, like

those of television and radio shows, are meaningful only ifthey are current. Up-to-date usage statistics, ratings, andrankings are available from firms that perform market re-search. For example, Jupiter Media Metrix reported that AOL

was the most popular site in 2002, with about ninety-threemillion unique visitors. (A unique visitor is a single person

who visited at least once during the month; repeat visits by thesame person are not counted.) Microsoft sites followed AOL,

with eighty-four million unique visitors, and Yahoo! rankedthird, with eighty million.20

Even with the economic downturn, the Internet will con-tinue to offer great opportunities for growth. Firms that adaptexisting business models to an online environment will con-tinue to dominate development. Books, CDs, clothing, hotelaccommodations, car rentals, and travel reservations are prod-ucts and services well suited to online buying and selling.

These products or services will continue to be sold in the tradi-



126

6Explore the growth,

future opportunities,and challenges of

e-business.


What do e-business players read to keep up to date

on other people, ideas, and trends in the fast-paced

world of e-business? Although there has been an in-formation explosion due to the Internet, the answer is

likely to include the following:

Wired:www.wired.com

Fast Company:www.fastcompany.com

Worth:www.worth.com

The Industry Standard:www.thestandard.com

CNET News:www.news.com

ZDNet:www.zdnet.com

U s i n g t h e I n t e r n e t@


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tional way, as well as in a more cost-effective andefficient fashion over the Internet.

The most exciting prospect for businesses andcustomers is not the conversion of existing businessactivities to e-business activities but the creation ofaltogether new and unique products and services.

While there are many examples of how the Inter-net can be used to distribute new and unique prod-

ucts, consider how the Internet is changing themusic industry. As noted earlier, MP3 and Kazaaare only two of the firms providing software for thedistribution of music directly to customers. Alsonow emerging are independent online music web-casters, which are presented to Internet users asonline radio stations. Thus, in addition to enablingexisting radio stations to find a global audience fortheir product, the technology exists for independ-ent producers to set up their own unique radio we-bcasting stations. Netscapes webcast radio service(http://radio.netscape.com) provides informa-tion about how private and public webcasts can

be created.

Environmental Forces Affecting e-BusinessAlthough the environmental forces that are at work are complex, it is useful to think ofthem as either internal or external forces that affect an e-business. Internal environ-mental forces are those that are closely associated with the actions and decisions takingplace within a firm. As shown in Figure 4.4, typical internal forces include the firmsplanning activities, organization structure, human resources, management decisions,


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$78.8 billion 1,283deals

2001 20022001 2002

$23.3 billion

Internet merger andacquisition activityInternet merger andacquisition activity

1,087deals

Although the number of deals was similar for this

2-year period, the dollar value decreased greatlyin 2002 due to the economic downturn.

Although the number of deals was similar for this

2-year period, the dollar value decreased greatlyin 2002 due to the economic downturn.

Spotlight

Source:www.webmergers.com.

f i g u r e 4 . 4Internal and External Forces thatAffect an e-BusinessToday, managers andemployees of an e-businessmust respond to internalforces within the organizationand external forces outsidethe organization.

Planning

activities

Globalization

Competition

Society

Technology

Demographic

factors

Legal

issues

The

economy

Political

forces

Available

financing

Internal forces

External forces

Organizational

structure

Human

resources

Management

decisions

Information

database

Successful

e-business


23/29

information database, and available financing. For example, a shortage of skilled em-ployees needed for specialized project work can undermine a firms ability to sell itsservices to clients. However, management might consider a particular project or client

worthy of the effort required to recruit the needed staff from another country or paypremium salaries. Unlike the external environmental forces affecting the firm, internalforces such as this one are more likely to be under the direct control of management. Inthis case, management can either go out and hire the needed staff or choose to passover a prospective project.

In contrast, external environmental forces are those factors affecting e-businessplanning that originate from outside the organization. These forces are unlikely to becontrollable by an e-business firm. Instead, managers and employees of an e-businessfirm generally will react to these forces, attempting to shield the organization fromany undue negative effects and finding ways to take advantage of opportunities in theever-changing e-business environment. The primary external environmental forcesaffecting e-business planning include globalization, society, and demographic, eco-nomic, competitive, technological, and political and legal forces.

No discussion about the future of e-business would be complete without men-tioning four specific external forcesglobalization, convergence of technologies, on-line communities, and partnering onlinethat are already changing e-business firmsaround the globe.

Globalization Globalization is currently the focus of a great deal of discussion anddebateand with good reason. For many people, globalization is a positive force thatis drawing the people of the world together to live under universally shared standardsof culture, communication, technologies, and economics. To others, globalizationrepresents a threat to their national cultures, identities, languages, and even their wayof life.

Regardless of whether you think globalization is good or bad, it is highly associ-ated with growth of the Internet, which helped speed the delivery of new ideas and in-formation to people around the globe. Simply put, the Internet exemplifiesglobalization because a person with a computer and Internet access in North America,Europe, Africa, or Asia can access information and conduct business online with any-one with similar access anyplace in the world. The way one companySAPfoundto sell its software products in global markets is described in the Going Global boxed

feature.Because of globalization, it is not uncommon to find software engineers in India

doing programming for American-based firms that are selling products to Germancustomers. Along with this collaboration by workers on the production of globally dis-

tributed products and services comes thetransfer of business methods used in dif-ferent parts of the world. In addition, jobsthat previously would not have been avail-able to engineers in India or any other na-tion in the world because of geography,trade barriers, and other restrictive factorsare now made accessible because the In-ternet creates a virtual workplace, allow-

ing individuals anywhere to be part of aglobal network of production and market-ing efforts.

Convergence of Technologies As we-bcast radio illustrates, the borders oftelecommunications technologies forelectronic distribution of sound, images,and text have become less clear. Today wecan send and receive e-mail from pagers,interact with the Internet from a small



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The real thing: A new wayto purchase Coca-Cola.Japans top mobile carrierNTT DoCoMo and Coca-Colahave developed newtechnology that allowsconsumers to use their cellphones to purchase soft drinksfrom a vending machine. Thesystem uses an infrared signalto turn the cell phone into acash card that works withspecially equipped vendingmachines.


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screen on a cell phone, and even have visually active telephone conversations. Thisphenomenon of overlapping capabilities and the merging of products and servicesinto one fully integrated interactive system is referred to as the convergence of tech-nologies. This convergence may well lead to interactive television programs, which

would allow viewers to select their preferences in the way a program is presented.Viewers of a cooking show, for example, might be able to select whether they wouldprefer instructions for regular or nonfat cooking. The profile of the viewers personaltastes and preferences could be maintained so that the next time the viewer watchedthe cooking show, the profile would be entered automatically and the appropriate dataprovided on the screen.

Online Communities Online communities,which are made up of groups of indi-viduals or firms that want to exchange information, products, or services over the In-ternet, are a phenomenon that is likely to grow. One example of a thriving onlinecommunity is iVillage.com, a commercial site for women. Other online communitiesinclude buyers groups, such as OnVia.com, a site that helps small businesses securegovernment contracts online. Online learning communities continue to evolve as sites

in a wide variety of fields, allowing people who share an interest or concern to com-municate with each other. Geocities.com is only one portal to a huge selection of on-line communities.

Partnering Online While opportunities for independent e-business effort will con-tinue, online partnerships, which can be of benefit to both large and small firms, arelikely to be increasingly common. By playing a role within a larger entity, small firmscan enjoy competitive advantage and access to marketable items, thereby increasingtheir rate of market penetration. A review of the major e-business sites, includingthose of IBM, Microsoft, and Oracle, indicates that the e-business approach taken bythese firms involves local business firms.


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SAP: Thirty Years in the Businessof e-Business

SAP, BASED IN WALLDORF, GERMANY, has

been giving companies an electronic boost since well be-fore the term e-businessbecame popular. Fast-food giantBurger King uses SAP software to share and analyze fi-nancial information worldwide. The Royal Dutch/ShellGroup uses SAP software to make business informationin centralized databases available to all 85,000 of itsglobal employees. Although SAP was founded in 1972, itdid not expand to serve customers beyond its home coun-try until five years later. Today, more than 17,000 compa-nies in fifty countries rely on SAP systems to bridge milesand time zones so that their employees, customers, andbusiness partners can collaborate electronically.

When a company such as Burger King installs a web-

based mySAP.com system, for example, its managers andemployees can log onto the customized site from any lo-cation at any time. Once they enter their passwords,they can connect to shared documents, databases, pro-grams, and analytical tools. If management chooses,

trusted suppliers and partners also can be granted accessto specific areas within the sy

Navigating the World of E-business

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