TRENDS AND BUSINESS ADVANTAGES OF e-COMMERCE
Introduction
E-commerce is continuously marking its significance in the daily life of internet users. However, its use is largely limited to modern countries because of cultural, economic and structural compatibilities. Poor and developing countries that represent most of the unfilled space for e-commerce are undermining the benefits of technology-based trade. As a result, the capabilities of global e-commerce are significantly undermined because majority of nations have underdeveloped infrastructures and cultures. Trading in a global scale is not really attained rather on its partial and minute phase. Until less developed countries can catch-up, the effectiveness and scope e-commerce will continuously puzzle businesses and consumers. This paper discusses the definition of e-commerce, some statistics, trends and factors that can affect the direction of e-commerce growth.
What is e-Commerce?
Short for electronic commerce, it is the process of buying and selling goods in the Internet particularly using the platform World Wide Web (2007). It can take the simplest form of ordering via telephone to more advanced exchanged exhibited in Internet transactions. In strict sense, it only includes negotiations through online systems such as the Internet, Extranet, Electronic Data Interchange Network and electronic mail system. This definition would exclude facsimile and telephone networks because parts of the transaction such as payment are done in an offline manner. Advanced e-commerce requires combination of different applications and systems such as shopping cart, network, security and payment processing (2007). According to (2007), e-commerce is also classified according to transactions between business to business (B2B) and business to consumers (B2C).
Businesses and transactions that are supported by e-commerce are embraced by a concept called network externality. It is a phenomenon that injects domino effect for the users of the online service particularly the consumers (2007). These consumers would be either positively or negatively affected by the network depending on the by changes of purchase trends of the consumer base. This makes e-commerce a highly advantageous yet highly risky engagement and platform. It provides interactivity, convenience and efficiency to transactions which businesses highlight on their marketing campaigns to attract consumers. However, there are threats of computer and network attacks which can prevent online service of the web interface of the business and can also lead to hacking confidential information of the consumers (2003). Once the e-commerce system of the business is tarnished, finding abrupt solution can be problematic and costly while decline in loyalty from current customers is very likely.
What is e-Commerce Statistics?
Global statistics of internet usage will reflect the number of potential and current users of e-commerce (refer to Figure 1). Asia, Europe and American regions posted the highest internet users by number garnering 418, 322 and 233 million heads respectively ( 2007). On the other hand, internet penetration or the percent of internet users to total population is ranked the highest in North America, Australia and European regions with 69, 54 and 40 percents respectively. This means that there are numerous potential internet users in Asia that are yet to be inclined in internet technology which only have 11% internet penetration. The global average of penetration is 18%. As e-commerce is also positively-related to advertising, top-1 Adverstising.com results of 88% reach or 157 out of 178 million unique visitors can also mean that most internet users are involved in trading online (2007).
What are the Trends in e-Commerce?
e-Banking
The banks’ enter into the realm of insurance provision to its customers brings forth a needed strategy to deliver the service in a fast, flexible and reliable manner which information technology has the advantage. According to the study and review conducted by progressive on-line insurance offerings were characterized by interactivity and simplicity of insurance forms with policy holder’s ability to update their insurance through a secured log-in account ( 1997). Simply put, insurance application and execution need to be customer-friendly. Can the bank maintain e-commerce and still be profitable? Is there a need to locate strategic partners who has the knowledge and experience in insurance industry?
According to (2000), insurance internet carriers capitalize on e-commerce due to cost advantages brought by the absence of overhead costs of maintaining branch locations and agents (p. 71). They transact and serve customers on-line or through phone. Most banks are popularly known because of heavy marketing and establishment of several offices across a country. Also, there is a possibility brokers can infiltrate and “steal valuable banking customer through virtual offerings”. Because of the cost-savings and security doubts to e-commerce in transacting insurance services, banks opted not to sell insurance in the internet while others used cooperative strategies (like First Union Bank’s alliance to The Hanford) and acquisitions (like North Carolina-based Wachovia Bank’s purchase of Tampa-based , an insurance broker) wherein the risks became diverse and minimal. However, these cases were few.
Most insurance companies have difficulties to adopt e-business model and strategy because of the likelihood to commit alienation of the existing distribution channel built by the firm’s agents, tedious application procedures, lack of universality in business processes and complex regulation from government intervention (1986). Such factors serve as disincentive for them to exploit the positive prospects of information technology. How then could banks create competitive advantage with them? The above challenges created a suitable condition for banks to pursue integrated financial services model which not only highlights the traditional lending and keeping services but also advisory, brokerage and now, insurance offerings. Since several banks are evaluated to be limited on cost-savings and security aspects, a context strategy can spark opportunities to exploit the estimated 38% annual growth rate on bank insurance premium that forecasted to start on 2004.
Context strategy situates a bank to offer different line of services from the traditional (i.e. lending) to more unusual but effective (i.e. legal services, postage) that could be sold profitably on the web. This can be obtained through diversification on its own or through others’ help by acquisition, strategic alliances and other cooperative endeavors. However, a “strong brand and relationship management capabilities” (2003) are needed to be successful in this strategy. The knowledge of a bank on customer needs and trends, synergy in culture and resources against the prospective insurance partners and experience in banking industry are the short lists to consider.
Engaging in e-commerce and context strategy in providing insurance services can foster “growth, large revenues and customer loyalties” (2000). There is a potential market awaiting an interactive and convenient alternative to insurance application. A bank only have to realize its strengths and weaknesses, put it in a framework, plan and determine if there is a need to partner an insurance firm and introduce or perhaps create a virtual synergy to top the strategy with profitable icing. With this, it could survive the present competitive landscape wherein banks offer other value-added services as brokerage and insurance firms are acting like the former.
e-Transactions
Until 1997, Massachusetts Institute of Technology (MIT) was adopting campus computer resale (1999). As environment changed and competition intensified, problems of this operational scheme started to emerge. The organization was doing business with 14,000 suppliers, 7,000 requisitions were done annually, inventory costs rose to million, storefront manpower requirement was 19-fulll time employees and 80% of the paperwork was orders under 0 at a cost of 0 per paper transaction. As margins decreased and overhead increased, MIT had to use a different purchasing model to fit the current competitive environment. MIT teamed-up with NECX, a vendor with e-commerce and Electronic Data Interchange (EDI) capabilities. The partnership created an online catalog where the former recommended-products and the latter pre-sales information were viewable.
In 1997 and 1998 operations, the e-procurement purchasing model had provided several benefits which can be discussed suing value-added equation (refer to Figure 2). The right hand side of the value-added equation is largely affected. S increased as 1997 sales reached .8 million while 1998 sales rose by 44% up to .8 million. On the other hand, B decreased as cost of good sold was reduced to 0,000 in 1997. The pressure to S was also lessened as inventory and carrying cost were eliminated while paper procurement process was reduced up to a level where it was regarded as the most significant cost saving. DP was also trimmed down when the floor space of the store was transformed to a mere showroom for the display of MIT selected and largely recommended computer products. However, there is an obvious adverse effect to the left hand side of the equation when employees were downsized to only four from the original nineteen. This is a scenario when one major stakeholder was undermined in favor of operational efficiencies (2005).
The increase in S, decrease in B and DP as well as other costs aggregately increase value-added distributable to stakeholders. The revitalized purchasing strategy generated by MIT led to this favorable state. Through e-procurement, individual and departmental customers that use the institution’s network can readily check the availability, price and specifications of the recommended products. MIT and NECX only included in the electronic catalog computer products compatible within the network. When customers order, the 30,000 suppliers and EDI capability of NECX will efficiently ship and provide after-sales service to end-users. On the other hand, MIT was responsible for consultancy (with four showroom employees) regarding the future status of compatible hardware, software and other accessories for the network. This, however, beat employee welfare as the adverse effect to the right hand side is isolated to W which in turn benefits other stakeholders.
Value-added was derived in the increase in S due to faster response to orders as MIT purchasing activities was relieved and passed to NECX. MIT was able to focus its core competencies in improving the network environment and making the products of NECX buyable. MIT did not led to complex operation as the partnership developed 30,000 from 14,000 suppliers. This advent even increased product differentiation, order availability and customer convenience. B is deducted with academic discounts aside from operation efficiencies and reduction in overhead from the former resale store. Consequently, the absence of resale store resulted to lesser DP in inventory, delivery vans, building use and other assets. The right hand side is maximize while deductions were minimized leading to optimal value-added outcome. Obviously, wealth distributable to stakeholders will be in better amounts except to MIT employees.
The interesting point here is that the supposedly increased in wealth of MIT could be in doubt as they downsized employees from 19 to 4 after e-procurement. This would mean that the contribution of employees was paid without regards to positive value added phenomenon (1999, ). It can be argued that by efficiency or automation other stakeholders can benefit from reducing the workforce as long as one right hand side factor will be undermined before distribution. Clearly, the bold demarcation of value-added and profit accounting can be derived. Profit equation (see figure 2) does not highlight the impact of the net result of operations to all major stakeholders. In the contrary, value-added equation separates the beneficiaries of wealth (the right hand side) from the catalysts of wealth (the left hand side elements). This implicitly indicates that the right hand side is untouchable or not responsible to any stakeholder welfare.
The value-added statement in Britain referred its profit-undermining concept as a part of social responsibility reporting (Belkaoui, 1999, p. 30). With this reference, authorities can question MIT about its workforce reduction as value-added reporting shows how productive (p. 39) not how efficient an organization is in using its resources. Efficiencies in paperwork, inventory costs, supplier communication, among others are in doubt if such were eliminated in a productive manner. Productive in the sense that they are managed to positively affect value-added attributable to stakeholders and not to prevent MIT responsibility on stakeholders. In this case, the net value-added is overstated (if not, distorted) because the operation failed to sustain the productive capacity of these purchasing activities to sustain the social responsibility of the organization particularly to its employees.
As the left hand side of the equation is the catalysts of value, the right hand side should be static at the end of the operation. In addition, the latter should not be responsible to other corresponding elements or other stakeholders. Value-added reporting concerns social responsibility and not the isolated welfare of shareholder, government, creditor or the firm. Further, the operation cycle of an organization is reflected in the equation. As pre-operation requirement, the organization employs labor, borrows money to creditors when financing fall short of budget, gets shareholder support for continuing the business or expansion, uses government roads and other infrastructures and involves its internal funding (W + I + DD + T + R). At the end of the productive operations, the organization results to a level of gross productive outcome deductible by input payments and asset reconciliation (S – B – DP). The residual or the level of the net productive outcome will be evaluated based on its ability to repay stakeholders.
When analyzed, MIT has became efficient rather productive during the adoption of e-procurement. Profit model rather value-added can best highlight this evolution. Since at the end of the operation, W in the right hand side is reduced, the contribution of W during the non e-procurement years (like friendship of sales people with customers) is undermined and extracted by automation. In addition, the marketing contribution of the former campus computer resale store was undermined and extracted by virtual environment. This made the distorted rise in the wealth of MIT as the accumulated contribution of W and store are passed to e-procurement as there was a pick-up of S and cost-efficiencies in B and DP. MIT should had paid for W or DP specifically at the end of operations but e-procurement made the organization efficient that enabled them to avoid the payment, thus, seemingly led to increase in wealth.
e-Learning
There are counter-arguments to the stated advantages of e-books in Gates’ essay that can be illuminated across the society ( 2004). For an individual, the provision of e-books of “audio-visual and flexibility through web linkages” not only improve understanding to a book’s contents but also impede pacing and concentration. Audio unique intonation, startling images and explanatory quotes from external links need additional time and effort for a curious reader. Unlike the traditional book, a reader is confronted by mere words with supporting illustrations on the same page that develops reader intimacy and flow.
For the household, the “storage portability of e-books” prevents simultaneous reading that will result to isolation of other interested members of the family. Information tends to slow. Or the other scenario, the first reader would slip of telling the important facts of the story that could spoil the interest of other members. On the other hand, when there is a common library, family members have wide array of books to select at. Even old ones, when securely stored, are worth reading. No need to pressure the current user of e-books that could minimize comprehension, or worse, result to conflict.
In the macroeconomic view, situating the technology in the less developed country would detach Gates’ projection of “improving literacy and education”. In most of them, poverty is the result of heavy corruption, warfare and strong belief of mediocrity practices that are likely to hamper the introduction of such technology. With paper books’ simplicity, any interested citizen would not be deprived for information only because of deprivation or absence of technology.
The opportunity lies in the ability of e-books to flourish in top-20 countries that have the technological and cultural infrastructure to use and maintain demand for them. Developing countries and other poor nations cannot support the demanding requirements of e-books and are more inclined to traditional learning process in print books. Business must establish the potential of e-books to strategic locations where electronic learning is accepted and exercised. If e-books will be located in poor economies, problems and difficulties cited above will only be the result. However, if it will be situated to economies that can embrace its features, the efficiency and interactivity it offers can fully be realized. E-books are part of e-learning and online education that universities cater to offshore students who wanted international education at local study room. In this view, e-books also develop in developing nations particularly in the upper market sector and urban areas.
e-Government
E-commerce is created and developed largely to make life easy, processes simple and broaden possibilities (2003). People can do many things in a moment and complete them in fast manner with minimal effort. As for not-for-profit organizations (NPO), the use of computers including key features like office programs (e.g. MS Word, MS Excel, etc.), networking, Internet and automation/ robotics is relatively less rampant or less required compared to for-profit ones. NPO like the offices and bureaus of the government are not only responsible to provide services to citizens per se but also balance the interactions of other sectors like business, foreign and other sub-groups (e.g. environmentalists, activists, terrorist, criminals, etc.).
The functionality of e-commerce is demanded to indefinite expansion to the needs of universal stakeholders within the jurisdiction of the specific government office. Computers are not only means to one end but ends in this situation. As a result, the impression creates bottleneck and confusion to politicians and public servants. For example, once toll fee payment is automated where car-owners and drivers do not have to speak to the toll teller and this strategy is dubbed as breakthrough in the transportation industry, the Department for Transportation would shoulder substantial risks of “break-away” or increase in hijacking due to reduction of toll fee guards.
In this particular issue, the government would prefer status quo rather drastic innovation because the former is attached with lesser risk of negative public opinion and even rage in times of innovation failure. In addition, there are no promises in connection with status quo that processes are familiar with the public and there is minimal need for substantial investment in both construction/ planning of the innovation and information to the public on how to use it. Therefore, computers which are integral element of any government-led innovation (i.e. also true to for-profit ones) are not used entirely in such feats that also limit potential public benefits (i.e. also costs).
Investments in computerization of government offices especially up to the point of maximizing the boundaries of information technology also serve as burden not only financial but also in terms of adaptation of the workforce and acceptance of managers/ officials. This issue is particularly eminent in developing and poor countries wherein the difference of public and private firms is significant. One is the requirement of training to employees which can be difficult as motivation of mostly old-age employees is at low levels. Another, there arises conflict of interest in automation and the extent of employees to minimize the demand of their job. When computers are introduced, there is likely demand for efficiency and re-engineering in the stages of job completion which may be resisted by employees who used to have “extended breaks”. Lastly, questions of validity in automation is advised as it displaces labor productivity that can be detrimental of government’s objective of job creation.
Perhaps, the last point is the strongest and valid (e.g. it is supported with macroeconomic models) in three of the arguments. The government would not predate its own objective particularly to the extent that is would ultimately demise their ability to address unemployment and underemployment problems. When computers are already installed in public terminals, withdrawal of them would cost the public substantial loss in both financial and “expectation” areas. As a result, the government does not commit its funds to increase computer usage to prevent cost and risk of unfamiliarity of the aftermath and the bold challenge of trying to bypassed and be exempted in labor economic models.
E-Government is a phenomenon that is happening in the developed world but the arguments above are more directed to developing nations. However, the entry of government to e-commerce can defeat free market structures as they can overlap the objectives of the private sector. Developed nations can do this because the actions of government are well-aligned with the actions of the private sector and definitely these governments have substantial funds compared to poorer nations. This is a call for less developed countries to iron-out corruption and increase monitoring of private sector activities for the government to have a framework on where to invest its limited funds. The opportunities of following developed nations are beneficial to the improvements of the economy and undermine the arguments presented above which is rooted to imperfect information between less developed governments and their private sector.
What are the Factors that Affect e-Commerce Growth?
The major barrier against the big developments in internet security and computer applications is the inequality of technology distribution in the world. E-commerce is limited to top-20 countries that average 50% internet penetration compared to bottom-200 countries that average less than 5% (2007). Another issue to consider is cultural restrictions which can disrupt each institution of a nation towards internet adoption. This is especially true when addressing human capital capabilities with available technological infrastructure. If ability and willingness is absent, government and corporate efforts will be ineffective. The best example is the Chinese conservative model in e-commerce adoption where information and transaction are filtered by the government due to fear of political and cultural implications from the West (2005). When cultural barriers are surpassed, it would only be useful to address requirements for foreign direct investments (i.e. through trade pacts) to stimulate supply and demand for e-commerce.
Threat of entry in e-commerce is low because first mover advantage is inherent to businesses that gain customers loyalty through time ( 2001). The new entrant may find it difficult to create its own network externality and arrive at the same customer volume as the first mover. Switching costs are moderate because there consumers that are naturally more concern to personal observation than virtual inspection of products that are expensive, promotes status/ personality and used over long periods. Bargaining power of suppliers is low because internet platform can bridge numerous sellers and buyers in global scale (2001). Bargaining power of customers is also low because businesses that are conducting e-commerce are exposed to international customers and their products tend to be heterogeneous depending on their intrinsic resources (2004). Threat of substitute products like malls, door-to-door delivery, drive-through chains and convenient stores are moderate because there are customers that are not yet inclined with security features of some e-commerce including their reputation of delivering the good service. Rivalry among e-commerce competitors is moderate depending on the tendency of businesses to serve as merely middleman or provide a vertically-integrated service that only uses e-commerce as part of the system.
Opportunities lay in the further modernization of retail sector and realization of global markets particularly those in top-20 of the efficiency, convenience and diversity of e-commerce. Threats are identifiable in bottom 200’s cultural and political boldness that would take decades of ideology cycle, perhaps, long-term negative economic recession due to failure of market actors to use and exploit available resources efficiently. Strengths of patented software innovations would give the firm sustained competitive advantage that can leverage long-run internet penetration of untapped global markets. However, weakness on niche competition would ultimately carry with it more valuable competencies due to focus strategies that would possibly be applied to win a share in certain markets.
Conclusion
Investing in e-commerce is a profitable engagement for firms whether they are in manufacturing, merchandizing, logistics, and services sector. Apart from the unstoppable computerization and modernization of countries especially the role of developing nations in providing offshore services, e-commerce promotes quality of life for internal and external customers of businesses ( 2003). It provides efficiency, convenience and security to transactions that minimize costs, time and threat to security of transacting parties. With considerable focus on making a safe, reliable and ethical e-commerce, the internet technology can be useful tool in making corporate objectives part of consumer objectives. Perfect competition also supports the advantages of conducting business online as prices are lower, consumers have more choices on a global scale and security of supplying products/ services are attained also in global scale.
Appendices
Figure 1: World Internet Usage and Penetration
Figure 2: Value-Added Equation
Profit accounting is R = S – B – DP – W – I – DD – T (with little mathematical manipulation) value added equation will be S – B – DP = W + I + DD + T + R.
Where,
R = retained earnings
S = sales revenue
B = bought-in materials and services
DP = depreciation
W = wages
I = interest
DD = dividends
T = taxes
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