Electronic Commerce: State of the Art

Michael J. Shaw

Department of Business Administration

College of Commerce

University of Illinois at Urbana-Champaign

There isa revolution transforming the global economy. Web technology is transforming all business into information-based activity. The rate of technological change is so rapid that emerging electronic commerce already is making fundamental changes in the economic landscape, affecting every aspect of how business is and will be conducted. The Web has extended the reach of corporations. New business opportunities are growing incrementally because of the vast amount of business information made available by the global Web, which helps bring together the information passed between businesses, between a business and its customers, and among different departments of a business. It will no longer be possible operationally or strategically to ignore the information-based virtual value chains for any business. This paper reviews the scope, current applications, and the potentials of electronic commerce. It also develops a framework for identifying the significant opportunities and important research issues associated with electronic commerce. The emphasis is on taking an interdisciplinary view that integrates technology and business models.

(Electronic Commerce; Web Strategy)

1. Introduction

We are witnessing a revolution in commerce and society primarily due to an explosion in information technology and the resulting rapid emergence of electronic commerce (EC). Transaction based commercial activities such as information gathering, shopping, trading, brokering, banking, accounting, auditing, auctioning, financing, negotiating, collaborating, marketing, supplying, partnering, training, meeting, scheduling, manufacturing, distributing, servicing, and retailing are experiencing rapid change due to the adoption of new information technology. In short, much of what we know about the everyday conduct of business will continue to change. All companies, large and small, will face inevitable challenges brought about by these technologically enabled developments. Fortunately, this change creates both risks and opportunities. Electronic commerce is in many ways an uncharted new frontier. Carefully thought-out business execution, strategy development, and research become important to understand all the shifting rules and to identify rising opportunities to develop new competitive advantages.

The information revolution is drastically reshaping global society and pushing the world toward an information-based economy. This revolution is touted as the beginning of a new era in which the majority of the value-adding activities in the economy will be shifted to cyberspace through globally connected electronic networks. There are many optimistic forecasts on how fast the electronic commerce market will grow. Most, including one from the U.S. Department of Commerce (Margherio, 1998), predict that the EC market will grow to hundreds of billions of dollars by early next century. A frequently quoted figure is that the total of volume of electronic commerce will reach $327 billion by 2003 (CyberStats, 1997; Business Week, 1998). These predictions paint a rosy picture for electronic commerce. However, even with all the optimism, how to capitalize on the full potential of electronic commerce is still an open question. With technology moving at a blazing pace, governments, businesses, and the general public all are struggling to catch up. On the other hand, the scope of electronic commerce is so broad and its reach so wide that efforts by the participants and the stakeholders need to be well coordinated. Multidisciplinary perspectives are therefore necessary to understand many of the issues involved.

The next section surveys the scope and the developments in electronic commerce along a host of dimensions, followed by a review of the critical issues, challenges, and opportunities involved. The objective is to lay out a framework for understanding the state and direction of the developments. Specifically, the following issues need to be addressed.

  • The scope of electronic commerce, its components, and potential impacts.
  • The consumer-oriented electronic commerce opportunities, the enhancement of electronic storefronts, and the development of new consumer processes.
  • The strategy for developing online business and digital services.
  • The transformation of business-to-business infrastructure and partnerships.
  • The rising needs to address security, privacy, and legal concerns.
  • The technology and infrastructure for EC, such as electronic payment systems.
  • The Web strategy for coordinating channel partners and for streamlining their processes.

This chapter ends with a summary of the challenges and opportunities in Electronic commerce.

2. Review of Practices, Scope, and Opportunities

Electronic commerce covers a wide variety of perspectives. The technological enabler is the Web, including the globally connected networks, the universal networking interface and transmitting standard (based on TCP/IP), and the World Wide Web infrastructure that facilitates information storage, browsing, and retrieval. Statistics and success stories about the growth of the Internet and electronic commerce abound (the following statistics are based on an annual information technology survey in Business Week (June 22, 1998) and a report published by the U.S. Department of Commerce (Margherio, 1998).

  • Fewer than 40 million people around the world were connected to the Internet during 1996. By the end of 1997, more than 100 million people were using the it. Some experts believe that there may be one billion people connected to the Internet by 2005.
  • As of December 1996, about 627,000 Internet domain names had been registered. By the end of 1997, the number more than doubled to 1.5 million.

The Internet is growing faster than any other technologies that have preceded it. Radio existed for 38 years before it had 50 million listeners and television took 13 years to reach that marks. The Internet crossed that line in just four years (since the wide distribution of World Wide Web browsers).

  • Traffic on the Internet has been doubling every 100 days. In addition, according to the Internet Domain Survey ( there were 1,776,000 host computers on the Internet in July 1993. By July 1998, the number was 36,739,000.
  • In 1996, Amazon.com, the first Internet bookstore, recorded sales of less than $16 million. In 1997, it sold $148 million worth of books to Internet customers. Cisco Systems closed 1996 with just over $100 million in sales on the Internet. By the end of 1997, its Internet sales were running at a $3.2 billion in annual sales.
  • In January 1997, Dell computer was selling less than $1 million of computers per day on the Internet. The company reported daily sales of $6 million several times during the December holiday period in 1997. In the meantime, Dell has developed its global supply chains into one of the most efficient, with the inventories turned around several times faster than its competitors.
  • Online sales are growing in every category of goods. Between 1997 to 2001, financial services will grow to $5 billion from $1.2 billion, travel will grow to $7.4 billion from $654 million, computer hardware and software will grow to $3.8 billion from $863 million and books and music will grow to $1.1 billion from $156 million.
  • Business-to-business (B2B) EC sales will grow from $8 billion in 1997 to $183 billion in 2001. It will account for 78% of the total spent on cyber transactions in 1998.
  • EDI is used to exchange about $250 billion of worth of products in 1998, which is 14 times larger than business-to-business EC. But EDI is pricey and complex to use. Within five years, EDI and Web-based B2B EC markets will be about equal, at more than $450 billion annually. By 2003, more than 30% of EDI data is expected to traverse the Web.
  • General Electric Co. brought $1 billion worth of supplies via the Web in 1997. That saved the company 20% on material costs. By 2000, GE expects to be buying $5 billion over the Web.
  • By the end of 1997, the number of profitable Web sites – both for consumer and for inter-business transactions- jumped to 46%, ending three years of stagnation at 30%. And some 81% of the remainder expect to be profitable in a year or two (BusinessWeek, 1998, p.126).

Due to its broad scope, the focus of electronic commerce must be viewed from a number of perspectives to appreciate a particular functional emphasis fully. Several dimensional perspectives are explained in the following.

(1)Technology. Electronic commerce is made possible by the global networks where business processes, inter-organization transactions, and market trading take place. The Internet is the major contributor, but other communications networks, such as value- adding networks for carrying out electronic data interchange, also play a role.

(2)Marketing and “new consumer processes”. Electronic commerce is the new channels to connect with customers and a new media to promote products. EC expands the boundaries of enterprises to reach out directly to their customers.

(3)Economic. Electronic commerce is a new economy that is information-based and shaped by new institutional and industrial organizations (Stigler, 1968). EC creates new markets and economic activities that are characterized by instant information flows, the delayering of value chains, the emergence of new intermediaries, and the shifting economic rules and market dynamics (Choi, et al., 1997). The fundamental valuation has been transformed by these changes, leading to needs for new strategy and business models.

(4)Electronic linkage. Electronic commerce provides new linkages to achieve more efficient economic activities, including: (a) the interface between businesses to consumers; (b) the linking of a business to its channel; and (c) the coordination of different units within a business.

(5)Informationvalue-adding. Electronic commerce accelerates the separation of the information-based value chains from the physical value-adding chains. The information-based or the virtual value chains (Sviokla,1998), create new ways to compile, synthesize, package, distribute, and market information as products and services.

(6)Market-making. The global networks supporting electronic commerce have provided opportunities to form electronic markets to match buyers and sellers (Strader & Shaw, 1997; Bakos, 1998). This new market space features real-time information transmission, interactive communication, wide reach and connectivity, and rich content. These characteristics potentially can form more efficient markets for exchanging goods, resource allocation, and trading.

(7)Service infrastructure. Electronic commerce needs a variety of services to support all potential functions, activities, requirements, and applications. These services need a coherent infrastructure to ensure integrity, uniformity, efficiency, and effectiveness. Examples of the infrastructure include infrastructures for public-key, payment and banking, information services for organizing, searching, retrieving, filtering, and summarizing information, and for processing business-to-business transactions, sharing supplier-catalog information, and supply-chain coordination.

(8)Legal, privacy, and public policy. All the structural, institutional, process, and technological changes brought by electronic commerce necessitate a new framework for addressing the legal, privacy, and public policy needs. This is a difficult task due to the number and diversity of interest groups involved. Yet, this is the one dimension that needs to be taken into account early in the development of EC to protect the interest of the general public. Addressing the issues involved requires a balanced approach that takes into account the interests and potential conflicts among different parties.

The scope of electronic commerce is depicted in Figure 1 (Shaw, et al., 1997), where, in addition to linking with suppliers (EC5) and distributors (EC4), it also includes the interface with consumers (EC3), and the management within the enterprise (EC1). Finally, electronic commerce also addresses the infrastructure issues (EC2), such as payment systems, network security, human-computer interface, and the information infrastructure. Electronic commerce provides unprecedented opportunities to integrate various types of communication networks, including the three primary types as depicted in Figure 2. These three types of networks have taken up their own specialization. (1) The Intranet for process, knowledge, and internal communication management, (2) The Extranet for external coordination and information sharing with channel partners such as suppliers, distributors, and dealers, and (3) The Internet for setting up electronic storefronts, providing customer services, and collecting market intelligence. In developing electronic commerce there is a constant need for new business models suitable for the new products (e.g., digital ones), new industrial organizations (e.g., virtual organizations), and new industrial organizations (e.g., information intermediaries).

Figure 1. The Scope of Electronic Commerce

Figure 1 and Figure 2 together summarize well the major impacts of the Web on managing a company. The Web provides the infrastructure for collecting, distributing, and sharing information. It serves as new channels for making sales, promoting products, and delivering services. Finally, it integrates the information organization for managing activities on all levels of the company and provides new electronic links for reaching out to the customers and supply-chain partners.

Figure 2. The Web Centric Enterprise

3. Web Storefront and Consumer Interface

One of the first applications of electronic commerce involves the development of electronic storefronts. Companies such as Cisco (Clark, 1997) or Dell Computers (Hill, 1997) have developed their Web storefronts into major sales channels. High profile Internet companies such as Amazon.com and Auto-by-Tel have developed innovative business models using Web storefronts as their main channel. However, these early successes do not necessarily guarantee that the Web will become the dominant sales channel for every business. One of the critical aspects influencing the success of electronic commerce will be the effectiveness of the interface interacting with the consumers. To date, it is not clear what deciding factors will draw people to shop on the Web. What makes Internet shopping different from mail-order catalogues or TV shopping? There are a host of potential advantages associated with the use of Web storefront as the consumer interface. The Web can provide aggregate information and interactive transmission, for example, to make the presentation more interesting. It is especially good at achieving remote accessibility while delivering rich information content at the same time (Evans, and Wurster, 1997). However, there are still barriers against consumers using the Web for retail shopping. Yes, selling products such as books, music CDs, and computer equipment over the Web has been relatively successful, but the type of text-based interface design used by, say, Amazon.com may not be able to cope with products that have more variations. To make the Web the prime place for shopping, more efforts will be needed to make the Web a better interface for consumers.

Overcoming these barriers is essential. One enhancement to the human computer interface (HCII) incorporates virtual reality (VR) with 3D visual and audio displays to enrich the Web shopping experience. Some of the techniques and tools developed in this area can be useful in implementing virtual storefronts.

Imagine sitting in your living room browsing the Web from the VR Web TV. You search and retrieve a direct merchant’s catalogue of winter clothing. Different styles of coats are displayed on a three-dimension digital model made to resemble your body. You can select the specific color combination and adjustment that fits your taste. While in this VR environment, you may also want to test the utility of the coat by walking around, getting into your car, and going to the office, to test its quality and suitability under various circumstances of use. In this way, a good VR interface could lead to the implementation of mass customization. You could interact with the VR display of the goods to select desirable features until you are satisfied and place the order through the Web to receive a highly customer specific product.

Although sales on the Internet through the electronic storefronts have met only limited successes to date, there are reasons for optimism. The bandwidth of the network infrastructure is improving to the extent that the information content presented in the Web storefront is getting richer. Statistics show that there is good potential for growth of this type of commerce. Each year about 55% of U.S. households purchase products from catalogs and about 7% purchase from TV (Burke, 1998). When the Web interface is better designed, catalog shoppers may be the first to consider electronic shopping.

Whether virtual-store shopping will take off or not certainly depends on more than the interface design. Users’ acceptance of a new technology is always difficult to predict. Ease of use, prices, costs, sense of community, trust, search efforts needed, information richness, among other factors, will likely play a role. There are still plenty of uncertainties. For example, Proctor and Gamble, with a global advertising budget around $3 billion, is seriously developing interactive marketing through their Web storefront. Yet their advertising spending on the Web is only a very tiny portion of the total advertising budget. Their executive for global advertising recently lamented that “the current state of Web advertising just isn’t effective enough to warrant any truly meaningful investment from us (Beausejour, 1998).” Other than the technical constraints and the need for more reliable measurement, the third reason he cited, which he emphasized was the major reason, was that marketing companies like Proctor & Gamble really don’t know how to use the Web effectively yet. Questions on how to develop meaningful relationships with consumers, whether brand name will play a significant role in the virtual shopping world, and what the consumers’ perception is about purchasing from virtual storefronts still are mostly unanswered.

4. Online Business and Digital Interactive Services

The rapid adoption of personal computers and greater accessibility of Internet infrastructure continues to fuel the digitization of products (e.g. newspapers) and services (e.g. voice communications) -- commonly referred to as digital interactive services (DIS). Many companies in entertainment, creative content, news distribution, communications, computing, and financial services are seizing the DIS opportunity by aligning capabilities and assets through mergers and acquisitions, resulting in the consolidation of the information industries.