STUDY UNIT 1: INTRODUCTION TO ELECTRONIC COMMERCE

Purpose The aim of this is to explain how the term E-commerce has
been defined, and how the internet has enabled this type of
business.
Specific After having worked through this study unit students should be
Learning able to:
Outcomes
• Define electronic commerce and demonstrate how it
has evolved into the 2nd wave of growth.
• Explain why organizations focus on revenue models
and the reasons for so much focus on business
processes and not business models.
• Evaluate the opportunities and challenges of e-
commerce.
• Assess the forces behind the continued growth of e-
commerce.
• Establish the application of SWOT analysis and value
chain in spotting opportunities.
• Illustrate the challenges of global e-commerce and its
international status.

Time It will take you 15 hours to make your way through this unit.

Important terms Electronic commerce (or e-commerce) is defined as shopping

and definitions that is done on the World Wide Web or the Internet.

Business to consumer (B2C) – This is when business

organizations supply products to consumers or households.

Business to business (B2B) - Business to business, also called B

to B or B2B, is a type of transaction that exists between
businesses, such as one involving a manufacturer and
wholesaler, or a wholesaler and a retailer‖ (Investopedia: Online).

Consumer to Consumer (C2C) - This involves business

transactions between consumers.

Business to Government (B2G) – Represents cases where

11
 businesses sell products to the government.

Consumer-to-Business (C2B) -. These are transactions involving

consumers selling goods and services to businesses.

Diminishing returns is when the number of inputs used for

production is increased when the capital is fixed; the result is a
decrease in productivity.

Economies of scale – Is when the long run per unit cost of

producing a product is decreasing.

1.1 Introduction

When e-commerce emerged, it was predominantly in America, but this has since
changed with the growth of the Chinese economy which is endowed with a population
of 1.4 billion people and 650 million of them have access to the Internet (Schneider,
2017). E-commerce and e-business have undoubtedly become instrumental in
enhancing business strategy and economic development. The advancement in
Information and Communication Technology (ICT) has reduced transaction costs,
facilitated mass customization, improved participation of customers and higher levels of
productivity.

Businesses enjoyed the benefits of e-commerce in the late 1970s when they could send
documents via electronic means, yet the general public only had access to e-
commerce in 1994. However, the security protocols were only put in place four years
later. By the year 2000, many businesses in the west started to sell their merchandise
via the Internet, giving birth to online businesses like Amazon and eBay (Schneider,
2017).

1.2 The definition of e-commerce

Electronic commerce (or e-Commerce) is the use of an electronic platform to execute

trade. Schneider (2017) defined e-commerce as shopping that is done on the World
Wide Web or the Internet. E-commerce (electronic commerce or EC) encompasses the
buying and selling of goods and services, or wiring of finances or data using an
12
electronic network, which in most cases is the Internet. E-commerce transactions come
in many various forms and some examples are consumer-to-consumer (C2C) or
consumer-to-business (C2B), business-tobusiness (B2B) and business-to-consumer
(B2C).

The terms ―electronic Business‖ and ―electronic commerce ―are used in the business
circles interchangeably. It is, however, important to note that e-business is broader, and
e-commerce is actually a subset of e-business. IBM defines e-business as ―the
transformation of key business processes through the use of Internet technologies‖
(Schneider, 2017). E-commerce includes all business transactions that require the use
of money as a medium of exchange whereas, on the other hand, e-business covers all
those activities that relate to the day to day running of the business (Khan, 2016). These
activities can be marketing, selling of goods and services, procurement customer
retention, customer education and the development of business partners.

The success of e-commerce and e-business depends on the setting up of storefronts

that are simple and easy to navigate through information on catalogues. E-business is,
therefore, an extension of e-commerce as it captures all the activities of the business
that are online based. In other terms, e-commerce is part and parcel of e-business, but
e-commerce in itself does not encompass all the aspects of e-business (Khan, 2016;
Schneider, 2017).
1.3 The evolution of e-commerce and growth
E-commerce emerged in the first wave in the United States where English was used
on the Internet pages mainly for B2C marketing via slow and inexpensive dial-up
modems. In the second wave, e-commerce became international as business was
done in several countries across the world and in various languages. The expansion of
global e-commerce brought challenges associated with language translation and the
conversion of currency during the second wave. The second wave of e-commerce was
boosted by the expansion in broadband connectivity and the increased use of electronic
mail in both B2B and B2C markets.

In the third wave of e-commerce, the mobile telephone was introduced, creating m-
commerce or mobile commerce. China, India and Brazil emerged as the critical players
in the space of e-commerce. This platform enabled the use of regular Internet

13
access and smart devices. In addition to smartphones, tablet computers were also
introduced, encompassing Web browsers, keyboard and an operating system.
Organisations are capable of communicating, access customer demand data, and
check inventory levels because of the interestedness of this technology. The third wave
of e-commerce is also associated with the use of social media platforms such as
Facebook, Twitter, LinkedIn and Google+ (Schneider, 2017).

According to (Schneider 2017; Bhalekar, Ingle & Pathak, 2014) electronic commerce is
grouped into the following categories:

Business to consumer (B2C) – Is when business organisations supply products to

consumers or households.

Business to business (B2B) - ―Business to business, also called B to B or B2B, is a

type of transaction that exists between businesses, such as one involving a
manufacturer and wholesaler, or a wholesaler and a retailer‖ (Investopedia: Online).

Consumer to Consumer (C2C) - This involves business transactions between

consumers.

Business to Government (B2G) – Represents cases where businesses sell products

to the government.

Consumer-to-Business (C2B) -. These are transactions involving consumers selling

goods and services to businesses.

Study group / Online forum discussion Discuss the topic in your

study group or online forum

In groups of three discuss the different types of e-commerce relationships using the table
1.1 showing the categories of E-commerce.

Table 1.1 below summarises the different types of e-commerce relationships. An

example and full description are provided.
Table 1.1: Categories of e-commerce

Category Description Example

Business to consumer Businesses sell goods and PnP online shopping

14
(B2C) services to consumers
Business to Business These are transactions
(B2B) between businesses
through electronic means
It includes all electronic
transactions of goods or
services carried out
between organisations.
This type of electronic
commerce is common with
producers and traditional
commerce wholesalers.

Consumes to consumer All transactions of goods An electronic marketplace

(C2C) and services are done via such as Gumtree and OLX
electronic means between
are examples of platforms
consumers. In most cases,
involving C2C scenarios.
a third party is involved and
their role is to create the
online platform that is used
for carrying out the
transactions.

Business to Government Represents cases where The online tendering

(B2G) businesses sell products to system is a good example
the government. of the B2C arrangement.

Businesses will then

supply a service of goods
after securing the tender.

Source: Schneider, (2017)

The growth of e-commerce was enhanced by the emergence of smartphones and tablet
devices. The growth of e-commerce was further promoted by Internet connectivity and
the explosion of social networks such as Facebook and Twitter. The Internet
connectivity is growing although this is still a challenge in developing economies. Small
businesses have also taken advantage of the e-commerce development, a huge relief
to their cost structures that are already compromised by their inability to raise capital
(Schneider, 2017).

15
1.4. Business Models, Revenue Models and Business Processes.

―We think that the business model is a system of resources and activities, which
create a value that is useful to the customer and the sale of this value makes money for
the company (Slávik & Bednár, 2014). During the first wave of e-commerce, the major
focus of business models was those that were Internet-driven or the ― dot-com‖
business. However, this model was not suitable for all companies and led to some major
business failures. This was a big lesson for businesses in that business models should
not be imitated simply because of a success story in another business. The same model
may not necessarily work for another company.

On the other hand, companies adopt a revenue model, which identifies its customers,
and market and make sales to those customers (Schneider, 2017). This model is
important in that is groups activities that generate revenue, enabling easy analysis and
communication.

1.4.1 Focus on specific business processes

Besides revenue models, organizations also look at specific business processes such
as hiring, training, logistics, purchasing and supply and transformation of inputs into
finished goods and services. E-commerce students should be able to understand those
processes and establish areas that can be enhanced by e-commerce capabilities. It is
important to acknowledge that not all processes should be transformed towards the e-
commerce route as they may function efficiently by manual means. E-commerce is,
therefore, a powerful tool for businesses to adapt to the dynamic business environment
and enhance organizational profitability (Schneider, 2017).

1.4.2 Role of Merchandising

Merchandising is the act of displaying products, designing the store and the general
laying out of product presentation. It is the process of promoting the sale of goods and
services at retail. This consist of free samples, display techniques, pricing, special
offers, on-the-spot demonstrations and another point of sale methods
(BusinessDictionary.com). E-commerce students should be able to incorporate e-
commerce tools into the merchandising process.

However, some products where consumers prefer to touch and feel before buying them
may be difficult to sell on the Web.

16
1.4.3 Product/Process Suitability to Electronic Commerce

Some products can be easily sold via e-commerce, whereas others are not.
Homogeneous products, products with a strong brand are easy to sell by e-commerce
means. Examples of such are books, CDs, investment and insurance products,
marketing of travelling services etc. On the other hand, items that require personal
selling skills may not be suitable for ecommerce but rather, traditional means and
examples are real estate business and the market for used cars. A hybrid model that
combines e-commerce and traditional means are used successfully in many
organizations.

1.5. E-commerce Opportunities and Concerns

Electronic commerce has affected the manner in which businesses operate. However,
the birth of e-commerce comes with opportunities and concerns.

1.5.1 The benefits of e-commerce

According to Khan, (2016), there has been a massive drive towards Business-to-
Business (B2B) e-commerce as a result of the accelerated diffusion of ICT tools such
as the increased Internet connectivity. This advancement gives buyers the ability to
remotely access the global market and get awareness on product substitute, make a
comparison of prices across regions and assess how market fragmentation affect
prices. Markets transparency enables customers to visit several e-commerce sites and
make comparisons on the services provided. This means that with e-commerce, a
competitor is easily accessible on a single click of a button.

Unlike in the physical commerce set up, e-commerce enables unhappy customers to
swiftly switch to a different supplier. Customers will have limitless access (24 hours a
day) to virtual suppliers through e-commerce. In the same vein, the seller may not need
to set up a physical shop in the world of e-commerce. Suppliers are capable of exploiting
the global market with minimal financial outlay. In addition, the organisation is
empowered to have a direct contact with consumers, eliminating the distribution channel
that may be too long and may also inflate the final product prices. Direct interaction with
customers has benefited organisations in that more customer data on their preferences
is collected, facilitating customisation of products and services to suit individual
preferences (Khan, 2016).

17
Suppliers become closer to their customers which then boost their sales and
productivity. The level of competitiveness also improves, coupled with better customer
service, more pre and post-sales support and proximity to customers is achieved. E-
commerce comes as a costcutting tool that can enhance the profitability of an
organisation. The transaction costs of doing business will be reduced allowing
organisations to charge customers reduced prices. Further benefits of e-commerce to
organisations include a more efficient and structured interaction with vendors,
employees, suppliers and other key stakeholders (Khan, 2016).
1.5.2 The Challenges Associated with e-commerce
Bhalekar, Ingle and Pathak (2014) cited the following challenges of e-commerce:
1.5.1 Difficulty in having discounts and bargaining – Online business and shopping
make it difficult for shoppers to bargain for shopping discounts.
1.5.2 Security concerns - Customers generally worry about some security issues
associated with online payments or paying someone of no fixed address.
1.5.3 Delays in delivery – Online shopping involving international suppliers can take
weeks and in some instances months to get the goods delivered.
1.5.4 Higher shipping costs – The customers in most cases have to bear the shipping
costs associated with online shopping, which can be high.
1.5.5 Product quality - online shopping enabled by e-commerce does not provide
consumers with an opportunity to inspect the quality and physical condition of a product
before buying it.
According to Khan, (2016) argued that the major disadvantages of e-commerce is that
it relies greatly on Information and Communication Technologies (ICT); it lacks
adequate legislation that will be instrumental in controlling new e-commerce activities
locally and internationally; it infringes on the privacy of users and the economic, regional
or country‘s identity is lost. The challenge of security concerns and the inability of
customers to try and test the product before buying is also cited as e- commerce
challenges.

The following benefits and challenges in table 1.2 below are associated with e-
commerce according to ( Khan, 2016; Sabou, Avram-Pop & Zima, 2017).

Table 1.2: Benefits and challenges associated with e-commerce

18
Benefits of e-commerce Challenges of e-commerce
• High revenue levels • Low levels of education
• Low maintenance and • Local tradition and culture
operating costs • Wrong online marketing
• Low procurement and purchase strategies
costs • Inadequate marketing
• Enhanced customer retention • Political factors
and loyalty • Challenges with Internet
• Lower transportation costs availability
• Better supplier and customer • The absence of trust among
relationships online businesses
• Higher selling and processing • Security concerns
speed
• Internal and external
communication is improved
• Improves company brand and
image
Source: Author‘s adaptation
E-commerce comes with a number of benefits and challenges as shown in table 1.2
above. The benefits however far outweigh the challenges associated with e- commerce.
Watch the following video clips to learn more about E-commerce.

1.6 Economic Forces and E-commerce

Businesses exist in a society that is concerned about the allocation of scarce resources
in a manner that will maximise the welfare of society. For e-commerce to operate, a
market must exist, which is defined as a link between a potential buyer and a potential
seller and this connection should also include a medium of exchange. In addition,
today‘s transactions involve large hierarchical organisations with multiple reporting
structures. These hierarchical structures should be taken into consideration when doing
business with such organisations.

19
E-commerce is also affected by transaction costs which are costs that buyers and
sellers meet when carrying out a purchase or a sale transaction. A good example of
transaction costs is when you spend money on fuel so that you can drive to meet with
a seller who is selling textbooks on OLX. Vertical integration occurs in organisations in
order to reduce transaction costs. This will improve the effectiveness and efficiency of
hierarchical monitoring activities. Setting up of business units allows firms to function as
decentralised entities, thus eliminating disadvantages of hierarchical structures
(Schneider, 2017).

It is also argued that today‘s organisations are neither market or hierarchical based but
rather, they form strategic partnerships or strategic alliances. E-commerce can factor in
the need for information sharing in such networks. This network (strategic alliance)
structure is predicted to be the future structure of most businesses. The network
structure allows for increasing returns and economies of scale instead of diminishing
returns. Diminishing returns is when the number of inputs used for production is
increased when the capital is fixed, the result is a decrease in productivity e.g. adding
more workers on a fixed piece of land will reduce productivity. Economies of scale – Is
when the long run per unit cost of producing a product is decreasing. Increasing returns
occur in the short-run when marginal productivity levels increase as additional inputs
are added (Investopedia: Online).

1.7 E-commerce Opportunities, Value Chain and SWOT Analysis

The setup existing in business structures can be confusing to an e-commerce specialist

who might want to introduce e-commerce capabilities to the business, given that a firm
can grow into multiple firms that will, in turn, make up an industry.

1.7.1 Strategic Business Unit Value Chains

Investopedia (Online) defined a value chain as ―interlinked value-adding activities that

convert inputs into outputs which, in turn, add to the bottom line and help create
competitive advantage‖. Schneider (2017) on the other hand defined a value chain as
organising business activities in such a way that they can produce market and sell the
goods and services produced. The business value chain is broken into primary activities
and supporting activities as shown in figure 1.1 below.

Figure 1.1: Value chain for a business unit

20
Source: Schneider (2017)

In figure 1.1 above, the top part represents the primary activities of the value chain
and the bottom parts are supporting activities.

According to Schneider (2017), the following primary activities are conducted by each
business unit:

Design – consists of engineering, research and producing a concept product.

– The process of finding new customers and retaining existing ones.

Identifying customers Purchase materials and supplies – All activities involving

procurement and relationship building with suppliers.

Transformation – manufacturing products through a transformation process.

Marketing – promoting, pricing, advertising and distribution channels.

Deliver – shipping and distribution of the final product

After Sales Service – product installation, warrants and repairs

21
On the supporting activities, the following are important:

Human Resources Management – Hiring, training, motivating employees

Finance and Administration – manages the funding of business activities and

observes regulatory requirements.

Technology – researching technology trends and how they can improve business
activities

1.7.2 Industry Value Chains

This helps to see how the strategic business unit fits in the whole industry as shown in
figure 1.2 below. It shows an example of the industry value chain for a wooden chair,
with several business units such as logger, sawmill…..consumer and retailer.

Figure 1.2: Industry value chain for a wooden chair

Source: Schneider (2017)

22
Knowledge of an industry value chain like the one above is key in appreciating how
ecommerce can complement business units and industry value chains in a manner that
will not disrupt profitable business processes.

1.7.3 SWOT Analysis: Evaluating Business Unit Opportunities

―Situation analysis in which internal strengths and weaknesses of an organisation and

external opportunities and threats faced by it are closely examined to chart a strategy.
SWOT stands for strengths, weaknesses, opportunities, and threats. See also PEST
analysis‖ (Investopedia: Online). Figure 1.3 below provide further insight on SWOT
analysis

Figure 1.3: SWOT analysis questions

Source: Schneider (2017)

E-commerce cannot be implemented effectively without conducting a proper SWOT

analysis. Strengths and opportunities should be exploited to the business‘s advantage.
Weaknesses and threats should be carefully explored to ensure that they do not affect
the implementation of e-commerce tools.

1.8 International Nature of Electronic Commerce

23
The nature of e-commerce is such that businesses are connected to the World Wide
Web thus making it globally connected. Being connected to the global e-commerce
environment comes with a number of challenges which include (Schneider, 2017):
cultural differences, language barrier, infrastructure, government and trust issues.

Language Barrier: Business can be done effectively in other countries after adapting to
the language of that country. For companies to effectively function in other economies,
they should adapt and adopt local and regional dialect. Trust Issues on the Web:
Customers generally worry about some security issues associated with online payments
or paying someone of no fixed address. All businesses involved in ecommerce should
work on building a long-term relationship with customers in order to eliminate the trust
barrier. The challenge is even worse for new companies that are trying to make their
presence on the Web known.

Culture Issues: Companies that have existing branches in different countries can easily
expand their e-commerce presence in those countries because they understand the
culture in those economies. This is not usually the case for emerging businesses. The
need to understand local culture and customs is very critical in e-commerce.

Culture and Government: In some economies, the government regulate the nature of
content that citizens should access on the Internet. Businesses should be informed of
such barriers so that they can package their products in a manner that suits the
regulatory requirements.

Infrastructure: Many developing economies are still lagging behind when it comes to
Internet connectivity. This challenge to some extent can limit the growth of e- commerce
in those economies.

There are several parties that are involved in international business transactions. Figure
1.4 below, summarises the key players in an international business activity.

Figure 1.4 Parties involved in a typical international trade transaction

24
Source: Schneider, (2017)

Unlike local business transaction, international trade involves extra middleman such as
international freight companies, customs agents, bonded warehouses and international
financial institutions (see figure 1.4 above).

1.9 Summary

The advancement in Information and Communication Technology (ICT) has reduced

transaction costs, facilitated mass customization, improved participation of customers
and higher levels of productivity. Electronic commerce has affected the manner in which
businesses operate. However, the birth of e-commerce comes with opportunities and
concerns. Some of the challenges of e-commerce include cultural differences, security
concerns, lack of direct contact with customers, and shipping costs.

1.10. Self-Assessment

Let‘s see what you have learned so far by taking this short self-assessment.

25
 1.10.1 Differentiate between e-commerce and e-business. (5)
1.10.2 Highlight the importance of SWOT Analysis in the world of electronic
commerce.
(10)
1.10.3 Evaluate the pros and cons of e-commerce. (15)
1.10.4 Illustrate the challenges of international e-commerce. (10)
1.10.5 Briefly discuss the activities of a business unit. (10)
1.10.6 Provide a comprehensive definition of e-commerce that would give you an in-
depth understanding of what e-commerce is all about. (5)
1.10.7 Briefly explain any five challenges associated with the use of e-commerce in
businesses. (10)

1.11. Revision Questions

Highlight the benefits of E-commerce to businesses and

customers
Evaluate the importance of SWOT Analysis in the world of
electronic commerce.
1.12. References

Botha, J., Bothma, C., and Geldenhuys, P. (2013) Managing e-commerce in

businesses, 2nd edition. Cape Town: Juta.
Bhalekar, P., Ingle, S. and Pathak, K. (2014) ‗The Study of e-Commerce‘, Asian
Journal of Computer Science And Information Technology, 4(3), pp. 25–27.
Guo, Z. (2016) ‗A Literature Review of Representation Models of E-Business Models
from the Perspective of Value Creation‘, American Journal of Industrial and Business
Management, 6(6), pp. 129–135. doi: 10.4236/ajibm.2016.62013.
Kalirungkut, R. (2014) ‗Measuring the Net Benefit of an E-Commerce for a University :
a Case Study of the University of Surabaya ‘ S E-Commerce‘, 9(9), pp. 1398–1404.
Khan, A. G. (2016) ‗Electronic Commerce: A Study on Benefits and Challenges in an

26
Emerging Economy‘, Global Journal of Management and Business Research:
Economics and Commerce, 16(1).
Pelet, J.-E. and Papadopoulou, P. (2012) ‗Investigating Social Networks in M-
Commerce‘, Procedia - Social and Behavioral Sciences, 00, pp. 0–0.
Sabou, S., Avram-Pop, B. and Zima, L. A. (2017) ‗The Impact of the Problems
Faced by Online Customers on Ecommerce‘, Studia Universitatis Babes-Bolyai
Oeconomica, 62(2), pp. 77–88. doi: 10.1515/subboec-2017-0010.
Slávik, Š. and Bednár, R. (2014) ‗Analysis of Business Models‘, Journal of
Competitiveness, 6(4), pp. 19–40. doi: 10.7441/joc.2014.04.02.
Schneider, G. P. (2017). Electronic Commerce. Boston: Cengage.
Guo, Z. (2016) ‗A Literature Review of Representation Models of E-Business
Models from the Perspective of Value Creation‘, American Journal of Industrial
and Business Management, 6(6), pp. 129–135. doi: 10.4236/ajibm.2016.62013.

Kalirungkut, R. (2014) ‗Measuring the Net Benefit of an E-Commerce for a

University : a Case Study of the University of Surabaya ‘ S E-Commerce‘, 9(9),
pp. 1398–1404.

Khan, A. G. (2016) ‗Electronic Commerce: A Study on Benefits and Challenges

in an Emerging Economy‘, Global Journal of Management and Business
Research: Economics and Commerce, 16(1).

Pelet, J.-E. and Papadopoulou, P. (2012) ‗Investigating Social Networks in M-

Commerce‘, Procedia - Social and Behavioral Sciences, 00, pp. 0–0.

Sabou, S., Avram-Pop, B. and Zima, L. A. (2017) ‗The Impact of the Problems
Faced by Online Customers on Ecommerce‘, Studia Universitatis Babes-Bolyai
Oeconomica, 62(2), pp. 77–88. doi: 10.1515/subboec-2017-0010.

Slávik, Š. and Bednár, R. (2014) ‗Analysis of Business Models‘, Journal of

Competitiveness, 6(4), pp. 19–40. doi: 10.7441/joc.2014.04.02.