Transcript E-Business

Electronic Commerce
Yan Xiong
College of Business
CSU Sacramento
9/25/03
Agenda
What is Electronic
Commerce?
 Understanding the Internet
 IT components of
Electronic Commerce
 Control issues related to
Electronic Commerce
 E-Payment

“In a few years' time, there
will be no Internet companies
- there will just be companies
- and all companies that will
operate in the future, will be
Internet companies.”
-A. Grove, ~1999
E-Business
“Electronic business
(e-business) is the use of
information technology and
electronic communication networks
to exchange business information
and conduct transactions in
electronic, paperless form.”
Glover, Liddle and Prawitt
Types of E-Commerce
Business to Business (B2B)
 Business to Customer (B2C)
 Various others (e.g., Government to
Customers)
 Were projected to grow at same rate
 BUT . . . then came
“dot.com failures”

E-Business Forecast **
Type of
1999
E-Business Volume
B2B
B2C
$109
billion
$20
billion
% of
Total
2004
Volume
% of
Total
84
$7.3
trillion
$800
billion
90
16
10
** Forrester and Gartner Groups (2000)
Where we’ve been
Add
proliferation
line
Discovery
High
Expectations
Reality
Check
Pragmatic
Adoption
1999
2000
2001
2002
Machine to Machine
Progression
•Rosettanet standardizes
format and choreography
for transactions
•Web services exposes
business capabilities as
real-time executable
functions
•Look for the best of both
to merge
Forecast
Product
Information
Order
Order Ack.
Payment
Invoice
Inventory
Reporting
Advanced Ship
Notice
Receipt
Notification
Web services
Order
Contract
Distributors Ship Notice
Manufacturers
Inventory
ForecastQuality DataCustomers
Invoice
Payment
Build Signal
Ship Notice
Orders
Forecast
Suppliers
Payment
EDI
FTP
Rosettanet
Invoice
Logistics
EDI
Electronic Data Interchange
 Mature technology (15 years) now
being moved to Internet
 Mainframe computers
 Batch processing
 Using value added network (VAN)
 Standards have been developed
Accounting standards recently

Typical EDI Transaction
Manufacturer
Purchase
Order
Value-Added
Network
Purchase
Order
Confirmation
Confirmation
E-mail using
ANSI X12 standard
Supplier
EDI Disadvantages
Changes limited by EDI structureserial process
 EDI using VANs costly



Works best between pairs of companies
Difficult for small firms to participate
Cisco has small firms use web service
Financial Electronic
Data Interchange (FEDI)
Use of EDI to exchange
information is only part of
buyer-seller relationship in
B2B electronic commerce
 Electronic funds transfer
(EFT): making cash payments
electronically
 EFT done through Automated
Clearing House (ACH) network

Emerging B2B Problems
Antitrust issues
 Control issues
 Virus and security problems
 Privacy of data issues
 Problems greater than with
traditional business enterprises
due to multiplicity of players

B2C Effects
Globalization of markets
 One-to-one marketing
 Customization of products / services
 Integration of systems with clients
 Dell linked to clients intranets
 Intel has to improve Taiwan
Phone Company

B2C Effects
E-service not even
envisaged before
 e.g., UPS adding computer setup
service to Dell’s provisioning
 Commoditization of products
 Commodity is product with narrow
profit margins and no major brand
differentiation in price
 e.g., printers

B2C Opportunities
Companies can create
electronic catalogs on
Web sites to totally automate
sales order entry
 Electronic commerce applications
can also improve quality of
post-sales customer support

B2C Opportunities
For products that can be
digitized :
 (books, software, music)
 inbound / outbound logistics
steps of value chain can be
performed electronically
 Improve efficiency / effectiveness
of value chain support activities

Bank Per-transaction Costs
$1.07
$0.39
E-Business
$0.01
Tellers
ATMs
Online
Home Heating Case
Downes and Mui
 East Coast client
 Part of larger oil and gas
retail operation
 17% share of total market
 Only 4% of direct sales to residents

Home Heating Oil

OPPORTUNITIES:
 Sales to residents
accounted for 75% of profits
 Sales to independent distributors
at a much lower margin than to
residential customers
Home Heating Oil

PROBLEMS:
 Company’s brand name
not strong
 70% of residential customers
over age of 50
 Exit costs too high to walk away
from business
Heating Oil Case
SOLUTION:
 Bypass distributors
 Break industry rules
 Destroy its own Value Chain
 Prospects so poor, they had little to
lose
 New “Virtual Fuel Company” (VFC)

Virtual Fuel Company
Early stages:
 Customers can order via
telephone or Web
 Longer term:
 Connect sensors from home
heating tanks to production
facilities
 Over wireless network or internet

Virtual Fuel Company


Will be able to tell customer
when it is time to reorder
Maybe JIT system?
 Fuel truck pulls up to residence
just when heating oil tank
reaches empty
New Model Advantages
No expensive sales or
distribution function
 Outsource order process
to customer
 Compete aggressively with
local dealers on price
 Reverse local dealer advantage of
location and personal relationships

Heating Oil Case
BOTTOM LINE:
“ . . .a disadvantaged player
already in the industry decided to
solve its problem by wrecking the
business model for everyone.”

Downes and Mui
But . . . .

. . .what does this have to
do with accounting?
 electronic transactions more
difficult to track / control
 fuzzy borders between firms
(e.g., vendors / customers)
 revenue recognition
 auditing becomes more difficult
So . . .

. . . let’s learn some more
about this beast that we
have to tame:
 how the Internet works
 IT components
 control issues
 e-payments
Agenda

Understanding the Internet
Internet Layers
Infrastructure Layer
Application Layer
Intermediary Layer
Commerce Layer
Infrastructure Layer
Companies providing
products and services to
create Internet provider (IP)
network infrastructure
 Includes:
 Internet Service Providers (ISPs)
 security vendors
 fiber optics vendors
 telecommunications companies

Application Layer
Enables business activities
to be performed online
 Provides software production and
services to facilitate Web transactions
 Includes:
 Web development software
 search engine software
 Web databases

Intermediary Layer
Increases efficiency of
electronic markets by facilitating
interaction between buyers and sellers
 Acts as mechanism for transaction
processing through previous layers
 Includes:
 brokerages
 online travel agents
 online advertising

Commerce Layer
Sales of products and
services over the Internet to
consumers and businesses
 Includes:
 “e-tailers”
 manufacturers selling online
 subscription-based services
 online entertainment
 airlines selling tickets online

Definitions




IP: Internet protocol
IP Address: message destination
Message Packet: String of data,
each carrying IP and IP Address
Regional Node: Meshing of
transmission lines
CONNECTION OPTIONS
Dial-up
Modem
You
DSL
Modem
Cable
Modem
Phone Lines
POP
Local bank
of modems –
Point of
Phone
Presence
Phone
Lines Company
ISP
Internet
Service
Provider
Cable
Node
Neighborhood
Connection Options
Dialup Modem: can make
local call to access Internet
 DSL Modem: regular phone service
and Internet service, on same line at
same time
 Cable Modem: the more neighbors
accessing node at same time, the
slower the connection

E-mail Messages
IPO
Message sits on
the E-mail server
until receiver logs
on; then message
sent.
Domain Name
Server (DNS)
E-mail
Server
log-on Receivor
Servers
High capacity computer
 contains network software
 Handles:
 communication
 storage
 resource sharing
 Application software / data
common to all users

Internet Protocols
Protocol: guidelines
computers use to talk to
one another
 Internet Protocol (IP):
for moving raw data
 Transmission Control
Protocol (TCP): for making
sure that data arrives intact
 Putting them together = TCP / IP

Agenda

IT components of
Electronic Commerce
Types of Networks

Global networks used by
many companies to conduct
e- commerce and to manage
internal operations consist of:
• Private portion owned or
leased by the company
• The Internet
Private Portion
Local area network (LAN):
system of computers and
other devices (printers)
located in close proximity
to each other
 Wide area network (WAN):
covers a wide geographic area

LAN
Nodes in close
proximity to each other
 e.g., same building
 Owned by using organization
 e.g., not leased from carrier

Why a LAN?
Simplicity
 Group production
 Data sharing
 Faster data transfer
 Cheaper
 Easier resource control

WANs
Companies typically own
all equipment for local
area network (LAN)
 Usually don’t own long-distance
data communications connections
of wide area network (WAN)
 Either contract to use value-added
network (VAN) or use the Internet

Intranets
Internal networks
connecting to main
Internet
 Can be navigated with same
browser software, but are
closed off from general public

Extranets
Link the intranets of two
or more companies
 Either Internet or VAN can
be used to connect companies
forming extranet
 Value-added networks (VAN) more
reliable and secure than Internet
 but more expensive

Network Types
Value-added Network (VAN)
 large-scale telecommunications
networks
 leased connections to clients
 charge based on usage
 Virtual Private Network (VPN)
 less expensive (public network)
 encrypt all packets

What is a VPN?
Info-Tech Research Group
DotComAdvisor
 Network encrypted with
special security protocol
 Requires a server for
authenticating remote users

Why VPNs?
Low implementation cost
 few thousands of $ for
each 20 to 50 simultaneous
users
 Low maintenance costs
 eliminates large bank of modems
 ISP handles this

Why VPNs?

Long distance savings
 Local connections
 Savings often pay for VPN
in a few months
What’s VPN Downside?
Some security problems
 Integration with other network
technologies
 access and use

Communications
Channels

Medium that connects
sender and receiver
– standard telephone lines
– coaxial cables
– fiber optics
– microwave systems
– communications satellites
– cellular radios and telephones
Client-Server
Many WANs, LANs set up
as client/server systems
 Each desktop computer is client
 Client send requests for data to server
 Servers perform preprocessing on
data base and send only relevant
subset of data to client for local processing

Agenda
What is Electronic
Commerce?
 Understanding the Internet
 IT components of
Electronic Commerce
 Control issues related to
Electronic Commerce
 E-Payments

E-Commerce Threats
High value and complexity
of E-Commerce initiatives
 Outside threats from automated
attack tools
 Lack of attention to security
fundamentals
 Myriad points of access with which
security managers must be concerned

Computer Technology Research Corporation, 2000
Types of Threats





Interception
Redirection (spoofing)
 Impersonation
Identification
Exploitable Program Errors
Weak Client Security
Deloitte and Touche
Auditing Challenges
Increased complexity of
auditing through computer
 Integrity and reliability of
clients’ networks
 Extension of audit to trading
partners’ systems
 Increased skills required by smaller
auditing firms
 small firms going on-line

Control Issues

E-commerce creates
control issues:
• Validity of transactions
• Authorization of transactions
• Safeguarding of assets
• Safeguarding privacy
Control Issues
Fundamental control
objective: all transactions
are valid
 In e-commerce, transaction validity
requires two things:
• Authenticate identity of parties
• Ensure that information is not
altered during transmission
between buyer and seller

Control Issues
Proper authorization of
transactions essential to
protect each party from
unilateral repudiation of
transaction by other party
 Both organizations and individuals
want to safeguard their assets

Control Issues
E-commerce threats:
– loss of confidentiality
– unauthorized access
– loss of data
 Although electronic commerce
introduces new threats not present in
traditional methods, it also provides
possibility of more effective controls

Agenda
What is Electronic
Commerce?
 Understanding the Internet
 IT components of
Electronic Commerce
 Control issues related to
Electronic Commerce
 E-Payments

E-Payment Methods
Magnetic Strip Card
(e.g., ATM cards)
 Smart Cards:
 contains microprocessor
and storage unit
 store 100 times more data
 popular in Europe
 requires US equipment investment

SET Protocol
Secure Electronic
Transaction (SET)
 Master Card / Visa
 Provide secure payment environment
for transmission of credit card data
 Number SET users increased by 300%
since implementation in 1998

SET Features
Confidentiality (encryption)
 Data integrity
 digital signatures / message digests
 Cardholder / merchant authentication
 digital signatures / certificates
 Platform interoperability
 defined protocols / message formats

Topics Covered
What is Electronic
Commerce?
 Understanding the Internet
 IT components of
Electronic Commerce
 Control issues related to
Electronic Commerce
 E-Payment
