This Document Contains Chapters 11 to 12 Chapter 11 Payment Systems for Electronic Commerce Review Questions 1. Name the most common forms of payment used in online transactions. Answer: The most common forms of payment for online transactions are credit or debit cards and alternative payment systems (predominantly PayPal). 2. What types of companies are most likely to use biller-direct EBPP systems? Answer: Large companies who want to manage and maintain their own systems are the ones most likely to use biller-direct EBPP systems. Utilities, telephone companies, and financial services companies (for payments on credit cards, mortgage and auto loans, and so on) are the primary users of biller-direct systems. 3. What types of companies are most likely to use consolidator EBPP systems? Answer: Most consolidator EBPP systems are operated by banks or credit unions as a service to their customers. 4. What is a micropayment? Answer: Internet payments for items costing from a few cents to approximately a dollar are called micropayments. 5. What is a debit card? Answer: A debit card looks like a credit card, but it works quite differently. Instead of charging purchases against a credit line, a debit card removes the amount of the sale from the cardholder’s bank account and transfers it to the seller’s bank account. Debit cards are also called electronic funds transfer at point of sale (EFTPOS) cards, especially outside the United States. Debit cards are issued by the cardholder’s bank and usually carry the name of a major credit card issuer, such as Visa or MasterCard, by agreement between the issuing bank and the credit card issuer. By branding their debit cards (with the Visa or MasterCard name), banks ensure that their debit cards will be accepted by merchants who recognize the credit card brand names. 6. What is a store charge card and how is it different from a credit card? Answer: A store charge card (store-branded card) is a charge card issued by a specific retailer. A charge card carries no spending limit, and the entire amount charged to the card is due at the end of the billing period whereas credit cards have a spending limit based on the user’s credit history. A user can pay off the entire credit card balance or pay a minimum amount each billing period. Charge cards do not involve lines of credit and do not accumulate interest charges while credit card issuers charge interest on any unpaid balance. 7. What is a payment card interchange network? Answer: When a merchant accepts payment cards for online payment or for orders placed over the telephone, the merchant can authenticate and authorize purchases using an interchange network. An interchange network is a set of connections between banks that issue credit cards, the associations that own the credit cards (such as MasterCard or Visa), and merchants’ banks. 8. What is a credit card association? Answer: Credit card associations are member-run organizations that issue credit cards to individual consumers. Also called customer issuing banks. Visa and MasterCard are credit card associations that are operated by the banks who are members in the associations. 9. What is a merchant account? Answer: A merchant account is an account that a merchant must hold with a bank that allows the merchant to process payment card transactions. 10. What is a chargeback? Answer: When a cardholder successfully contests a charge, the acquiring bank must retrieve the money it placed in the merchant account in a process called a chargeback. To ensure that sufficient funds are available to cover charge backs, an acquiring bank might require a company to maintain funds on deposit in the merchant account. 11. What is an acquirer fee and what services does it cover? Answer: Acquirer fees are fees charged by an acquiring bank for providing payment card processing services. Acquirer fees usually include a charge per month and per transaction and are set by the acquiring bank. 12. Name one factor that affects the rate charged as an interchange fee. Answer: The rates that interchange fees are charged at depend on the merchant’s industry. The interchange fee rates are set by the card association itself (for example, Visa or MasterCard) and charged to the acquiring bank, which generally passes the cost along to the merchant. 13. Why do online merchants often ask a customer to provide their credit cards CVN? Answer: Having a CVN establishes that the purchaser has the card (or has seen the card) and is more likely not to be using a stolen card number. 14. Name three types of businesses that might use an ACH network. Answer: In addition to some online merchants, issuing banks, interchange networks, and acquiring banks also use the ACH network to transfer funds to clear their card payment accounts with each other, so this network is an important part of online payment processing. 15. What is a payment gateway? Answer: A front-end processor obtains authorization for the transaction by sending the transaction’s details to the interchange network and storing a record of the approval or denial(a process which usually takes less than a second). Front-end processors (or the hardware and software that they use to obtain transaction approvals) are often called payment gateways. 16. Briefly explain the key differences between a stored-value card that uses a magnetic strip and one that uses an embedded microchip. Answer: Most magnetic strip cards hold value that can be recharged by inserting them into the appropriate machines, inserting currency into the machine, and withdrawing the card; the card’s strip stores the increased cash value. Magnetic strip cards are passive; that is, they cannot send or receive information, nor can they increment or decrement the value of cash stored on the card. The processing must be done on a device into which the card is inserted. The embedded microchip can also store information, but it can store more than 100 times the amount of information that a magnetic strip can store. Thus, a stored-value card can hold private user data, such as financial facts, encryption keys, account information, credit card numbers, health insurance information, medical records, and so on. The microchip can also include a tiny computer processor that can perform calculations and storage operations right on the card. Most of these cards incorporate nearfield communication (NFC) technology, which allows for contactless data transmission over short distances (generally less than about 25 inches), so the computer processor in the microchip can interact with readers and other devices. Microchip cards are safer than magnetic strip credit cards because the information stored on a smart card can be encrypted. 17. What are the two types of storage available for digital cash? Answer: Digital cash can be held in online storage or offline storage. Online cash storage means that the consumer does not personally possess digital cash. Instead, a trusted third party, such as an online bank, coordinates all transfers of digital cash and holds the consumers’ cash accounts. In an online storage system, the merchant must contact the consumer’s bank to receive payment for a purchase. This helps prevent fraud by confirming that the consumer’s cash is valid. 18. Briefly describe the double spending issue with digital cash. Answer: Double spending is spending a particular piece of digital cash twice by submitting the same electronic currency to two different vendors. When the electronic currency reaches the bank for clearance a second time, it is too late to prevent the fraudulent act. The main deterrent to double spending is the threat of detection and prosecution. Thus, digital cash must be traceable back to its origin. 19. What is money laundering? Answer: Money laundering is a technique used by criminals to convert money that they have obtained illegally into cash that they can spend without having it identified as the proceeds of an illegal activity. Money laundering can be accomplished by purchasing goods or services with ill-gotten digital cash. The goods are then sold for physical cash on the open market. 20. What is a digital wallet? Answer: A digital wallet, serving a function similar to a physical wallet, is an electronic device or software that can store credit card numbers, digital cash, owner identification, and owner contact information and provide that information to an online business at checkout. Digital wallets give consumers the benefit of entering their information just once, instead of having to enter their information at every site with which they want to do business. 21. Why is privacy a concern for users of a digital wallet? Answer: Software-based digital wallets fall into two categories, depending on where they are stored, server-side and client-side. The main weakness of server-side digital wallets is that a security breach could reveal thousands of users’ personal information to unauthorized parties. Typically, server-side digital wallets employ strong security measures that minimize the possibility of unauthorized disclosure. A disadvantage of client-side wallets is that they are not portable. For example, a client-side wallet is not available when a purchase is made from a computer other than the computer on which the wallet resides. This removes the risk that an attack on a client-side digital wallet vendor’s server could reveal the sensitive information. However, an attack on the user’s computer could yield that information. 22. What is the meaning of “float” as the term is used in the financial services industry? Answer: Float is the delay that occurs between the time that a person writes a check and the time that check clears the person’s bank. 23. What is a phishing attack? Answer: The basic structure of a phishing attack involves an attacker who sends e-mail messages to a large number of recipients who might have an account at a targeted Web site. 24. What is identity theft? Answer: Identity theft is a criminal act in which the perpetrator gathers personal information about a victim and then uses that information to obtain credit. After establishing credit accounts, the perpetrator runs upcharges on the accounts and then disappears. 25. What is a zombie farm? Answer: A zombie farm is a group of computers on which a hacker has planted zombie programs. Exercises 1. In about 100 words, discuss issues that arise when processing small payments (under$10) for online transactions. Be sure to describe the solutions to any problems you identify, including the names of companies or products that provide such solutions. Answer: Mobile telephone carriers are currently the most widely used small payments services. Buyers make their purchases using their mobile phones and the charges appear on the buyers’ monthly mobile phone bill. The use of this micropayment system has been held back by the mobile carriers’ substantial charges for providing the service, which can amount to 30 percent of each transaction. The company that offers the service typically takes another five percent, thus the buyer can end up paying substantially more than the actual value of the purchase. One of the largest small payments markets today is for music downloads. Most of the music and smartphone software downloads sold by Amazon and Apple (iTunes) are paid by credit card. Sales through the Google Play store are primarily paid as charges on the customer’s monthly mobile phone bill. 2. In a paragraph, explain how payment processing is different for credit cards and debit cards. Answer: A credit card, such as a Visa or MasterCard, has a spending limit based on the user’s credit history; a user can pay off the entire credit card balance or pay a minimum amount each billing period. Credit card issuers charge interest on any unpaid balance. Note that a consumer is protected by an automatic 30-day period in which he or she can dispute an online credit card purchase. A debit card looks like a credit card, but it works quite differently. Instead of charging purchases against a credit line, a debit card removes the amount of the sale from the cardholder’s bank account and transfers it to the seller’s bank account. 3. In about 100 words, explain what a “card not present” transaction is and why it presents a greater risk than card present transactions for a retail business. Answer: Online credit card purchases are similar to telephone purchases in that the card holder is not present and cannot provide proof of identity as easily as he or she can when standing at the cash register. Online and telephone purchases are often called card not present transactions and both include an extra degree of risk for merchants and banks. 4. In one or two paragraphs, explain the difference between an open loop and a closed loop payment card processing system. Answer: In some payment card systems, the card issuer pays the merchants that accept the card directly and does not use an intermediary, such as a bank or clearinghouse system. These types of arrangements are called closed loop systems because no other institution is involved in the transaction. American Express and Discover Card are examples of closed loop systems. Open loop systems add additional payment processing intermediaries to the structure of a closed loop system. Suppose an Internet shopper uses a Visa card issued by the First Bank of Woodland to purchase an item from Web Wonders, whose bank account is at the Hackensack Commerce Bank. The banking system includes one or more intermediaries (banks or other types of payment processing companies) that coordinate the transfer of funds from the First Bank of Woodland to the Hackensack Commerce Bank. Whenever additional parties, such as the intermediaries in this example, are included in payment card transaction processing, the system is called an open loop system. 5. In one or two paragraphs, describe the role of an acquiring bank in processing online payment transactions. Answer: An acquiring bank is a bank that does business with sellers (both Internet and non-Internet) that want to accept payment cards. To process payment cards for Internet transactions, a business must set up a merchant account with an acquiring bank. One type of merchant account is similar to a regular business checking account; the merchant’s acquiring bank collects credit card receipts on behalf of the merchant from the payment card-issuing bank and credits their value, net of processing fees, to the merchant’s account. More commonly, a merchant account is set up to operate as a credit line rather than as a checking account; that is, the acquiring bank makes what is essentially a non-interest-bearing loan to the merchant in the amount of the net credit card receipts each day. As the acquiring bank collects the proceeds of the transactions from the issuing bank, the acquiring bank reduces the balance of the non-interest-bearing loan to the merchant. 6. In about 100 words, explain why an acquiring bank would normally evaluate the creditworthiness of a business before opening a merchant account to process credit card transactions for that business. Answer: The acquiring bank wants to be sure that the merchant has a good prospect of staying in business and wants to minimize its risk. If the merchant is new or is not doing well financially, the acquiring bank might ask for a deposit or personal guarantees of the owners or stockholders of the merchant. In some cases, the acquiring bank will demand that collateral (the owner’s house, for example) be assigned. The riskiness of the business also influences the acquiring bank’s decision to provide a merchant account. Some types of businesses have a higher likelihood that customers will contest card charges than others. The bank assesses the level of risk in the business based on the type of business and the credit information that is provided. Acquiring banks must estimate what percentage of sales are likely to be contested by cardholders. 7. In about 200 words, explain what function is performed by payment processors and briefly describe how each of the two types of payment processors performs this function. Answer: Small online businesses generally rely on a service provider either to assist them in processing payment card transactions or to handle the entire function for them. These service providers are called payment processing service providers or payment processors and are usually grouped into two general types, front-end processors and back-end processors. A front-end processor obtains authorization for the transaction by sending the transaction’s details to the interchange network and storing a record of the approval or denial(a process which usually takes less than a second). Front-end processors (or the hardware and software that they use to obtain transaction approvals) are often called payment gateways. A back-end processor takes the transactions from the front-end processor and coordinates information flows through the interchange network to settle the transactions. The back-end processor handles chargebacks and any other reconciliation items through the interchange network and the acquiring and issuing banks, including the ACH transfers. 8. In about 100 words, explain why stored-value cards that are NFC enabled were slower to catch on in the United States than in Europe and Asia. Answer: In the United States, NFC has been slower to catch on because there is already a well-established banking network that supports customers with credit cards and ATM machines to provide a ready supply of cash and credit. In the United States, most consumers have credit cards, debit cards, charge cards, and checking accounts. These payment alternatives work well for U.S. consumers in both online and offline transactions. In addition, most restaurant and retail store cash registers don’t have built-in smart card readers. 9. Bitcoin has fluctuated widely in value since its inception. In about 100 words, outline the reasons that a cryptocurrency might fluctuate to a greater degree than most other currencies. Answer: There are several reason cryptocurrencies might fluctuate to a greater degree than other currencies: • Cryptocurrency generally lacks stability without a country’s legal system to back it • Prices are based on supply and demand • Limited use in everyday transactions • Cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist 10. Some anonymous digital cash products are touted as being free from the constraints of any banking system or government regulation. In about 100 words, evaluate this claim and outline how such a freedom might affect the usefulness of such a product. Answer: The use of digital cash provides no audit trail; that is, digital cash is just like real cash in that it cannot be easily traced. Because true digital cash is not traceable, another problem arises: money laundering. Money laundering is a technique used by criminals to convert money that they have obtained illegally into cash that they can spend without having it identified as the proceeds of an illegal activity. Money laundering can be accomplished by purchasing goods or services with ill-gotten digital cash. The goods are then sold for physical cash on the open market. 11. In one or two paragraphs, explain what the Check 21 law facilitates and explain what it was intended to accomplish. Answer: The Check Clearing for the 21st Century Act (usually referred to as Check 21) permits banks to eliminate the movement of physical checks entirely. Today, retailers can scan a customer’s check. The scanned image is transmitted instantly through a clearing system and posts almost immediately to both accounts (that is, the withdrawal from the customer’s account and the deposit to the retailer’s account occur instantly), eliminating any float on the transaction. 12. In about 100 words, explain how a phishing attack could be used to perpetrate identity theft. Include a brief description of countermeasures that might prove effective in thwarting such an attack. Answer: Large criminal organizations can be highly efficient perpetrators of identity theft because they can exploit large amounts of personal information very quickly and efficiently. These organizations can use phishing attacks to gather personal information and then use it to perpetrate identity theft and other crimes. These criminal organizations often sell or trade information that they cannot use immediately to other organized crime entities around the world. Some of these criminal transactions are even conducted online. For example, a hacker who has planted zombie programs on a large number of computers (thus creating a zombie farm) might sell the right to use the zombie farm to an organized crime association that wants to launch a phishing attack (when a zombie farm is used this way, the attack is sometimes called a pharming attack). Individuals who commit these crimes have always posed a serious threat, but organized crime’s entry into this activity increases the threat. Several groups are working on ways to improve the Internet’s mail transport protocols so that spam senders can be identified. Because spa mis a key element of phishing attacks, any protocol change that improves e-mail recipients’ ability to identify the source of an e-mail message will also help to reduce the threat of phishing attacks. The most important step that companies can take today, however, is to educate their Web site users. Cases C1.Digital Wallets on Mobile Devices: Apple and Google 1. Google Wallet: • Users must maintain balance with issuing bank • No fee to merchants • No transaction fee • Covers costs with advertising to consumers Apple Pay • 0.05% transaction fee to issuing bank • Covers fraudulent transactions • Consumers not charged and not subject to advertising 2. Responses will vary, but students should mention how Google struggled to get Google Wallet to catch on. Android Pay is meant to be better, more convenient and more secure. 3. Responses will vary, but students should mention how Current C has been in beta testing but has closed beta as of June 2016 with the future uncertain. Current C was not met with enthusiasm by consumers. 4. Responses will vary. Some banks offering digital wallets include: • http://www.pymnts.com/news/payment-methods/2016/fifth-third-masterpass-digital-wallet/ • http://www.recode.net/2015/10/26/11620042/chase-announces-chase-pay-its-own-digital-wallet C2. The Moose Hut 1. Responses will vary. PayPal Processing Pro - Canada • $35 monthly • 2.9% plus $0.30 or less per transaction • Currencies – CAD and USD Merchant Accounts.ca • Setup fee– none • Monthly fee – none • Discount - 2.5% • Per transaction - $.30 • Currencies – CAD and USD Authorize.net • Setup fee - $49.00 • Monthly gateway fee - $25.00 • Transaction fee –2.9% + $0.30 • Currencies – CAD and USD 2. Responses will vary. In 2014, about 90 percent of Bitcoins were held by speculators rather than by individuals who expect to use the digital currency to make purchases. As a currency that lacks stability and has no country’s legal system to back it, Bitcoin is of limited use in everyday transactions. Experts disagree on the future viability of Bitcoin; however, some believe it has great potential for adoption around the world. 3. Responses will vary, but students should offer several different options for portable card readers. Chapter 12 Planning for Electronic Commerce Review Questions 1. What are the two keys to successful implementation of an information technology project? Answer: The keys to successful implementation of any information technology project are planning and execution. 2. Provide two brief examples of business strategies that might be included in the plan for an online business initiative. Answer: A successful business plan for an online business initiative should include activities that identify the initiative’s specific objectives and link those objectives to business strategies. In setting the objectives for an online business initiative, managers should consider the strategic role of the project, its intended scope, and the resources available for executing it. Businesses use tactics called downstream strategies to improve the value that the business provides to its customers. Alternatively, businesses can pursue upstream strategies that focus on reducing costs or generating value by working with suppliers or inbound shipping and freight service providers. 3. What is the goal of a downstream strategy? Answer: Downstream strategies improve the value that a business provides to its customers. 4. What is the goal of an upstream strategy? Answer: Upstream strategies focus on reducing costs or generating value by working with suppliers or inbound shipping and freight service providers. 5. How might an online retailer measure increased customer satisfaction? Answer: Answers may vary. Increased customer satisfaction might be measured by counting the number of first-time customers who return to the site and buy. 6. What is total cost of ownership? Answer: Total cost of ownership (TCO) is the business activity costs including the costs of hiring, training, and paying the personnel who will design the Web site, write or customize the software, create the content, and operate and maintain the site. TCO also includes hardware and software costs. 7. Provide one brief example of an opportunity cost. Answer: Opportunity costs of not undertaking an online business initiative could include the value of customers never obtained, sales not made, suppliers not identified, or cost reductions not achieved in the company’s supply chain. 8. What is an angel investor? Answer: An angel investor is an investor who funds the initial startup of an online business. In return for his capital, the angel investor becomes a stockholder in the business and often owns more of the business than the founder. Typical funding by angel investors is between a few hundred thousand dollars and a few million dollars. 9. What is a venture capitalist? Answer: Venture capitalists are very wealthy individuals, groups of wealthy individuals, or investment firms that look for small companies that are about to grow rapidly. They invest large amounts of money (between a million and a few hundred million dollars) hoping that in a few years the company will be large enough to sell stock to the public in an event called an initial public offering (IPO). 10. What is an initial public offering (IPO)? Answer: An initial public offering (IPO) is the original sale of a company’s stock to the public. 11. What is a capital project? Answer: A capital project, or capital investment, is a major outlay of funds made by a company to purchase fixed assets such as property, a factory, or equipment. 12. What specific information is provided by a return-on-investment (ROI) calculation? Answer: Return on investment (ROI) techniques measure the amount of income (return) that will be provided by a specific current expenditure (investment). ROI techniques provide a quantitative expression of whether the benefits of a particular investment exceed their costs (including opportunity costs). 13. What is late outsourcing? Answer: Late outsourcing is the hiring of an external company to maintain an electronic commerce site that has been designed and developed by an internal information systems team. 14. What is component outsourcing? Answer: Component outsourcing is synonymous with partial outsourcing. It is the outsourcing of the design, development, implementation, or operation of specific portions of an electronic commerce system. 15. What is project management? Answer: Project management is a collection of formal techniques for planning and controlling the activities undertaken to achieve a specific goal. 16. What is the function of a database administrator in an online business operation? Answer: The database administration function supports activities such as transaction processing, order entry, inquiry management, or shipment logistics. These activities require either an existing database into which the site is being integrated, or a separate database established for the electronic commerce initiative. It is important to have a database administrator who can effectively manage the design and implementation of this function. 17. What is a postimplementation audit? Answer: A postimplementation audit (also called a post audit review) is a formal review of a project after it is up and running. It gives managers a chance to examine the objectives, performance specifications, cost estimates, and scheduled delivery dates that were established for the project in its planning stage and compare them to what actually happened. 18. What is change management? Answer: Change management is the process of helping employees cope with these changes. Change management techniques include communicating the need for change to employees, including employees in the decision processes leading up to the change, allowing employees to participate in the planning for the change, and other tactics designed to help employees feel that they are a part of the change. This helps employees overcome the feelings of powerlessness that can lead to stress and reduced work performance. Exercises 1. Midtown Bistro, a local restaurant, has hired you to help them develop a new online business initiative. The company wants to use social networking actively in its marketing plan and integrate it into its Web site. In one or two paragraphs, identify three benefits that Midtown Bistro might hope to obtain from this initiative and then write one additional paragraph about how it might measure its achievement of each benefit objective. Answer: Answers may vary. Some benefits might include increased sales, increased brand awareness and increased customer satisfaction. Some measurement techniques might include measuring the number of visitors, the number of return visits per visitor, the duration of average visit, or the participation in online discussions. 2. In about 100 words, name four activities that a business might want to accomplish online and for each activity, briefly explain why its success might be difficult to measure. Answer: Responses will vary, but some activities might include: • Building brands • Enhancing existing marketing programs • Selling products and services • Selling advertising • Developing a better understanding of customer needs • Improving after-sale service and support • Purchasing products and services • Managing supply chains • Operating auctions • Building or using virtual communities to maintain relationships with customers and suppliers Ways to measure some of the above activities might include: Benefit Objective Common Measurements Build brands Surveys or opinion polls that measure brand awareness, changes in market share Enhance existing marketing programs and create new marketing programs Change in per-unit sales volume, frequency of customer contact, conversion (to buyers) rate Improve customer service Customer satisfaction surveys, quantity of customer complaints, customer loyalty Reduce cost of after-sale support Quantity and type (telephone, fax, e-mail) of support activities, change in net support cost per customer Improve supply chain operation Cost, quality, and on-time delivery of materials or services purchased, overall reduction in cost of goods sold Hold auctions Quantity of auctions, bidders, sellers, items sold, registered participants; dollar volume of items sold; participation rate Provide portals, social networks, and virtual communities Number of visitors, number of return visits per visitor, duration of average visit, participation in online discussions 3. In about 100 words, explain why companies began creating pilot Web sites during the second wave of electronic commerce. Answer: In the second wave of electronic commerce, companies started taking a closer look at the benefits and costs of their electronic commerce initiatives before committing resources to them. It became necessary for online business ideas to have specific objectives for benefits to be achieved and costs to be incurred. Companies began creating pilot Web sites to test their online business ideas and then released production Web sites to handle full implementations. Companies started specifying clear goals that their pilot tests had to meet before they would launch new Web sites in their full production versions. 4. In a paragraph or two, outline two online activities that businesses can use to improve the value they provide to customers. Answer: Businesses use tactics called downstream strategies to improve the value that the business provides to its customers. Activities might include: • Building or using virtual communities to maintain relationships with customers and suppliers • Developing a better understanding of customer needs • Improving after-sale service and support 5. In about 100 words, list and briefly describe four specific activities that a company might undertake in the formation of an online business initiative. Answer: A successful business plan for an online business initiative should include activities that identify the initiative’s specific objectives, link those objectives to business strategies, identify and measure benefits, and identify and estimate costs. 6. In the third wave of electronic commerce, businesses no longer limit their vision of online activity to Web sites. In two or three paragraphs, outline at least two online business implementations that would not be accomplished by building or improving a Web site. Answer: In the third wave, companies are moving beyond a conceptualization of online business as a Web site that communicates to individual users running Web browser software on their computers. The pervasiveness of smartphones and tablet devices puts the power of a Web browser into many more hands in many more locations. It also changes the nature of online communication. Messaging between a Web client running on a fixed location computer and a Web browser is a communication from one point to another, much like a land-line telephone. Web clients running on multiple devices (some of which might be used simultaneously by a single user) make the types of communication and interaction richer and able to accomplish a wider array of tasks. The ease of acquiring the benefits of a technology is also increasing. For example, a company might never own its own micro blogging-based social media tool (such as Twitter), but it can certainly use the tool Twitter provides to participate in a virtual community in ways that cement its relationships with customers, suppliers, and even its own employees. The most profound change in the third wave, however, is likely to be the increase in electronic commerce activities by smaller businesses. These firms can use the existing communication infrastructure of the world’s Facebooks, Twitters, and similar social media tools to get information out to potential customers very effectively without investing large amounts of money in their own Web infrastructures. Some experts even suggest that small businesses might be better off investing their promotional resources in social media than in traditional Web sites. 7. No matter how a company measures the benefits provided by an online business implementation, it usually tries to measure those benefits in monetary units. In a paragraph or two, explain why this is a good practice. Answer: No matter how a company measures the benefits provided by an online business implementation, it usually tries to convert the raw activity measurements to monetary units. Having the benefits expressed in monetary units lets the company compare benefits to costs and compare the net benefit (benefits minus costs) of a particular initiative to the net benefits provided by other projects. Although each activity provides some value to the company, it can be difficult to measure the value in monetary units precisely. Usually, even the best attempts at these measurement conversions yield only rough approximations. 8. In one paragraph, name and briefly describe two specific costs that might be included in the total cost of ownership of an online business initiative. Answer: The TCO of an electronic commerce implementation includes the costs of hardware (server computers, routers, firewalls, and load balancing devices), software (licenses for operating systems, Web server software, database software, and application software), design work outsourced, salaries and benefits for employees involved in the project, and the costs of maintaining the site once it is operational. 9. The cost of launching an online business has increased steadily since the early years of electronic commerce. In about 100 words, explain why this change has occurred. Answer: Although the total dollar amounts required to create and operate a Web site have varied over the years (and across specific types of businesses), the relative proportion of startup costs has remained surprisingly stable. About 10 percent of the cost is for computer hardware, another 10 percent is for software, and about 80 percent of the cost is for labor (including both internal labor and the cost of outside consultants). The annual cost of operating an online business Web site generally ranges between 50 and 200 percent of the initial cost of the site. Note, however, that many industry observers have noted that costs are generally heading downward. Startup firms increasingly find they can get their operations launched for dollar amounts that are in the low end of the range in each category. Lower costs for broadband access and computer hardware play a major role, but the most significant trend is that the cost of developing and maintaining software to run an online business (a cost that includes a substantial labor component) is decreasing. 10. In about 100 words, explain the advantages and disadvantages of using ROI to evaluate online business proposals. Answer: Return on investment (ROI) techniques measure the amount of income (return) that will be provided by a specific current expenditure (investment). ROI techniques provide a quantitative expression of whether the benefits of a particular investment exceed their costs (including opportunity costs). They can also mathematically adjust for the reduced value of benefits that the investment will return in future years (benefits received in future years are worth less than those received in the current year). Note, however, that ROI has some built-in biases that can lead managers to make poor decisions. First, ROI requires that all costs and benefits be stated in dollars. Because it is usually easier to quantify costs than benefits, ROI measurements can be biased in a way that gives undue weight to costs. Second, ROI focuses on benefits that can be predicted. Many electronic commerce initiatives have returned benefits that were not foreseen by their planners. The benefits developed after the initiatives were in place. Yet another weakness of ROI is that it tends to emphasize short-run benefits over long-run benefits. 11. In two or three paragraphs, explain why early outsourcing is often used for some parts of online business initiatives. Answer: In many electronic commerce projects, the company outsources the initial site design and development to launch the project quickly. The outsourcing team then trains the company’s information systems professionals in the new technology before handing the operation of the site over to them. This approach is called early outsourcing. Because operating an electronic commerce site can rapidly become a source of competitive advantage for a company, it is best to have the company’s own information systems people working closely with the outsourcing team and developing ideas for improvements as early as possible in the life of the project. 12. In about 300 words, explain how incubators and accelerators work. In your answer, compare these two approaches and provide at least one example of each. Answer: An incubator is a company that offers startup companies a physical location with offices, accounting and legal assistance, computers, and Internet connections at a very low monthly cost. Sometimes, the incubator offers seed money, management advice, and marketing assistance as well. In exchange, the incubator receives an ownership interest in the company, typically between 10 percent and 50 percent. One of the first Internet incubators was Idea lab, which helped launch companies such as CarsDirect.com, Overture, and Tickets.com. Another example is Spark Labs, an incubator that develops new ideas at its facilities in Seoul, South Korea. An accelerator is a company that performs a function similar to that of an incubator; however, accelerators structure their activities differently. Also, accelerators tend to work with entrepreneurs who have already developed their idea into a business as opposed to incubators, which often work with entrepreneurs who are still at the “I have a great idea” stage. Y Combinator is a highly successful accelerator. Other companies that operate accelerators include TechStars and the Brander. 13. In about 100 words, outline the functions of project management software. In your answer, explain what problems this type of software is designed to prevent. Answer: Project management software to helps project managers oversee projects. Commercial project management software products give managers an array of built-in tools for managing resources and schedules. The software can generate charts and tables that show, for example, which parts of the project are critical to its timely completion, which parts can be rescheduled or delayed without changing the project finish date, and where additional resources might be most effective in speeding up the project. In addition to managing the people and tasks of the internal team, project management software can help the team manage the tasks assigned to consultants, technology partners, and outsourced service providers. Cases C1. Idea Market 1. Responses will vary. Some may consider the decision a strategic error because Idea lab abandoned some of its organizational strengths to compete in a market already dominated by Amazon. Others may report that the decision was a simple case of bad timing. Idea lab entered the market when the initial e-commerce Internet bubble was beginning to burst and investments were drying up. 2. Responses will vary, as the case does not specify Gross' rationale for the decision to devote Idea lab’s resources to the development of internally generated ideas. Possible explanations include: • Previous experience with external entrepreneurs ended in financial failure. • After struggling through several years of conflict and failure, Gross was eager to start over with a streamlined, cohesive organization. 3. Students should compare and contract Quirky with Idea Market. It would be wise to note that with new financing and owners Quirky relaunched in mid-2016 while Idea Market shut down as of March 2016 (http://www.ideamarket.com/). Some people theorize Quirky failed the first time around because it attempted to accomplish too much. It set its sights on developing fifty-plus products a year rather than focusing on product iteration. C2. Davis Humanins 1. Responses will vary. Benefits include: • Improved customer service • Increased revenue • Better internal communication • The ability to correctly identify target audience • Analysis of customer service practice – the information can then be used to identify areas that need improvement • Quick access to information • More accurate data • Can be used to improve security by controlling who has access to data 2. Responses will vary. Students should list the major limitations of using ROI as an evaluation method. These include: • ROI measurements can be biased, thereby giving undue weight to costs. • ROI tends to focus on benefits that can be predicted; therefore, unforeseen benefits may never be realized. • ROI calculations tend to weigh short-term costs and benefits more heavily than long-term costs and benefits. As a result, ROI analysis may be unrealistic and lead managers to make incorrect decisions. • Information technology projects are especially difficult to accurately model using ROI analysis. Solution Manual for Electronic Commerce Gary P. Schneider 9781305867819
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