CH-5-6 Business-to-Business Activities: Improving Efficiency and Reducing Costs – Electronic Commerce : Chapter Notes

This Document Contains Chapters 5 to 6 Chapter 5 Business-to-Business Activities: Improving Efficiency and Reducing Costs At a Glance Instructor’s Manual Table of Contents • Introduction • Learning Objectives • Teaching Tips • Quick Quizzes • Class Discussion Topics • Additional Projects • Additional Resources • Key Terms Lecture Notes Introduction Since the first large companies evolved during the Industrial Revolution, they have sought ways to cut costs and operate more efficiently by streamlining their internal manufacturing processes. As more countries around the world developed increasingly reliable transportation and governmental infrastructures, companies felt more comfortable contracting with foreign providers for various business functions, despite technological and cultural differences between countries. One potential source of business service workers existed (and still exists) in the poorest countries of the world. The lack of infrastructure (water, electricity, and roads) in less-developed countries often limited the kinds of business activities in these countries. The Internet, however, has started to change this. Sama source is a not-for-profit organization that facilitates connections between these potential workers and work that large high-tech companies need to have done. Sama source contracts with large companies that have specific business processing needs, such as data entry, transcriptions, creating captions for images, error-checking information in databases, translating text, and so on. Sama source then breaks down these projects into small tasks that workers can perform anywhere in the world, as long as they have an Internet connection. Sama source has lifted more than 3800 African, Asian, and Haitian workers and their families above the poverty line by lining up work for them with companies such as Google, Microsoft, Walmart, and Getty Images and providing the necessary technology and connectivity resources. Organizations such as Sama source help businesses in the developed world get tasks accomplished more cost-effectively. At the same time, they help build worker knowledge and skills in less developed countries that can help industries grow there. Global industries see this development of trained workforces that can eventually support manufacturing industries as a good long-term strategy. The Internet helps bring together work and workers in a way that does a great deal of good for people in need around the world. Learning Objectives In this chapter, your students will learn: • How businesses use the Internet to improve purchasing, logistics, and other business process activities • How the Internet facilitates implementation of outsourcing and offshoring business strategies • How electronic data interchange and how it has evolved using Internet technologies • How businesses have moved some of their electronic data interchange operations to the Internet • What supply chain management is and how it uses Internet technologies to improve efficiency and cooperation in supply chains • How the various types of online business marketplaces operate to make B2B transactions easier and more efficient Teaching Tips Purchasing, Logistics, and Business Support Processes 1. Introduce the chapter by explaining that students will learn how companies use electronic commerce to improve their business processes, including purchasing and logistics primary activities and all of the processes relating to their support activities (which include finance and administration, human resources, and technology development). 2. Refer to Figure 1-9 in Chapter 1 for a review of primary activities and support activities. 3. Note that although the work might not seem as creative as designing a Web site or developing an advertising campaign, the potential impact of cost reductions and business process improvements in purchasing, logistics, and support activities is tremendous. Outsourcing and Offshoring 1. Explain why an important characteristic of purchasing, logistics, and support activities is flexibility. 2. Introduce the terms outsourcing, offshoring, business process offshoring, and impact sourcing/smart sourcing. Purchasing Activities 1. Explain that purchasing activities include identifying and evaluating vendors, selecting specific products, placing orders, and resolving any issues that arise after receiving the ordered goods or services. 2. Remind students that companies can organize their strategic business unit activities using an industry value chain. 3. Introduce the term supply chain. 4. Discuss the Purchasing Department’s role within the supply chain. Note that the Purchasing Department within most companies traditionally has been charged with buying all product or service components at the lowest price possible. 5. Mention that another term used to describe procurement activities is supply management. 6. Introduce the terms sourcing and e-sourcing. 7. Refer to Figure 5-1 to illustrate the steps in a typical business purchasing process. 8. Introduce the term spend. Direct vs. Indirect Materials Purchasing 1. Discuss the concept of direct vs. indirect materials purchasing. 2. Introduce the term direct materials. 3. Review the two types of direct materials purchasing: replenishment purchasing (contract purchasing) and spot purchasing. Introduce the term spot market. 4. Discuss indirect materials (maintenance, repair, and operating (MRO) supplies) and purchasing cards (p-cards). Logistics Activities 1. Note that businesses need to ensure that the products they sell to customers are delivered on time and that the raw materials they buy from vendors and use to create their products arrive when needed. 2. Point out that logistics activities include managing the inbound movements of materials and supplies and the outbound movements of finished goods and services. 3. Introduce the term third-party logistics (3PL) provider. 4. Note that the marriage of GPS and portable computers with the Internet was an excellent example of second-wave electronic commerce. The addition of mobile device technologies to the mix is an example of third-wave electronic commerce. Business Process Support Activities 1. Explain that support activities include the general categories of finance and administration, human resources, and technology development. 2. Refer to Figure 5-2 to summarize categories of support activities. 3. Introduce the term knowledge management. 4. Note that a common support activity that underlies multiple primary activities is training. E-Government 1. Define the term e-government. 2. Refer to Figure 5-3 to illustrate the state of California’s one-stop portal site. 3. Explain that the most common services offered by states and similar regional government. They are: access to the text of state laws and regulations, renewal of licenses, promotion of the state to businesses considering new locations, job listings, promotion of tourism in the state, tax forms and filing information, and information for companies that want to do business with the state. Network Model of Economic Organization in Purchasing: Supply Webs 1. Emphasize that the need for clarity in purchasing, logistics, and support activities has led to a shift away from hierarchical structures toward network structures. 2. Emphasize that some researchers who study the interaction of firms within an industry value chain are beginning to use the term supply web instead of “supply chain.” Many industry value chains no longer consist of a single sequence of companies linked in a single line, but include many parallel lines that are interconnected in a web or network configuration made up of strategic alliances or complex configurations of outsourcing contracts. Quick Quiz 1 1. The part of an industry value chain that precedes a particular strategic business unit is called that business unit’s ____. Answer: supply chain 2. The total dollar amount of the goods and services that a company buys during a year is called its ____. Answer: spend 3. ____are those materials that become part of the finished product in a manufacturing process. Answer: Direct materials 4. ____ is the intentional collection, classification, and dissemination of information about a company, its products, and its processes. Answer: Knowledge management Electronic Data Interchange 1. Introduce the term EDI compatible. 2. Emphasize that understanding EDI is important because most B2B electronic commerce is based on EDI or adapted from EDI. It is also important because EDI is still the single most commonly used technology in online B2B transactions. Teaching Tip To learn more about EDI, see: http://www.covalentworks.com/what-is-edi.asp Early Business Information Interchange Efforts 1. Note that in 1968, a number of freight and shipping companies joined together to attack their collective paperwork burden. They created a standardized information set that included all the data elements that shippers commonly included on bills of lading, freight invoices, shipping manifests, and other paper forms. 2. Point out that although these industry-specific data interchange standards were helpful; their benefits were limited to members of the standard-setting groups in those specific industries. 3. Emphasize that full realization of economies and efficiencies required standards that could be used by companies in all industries. Emergence of Broader Standards: The Birth of EDI 1. The American National Standards Institute (ANSI) has been the coordinating body for standards in the United States since 1918. Note that ANSI does not set standards itself. Instead, it maintains procedures for the development of national standards and it accredits committees that follow those procedures. 2. Provide a historical outline of efforts to develop uniform EDI standards. • In 1979, ANSI chartered the Accredited Standards Committee X12 (ASC X12). • The ASC X12 standard currently includes specifications for several hundred transaction sets, which are the names of the formats for specific business data interchanges. • In 1987, the United Nations published its first standards under the title EDI for Administration, Commerce, and Transport (EDIFACT, or UN/EDIFACT). • Though attempts have been made to develop a single common set of international standards, these attempts have never succeeded. 3. Refer to Figure 5-4 to illustrate some of the more commonly used transaction sets, showing the paper document from which the transaction set was devised along with the identifiers of the ASC X12 and the UN/EDIFACT versions of the transaction set. Teaching Tip To learn more about ANSI, see: http://www.ansi.org/ How EDI Works 1. Point out that although the basic idea behind EDI is straightforward, its implementation can be complicated, even in relatively simplistic business scenarios. Paper-Based Purchasing Process and EDI Purchasing Process 1. With the paper-based purchasing process information transfer between the buyer and vendor is paper based and can be delivered by mail, courier, or fax. Refer to Figure 5-5. 2. The information flows that occur in the EDI version of a sample purchasing process are shown in Figure 5-6. 3. Compare the paper-based purchasing process in Figure 5-5 to the EDI purchasing process in Figure 5-6. • The departments are exchanging the same messages among themselves, but EDI reduces paper flow and streamlines the interchange of information among departments within a company and between companies. • The paper-based system has 16 individual steps compared to the eight steps required to complete this transaction using EDI. • The three key elements (shown in Figure 5-6) that alter the process so dramatically are the EDI network (instead of the mail service) that connects the two companies and the two EDI translator computers that handle the conversion of data from the formats used internally by the buyer and the vendor to standard EDI transaction sets. Value-Added Networks 1. Explain that trading partners can implement the EDI network and EDI translation processes in several ways. Each of these ways uses one of two basic approaches: direct connection or indirect connection. 2. Introduce the term direct connection EDI. Refer to Figure 5-7 as an example. 3. Introduce the term indirect connection EDI. Refer to Figure 5-8 as an example. 4. Introduce the following terms: nonrepudiation, Internet EDI/Web EDI/open EDI, EDIINT (Electronic Data Interchange-Internet Integration)/EDI-INT, AS2 (Applicability Statement 2), and AS3 (Applicability Statement 3). EDI Payments 1. Reintroduce the term electronic funds transfers (EFTs). 2. Explain that when EFTs involve two banks, they are executed using an automated clearing house (ACH) system which is a service that banks use to manage their accounts with each other. Quick Quiz 2 1. The ____ has been the coordinating body for standards in the United States since 1918. Answer: American National Standards Institute (ANSI) 2. (True or False) ANSI does not set standards itself, but maintains procedures for the development of national standards and it accredits committees that follow those procedures. Answer: True 3. ____ is the ability to establish that a particular transaction actually occurred. Answer: Nonrepudiation 4. When EFTs involve two banks, they are executed using a(n) ____ system, which is a service that banks use to manage their accounts with each other. Answer: automated clearing house (ACH) Supply Chain Management Using Internet Technologies 1. Define the term supply chain management. 2. Note that the ultimate goal of supply chain management is to achieve a higher-quality or lower-cost product at the end of the chain. Value Creation in the Supply Chain 1. Today, supply chain management is used to add value in the form of benefits to the ultimate consumer at the end of the supply chain. 2. Introduce the terms supply-chain competition, just-in-time inventory management, lean production, tier-one suppliers, tier-two suppliers, tier-three suppliers, and supply alliances. 3. Note that a key element in the coordination of supply chain activities is the establishment of a consistent production strategy that is adopted by all supply chain participants. Introduce the term production strategy. 4. Emphasize that clear communications, and quick responses to those communications, are key elements of successful supply chain management. Technologies, and especially the technologies of the Internet and the Web, can be very effective communications enhancers. 5. Introduce the term adaptive supply chain. 6. Refer to Figure 5-9 to illustrate the advantages of using Internet technologies in supply chain management. Increasing Supply Chain Efficiency and Cooperation 1. Explain how many companies are using Internet and Web technologies to manage supply chains in ways that yield increases in efficiency throughout the chain. These companies have found ways to increase process speed, reduce costs, and increase manufacturing flexibility so that they can respond to changes in the quantity and nature of ultimate consumer demand. 2. Introduce the term collaborative commerce. Materials-Tracking Technologies 1. Note that companies have been using optical scanners and bar codes for many years to help track the movement of materials. In many industries, the integration of bar coding and EDI has become prevalent. 2. Refer to Figure 5-10 as an example of a typical bar-coded shipping label that is used in the auto industry. 3. Introduce the terms real-time location systems (RTLS), Radio Frequency Identification Devices (RFIDs), active RFIDs and passive RFIDs. 4. Discuss the concept of a stockout. 5. Explain that many industry observers have concluded that general acceptance of product-level RDIF tagging will become widespread in retailing starting in 2017 with many retailers projecting full RRID reading capabilities in all of their locations by then. 6. Refer to Figure 5-11 to illustrate a passive RFID tag. Teaching Tip To learn more about RFID, see: http://www.aimglobal.org/?RFID Creating an Ultimate Consumer Orientation in the Supply Chain 1. Emphasize that the main goal of supply chain management is to help each company in the chain focus on meeting the needs of the consumer at the end of the supply chain. 2. Introduce the term ultimate consumer orientation. Building and Maintaining Trust in the Supply Chain 1. Emphasize that the major issue that most companies must deal with in forming supply chain alliances is developing trust. 2. Explain that many supply chain management researchers are working on new ways to accumulate information about supplier performance and report that information to supply chain partners. Online Business Marketplaces and Networks 1. Introduce the term vertical portals. 2. Note that your students will learn how these B2B electronic marketplaces were conceived, developed, and operated as this sector of electronic commerce matured from 1997 through the present. Independent Industry Marketplaces 1. Introduce the terms industry marketplaces, independent exchanges, public marketplaces, and independent industry marketplaces. 2. Note that by 2010 various forms of B2B marketplaces gradually replaced independent marketplaces. 3. Mention that four B2B marketplace models (private stores, customer portals, private company marketplaces, and industry consortia-sponsored marketplaces) will be covered in the remainder of this section. Private Stores and Customer Portals 1. Introduce the terms private store and customer portal. Private Company Marketplaces 1. Introduce the term e-procurement software. 2. Note that companies that implement e-procurement software usually require their suppliers to bid on their business. Use real-world examples to illustrate. 3. Introduce the terms private company marketplace, private industrial networks and private trading exchanges. Industry Consortia-Sponsored Marketplaces 1. Introduce the term industry consortia-sponsored marketplace. 2. Use Figure 5-13 to summarize the characteristics of five general forms of marketplaces that exist in B2B electronic commerce today. Point out that although the figure shows five distinct B2B marketplace categories, the lines between them are not always clear. Quick Quiz 3 1. (True or False) RFIDs can be read much more quickly and with a higher degree of accuracy than bar codes. Answer: True 2. (True or False) A passive RFID tag needs a power source. Answer: False 3. A(n) ____ occurs when a retailer loses sales because it does not have specific goods on its shelves that customers want to buy. Answer: stockout 4. (True or False) The major issue that most companies must deal with in forming supply chain alliances is developing trust. Answer: True 5. A(n) ____ has a password-protected entrance and offers negotiated price reductions on a limited selection of products - usually those that the customer has agreed to purchase in certain minimum quantities. Answer: private store 6. A(n) ____ marketplace is a marketplace formed by several large buyers in a particular industry. Answer: industry consortia-sponsored Class Discussion Topics 1. Discuss how different industries implement supply chain management. 2. Examine the different marketplaces and their impact on purchasing/shopping and information gathering. 3. What are the advantages and disadvantages of using a VAN? 4. Why is nonrepudiation important? 5. What are the obstacles to Internet EDI? Additional Projects 1. Provide answers to the following questions:  What are the advantages and disadvantages of RFID?  What do you think will be the impact of RFID on electronic commerce?  Why do you think the focus of RFID should be on the supply chain? 2. Describe five best practices that companies should develop in order to reap the benefits of e-sourcing. Additional Resources 1. EDI Basics: http://www.edibasics.co.uk/ 2. Electronic Data Interchange:http://www.truecommerce.com/resources/what-is-edi?gclid=CJjzkrWA0soCFdEYHwodc80HdQ 3. A General Framework for E-Government: Definition - Maturity Challenges, Opportunities, and Success: http://www.unpan.org/Library/MajorPublications/UNEGovernmentSurvey/PublicEGovernanceSurveyintheNews/tabid/651/mctl/ArticleView/ModuleId/1555/articleId/20840/Default.aspx 4. Knowledge Management Definition and Solutions: http://www.cio.com/article/40343/Knowledge_Management_Definition_and_Solutions 5. Supply Chain Management: http://www.cio.com/article/40940/Supply_Chain_Management_Definition_and_Solutions Key Terms  Accredited Standards Committee X12 (ASC X12): committee that develops uniform EDI standards.  Active RFID (radio frequency identification device): a RFID that has its own power supply.  Adaptive supply chain: when a company uses technology to respond quickly to changes in market demand and supplier conditions, which can lead to higher efficiency, lower costs and greater profits.  American National Standards Institute (ANSI): the coordinating body for standards in the United States since 1918.  AS2 (Applicability Statement 2):encoding for EDIINT exchanges based on the HTTP rules for Web page transfers.  AS3 (Applicability Statement 3): more secure specification for encoding for EDIINT exchanges.  Automated clearing house (ACH): a service that banks use to manage their accounts with each other.  Business process offshoring: the offshoring of nonmanufacturing activities such as purchasing, research and development, recordkeeping, and information management.  Collaborative commerce: using Internet technologies to integrate the design, development, construction, testing, and refinement of products.  Contract purchasing: the company negotiates long-term contracts for most of the materials that it will need. Also called replenishing purchasing.  Customer portal: offer private stores along with services such as part number cross-referencing, product usage guidelines, safety information, and other services that would be needlessly duplicated if the sellers were to participate in an industry marketplace.  Direct connection EDI: requires each business in the network to operate its own on-site EDI translator computer.  Direct materials: those materials that become part of the finished product in a manufacturing process.  EDI compatible: firms that exchange data in specific standard formats.  EDI for Administration, Commerce, and Transport (EDIFACT, or UN/EDIFACT): first standard published by the United Nations in 1987.  EDIINT (Electronic Data Interchange-Internet Integration, EDI-INT): the most common set of protocols used for the exchange of EDI transaction sets over the Internet.  E-government: the use of Internet technologies by governments and government agencies to perform important functions for the individual citizens, businesses, and other organizations they serve.  E-procurement software: allows a company to manage its purchasing function through a Web interface.  E-sourcing: the use of Internet technologies in sourcing activities.  Impact sourcing: offshoring that is done by or through not-for-profit organizations who use the business activity to support training or charitable activities in less developed parts of the world. Also called smart sourcing.  Independent exchange: trading exchange not controlled by a company that was an established buyer or seller in the industry.  Independent industry marketplace: industry marketplaces, independent exchanges, and public marketplaces.  Indirect connection EDI: occurs when the trading partners pass messages through the VAN instead of connecting their computers directly to each other.  Indirect materials: all other materials that the company purchases, including factory supplies such as sandpaper, hand tools, and replacement parts for manufacturing machinery.  Industry consortia-sponsored marketplace: marketplace formed by several large buyers in a particular industry.  Industry marketplace: trading exchanges focused on a single industry.  Internet EDI: EDI on the Internet. Also called Web EDI or open EDI.  Just-in-time inventory management: used to reduce inventory stocks of component parts purchased by arranging for delivery of those parts to occur very close to the time they are used in the manufacturing process.  Knowledge management: the intentional collection, classification, and dissemination of information about a company, its products, and its processes.  Lean production: methods that focus on eliminating waste and unnecessary processes throughout the manufacturing process.  Maintenance, repair, and operating (MRO): standard items that buyers usually select using price as their main criterion.  Nonrepudiation: the ability to establish that a particular transaction actually occurred.  Offshoring: outsourcing that is done by organizations in other countries.  Open EDI: EDI on the Internet. Also called Internet EDI or Web EDI.  Outsourcing: the use of other organizations to perform specific activities.  Passive RFID: a RFID that does not need a power source, receives a radio signal from a nearby transmitter, and extracts a tiny amount of power from that signal.  Private company marketplace: a marketplace that provides auctions, request for quote postings, and other features (many of which are similar to those of e-procurement software) to companies that want to operate their own marketplaces.  Private industrial network: expanded private company marketplace that includes functions to allow supply chain participants to manage multiple functions including manufacturing, tier-one and tier-two suppliers, distribution centers, transportation, orders, invoicing, and payments.  Private store: has a password-protected entrance and offers negotiated price reductions on a limited selection of products - usually those that the customer has agreed to purchase in certain minimum quantities.  Private trading exchange: another term for a private industrial network  Production strategy: the way a company achieves competitive advantage in its product creation activities; the two most common strategies are efficient processing (in which the company tries to make products as quickly or as inexpensively as possible) or market-responsive flexibility (in which the company tries to produce the specific products demanded by the market as it changes).  Public marketplace: trading exchanges open to new buyers and sellers just entering the industry.  Purchasing card (p-card): cards, which resemble credit cards, give individual managers the ability to make multiple small purchases at their discretion while providing cost-tracking information to the procurement office.  Radio Frequency Identification Devices (RFIDs): small chips that use radio transmissions to track inventory.  Real-time location systems (RTLS): tracking systems that use bar codes to monitor inventory movements and ensure that goods are shipped as quickly as possible.  Replenishment purchasing: the company negotiates long-term contracts for most of the materials that it will need. Also called contract purchasing.  Smart sourcing: offshoring that is done by or through not-for-profit organizations who use the business activity to support training or charitable activities in less developed parts of the world. Also called impact sourcing.  Sourcing: the part of procurement activity devoted to identifying suppliers and determining the qualifications of those suppliers.  Spend: total dollar amount of goods and services that a company buys during a year.  Spot market: loosely organized market that includes steel mills, warehouses, speculators (who buy and sell contracts for future delivery of steel), and companies that have excess steel that they purchased on contract.  Spot purchasing: buying in a spot market.  Stockout: when a retailer loses sales because it does not have specific goods on its shelves that customers want to buy.  Supply alliances: the long-term relationships created among participants in the supply chain.  Supply chain: the part of an industry value chain that precedes a particular strategic business unit.  Supply chain competition: use of technologies to improve efficiency of a company’s operations that can help implement techniques such as just-in-time and lean production.  Supply chain management: when companies integrate their supply management and logistics activities across multiple participants in a particular product’s supply chain.  Supply web: term used instead of “supply chain.”  Third-party logistics (3PL) provider: a transportation and freight company that engages in the business of operating all or a large portion of a customer’s materials movement activities.  Tier-one suppliers: a small number of very capable suppliers.  Tier-three suppliers: provide tier-two suppliers with components and raw materials.  Tier-two suppliers: manage relationships with the next level of suppliers, called tier-three suppliers.  Transaction sets: the names of the formats for specific business data interchanges.  Ultimate consumer orientation: maintaining customer focus by meeting the needs of the consumer at the end of the supply chain.  Vertical portal: hub that offers a doorway (or portal) to the Internet for industry members.  Web EDI: EDI on the Internet. Also called Internet EDI or open EDI. Chapter 6 Social Networking, Mobile Commerce, and Online Auctions At a Glance Instructor’s Manual Table of Contents • Introduction • Learning Objectives • Teaching Tips • Quick Quizzes • Class Discussion Topics • Additional Projects • Additional Resources • Key Terms Lecture Notes Introduction Many companies are now using technologies such as social media and mobile commerce to interact with customers, potential customers, and other stakeholders in new ways. Participating actively in social media sites such as Facebook and Twitter, along with buying large amounts of advertising on those services, has led to social media success for many companies. Starbucks, however, has incorporated an additional strategy. Starbucks sees social media as an extension of the barista-customer relationships that develop in its stores along with the relationships that arise among its customers as they enjoy Starbucks products and the atmosphere of its stores. In addition to directing communications towards individual customers, the company uses social media to provide a platform for customers to talk with each other about their favorite Starbucks products. Starbucks also integrates mobile technology with the customer experience by accepting payments from mobile devices and by providing a Starbucks mobile device app that lets customers manage their loyalty program benefits. Whereas most companies embrace the common wisdom that sees social media and mobile technologies as just another advertising channel, Starbucks has taken a different approach: expanding its connection to individual users. Cementing these connections with insights gained by being a social media observer rather than an active participant has helped the company outperform most other consumer brands in the world of online consumer engagement. Learning Objectives In this chapter, your students will learn: • How social networking emerged from virtual communities • How social networking Web sites earn revenue • How companies use social networking tools in online business activities • About mobile technologies that are now used to do business online • How auctions and auction-related businesses are conducted online Teaching Tips From Virtual Communities to Social Networks 1. Remind students that in previous chapters, the focus was on how companies are using the Web to improve the things that they have been doing for years, primarily buying and selling. In this chapter, your students will learn how companies are using the Web to perform tasks that were either very difficult or impossible to do before online connectivity became commonplace. 2. Emphasize that combining the Internet’s transaction cost-reduction potential with its role as a facilitator of communication among people has led companies to develop new ways of making money on the Web by serving as relationship facilitators. Virtual Communities 1. Discuss the history of virtual communities by introducing the terms virtual community, bulletin board systems (BBSs), and Usenet newsgroups. 2. Note that many sociologists believe the communication and relationship-forming activities that occur online are similar to those that occur in physical communities. Early Web Communities 1. Note that one of the first Web communities was the WELL. The WELL, which is an acronym for “whole earth ‘lectronic link,” predates the Web. 2. Point out that as the Web emerged in the mid-1990s, its potential for creating new virtual communities was quickly exploited. Briefly review the history of some of these communities. • In 1995, the Beverly Hills Internet site featured two Webcams aimed down Hollywood streets along with links to entertainment Web sites and free space for member-created Web pages. • Beverly Hills grew and changed its name to GeoCities. They earned revenue by selling advertising. • GeoCities grew rapidly and was purchased in 1999 by Yahoo! for $5 billion but Yahoo! failed to engage members and closed GeoCities in 2009. • During the 1995–2001 time period, companies such as Tripod and Theglobe.com operated similar advertising supported virtual communities. 3. Note that these virtual communities evolved into the social networking sites that emerged in the late 1990s as part of the second wave of electronic commerce. Social Networking Emerges 1. Explain that in the second wave of electronic commerce, a new phenomenon in online communication began. A variety of common interests (e.g., gardening, specific medical issues, parenting) created the basis for online interaction. 2. Introduce the terms social networking, social networking sites and tweets. Refer to Figure 6-1 and discuss some popular social networking sites. 3. Emphasize that the general idea behind many social networking sites is that people are invited to join by existing members who think they would be valuable additions to the community. 4. Use Figure 6-2 to illustrate how the expansion of social networking sites into all corners of the world continues as we move into the third wave of electronic commerce. Web Logs (Blogs), Microblogs, and Participatory Journalism 1. Recall that Web logs or blogs are Web sites that contain commentary on current events or specific issues written by individuals. 2. Note that because blog sites encourage interaction among people interested in a particular topic, blog sites are a form of a social networking site. 3. Introduce the terms microblogs and meetups. 4. Point out that after seeing the success of blogs and virtual communities as political networking tools, some retailers embraced blogs as a way to engage Web site visitors who were not ready to buy from the site, but who were interested in the products or services offered. 5. Introduce the term participatory journalism. 6. Note that blogs can become a business in themselves if they can generate financial support through fees or advertising. Location-Aware Mobile Social Networks 1. Discuss the impact a traveling Internet connection has on social media and introduce the term location-aware services. Teaching Tip Invite students to share their own experiences using social networking sites. Business Uses of Social Networking 1. Point out that business use of social media is still evolving and there are many opinions on what companies should and should not try to do with social networking tools. Mention Starbucks, Brooks Running and Campbell’s Soup as examples. 2. Use Figure 6-3 to illustrate social media strategies for business. Social Shopping Sites 1. Discuss the concept of social networking Web sites for shoppers. Introduce the term social shopping. Mention Craigslist, ETSY, Wanelo, Polyvore and Posh mark as examples. Idea-Based Social Networking 1. Introduce the terms idea-based social media and idea-based social networking. Mention Delicious as an example. Virtual Learning Networks 1. Introduce the term virtual learning network. Mention Blackboard as an example. Introduce the term massive open online courses (MOOCs). Discuss the pros and cons of sites such as Coursera and Udacity. Open-Source Software 1. Note that some open-source software projects such as Moodle and uPortal are developed to the development of virtual learning communities. 2. Introduce the term open-source software. Point out that open-source software is an early and successful example of a virtual community that we would now call a social network. Revenue Models for Social Networking Sites 1. Discuss the wave of purchases and mergers that occurred among virtual communities, search engine sites, and Web directories beginning in 1998. 2. Refer to Figure 6-4 to illustrate the most popular Web sites in the world based on the number of users who accessed the sites during the month of August 2015. Advertising-Supported Social Networking Sites 1. Discuss why social networking sites appeal to advertisers. 2. Use Figure 6-5 to illustrate recent and projected worldwide social network spending on advertising. Mixed-Revenue and Fee-For-Service Social Networking Sites 1. Discuss the concept of mixed-revenue and fee-for-service social networking sites. Point out that most social networking sites use advertising to support their operations, but some charge a fee for some services. Use Yahoo! as an example. 2. Introduce the term monetizing. 3. Note that financial information sites such as The Motley Fool and TheStreet.com also use mixed-revenue models. Fee-Based Social Networking 1. Discuss the concept of fee-based social networking and Google’s attempt to monetize social networking by charging a fee for a specific service with Google Answers Microlending Sites 1. Introduce the term microlending. 2. Note that a key element of microlending is working within a social network of borrowers. 3. Explain how Kiva and Micro Place work. Refer to the Michigan Economic Development Corporation (MEDC), local community groups in the state, and Huntington Bank as an example of a microlending program designed to help new businesses start and existing home-based businesses expand. Teaching Tip To learn more about how microlending works, see: http://money.howstuffworks.com/microlending.htm Crowdfunding Sites 1. Introduce the terms crowdfunding and reward-based crowdfunding. 2. Point out that crowdfunding reduces the investors’ individual risk but still can provide substantial total equity funding for new ventures. Use Kickstarter and IndieGoGo as examples. Teaching Tip Review the top 10 crowdfunding sites at: http://crowdfunding.com/ Internal Social Networking 1. Discuss the concept of internal social networking. Point out that organizations can save significant amounts of money by replacing the printing and distribution of paper memos, newsletters, and other correspondence with a Web site. Teaching Tip Note that an intranet is another name for an internal virtual community. Encourage students to read the following article: http://www.buzzle.com/articles/intranet-vs-internet.html Quick Quiz 1 1. A(n) ____ is a gathering place for people and businesses that does not have a physical existence. Answer: virtual community, Web community, online community 2. The practice of bringing buyers and sellers together in a social network to facilitate retail sales is called ____. Answer: social shopping 3. The trend toward having readers help write their own news is called ____. Answer: participatory journalism 4. The term ____ refers to the conversion of existing regular site visitors seeking free information or services into fee-paying subscribers or purchasers of services. Answer: monetizing Mobile Commerce 1. Introduce the terms short messaging service (SMS) and texting. 2. Emphasize the two developments that made mobile phones truly viable Web browsing devices: high-speed mobile telephone network availability and smartphones that included a Web browser and a large screen. 3. Introduce the term mobile commerce (m-commerce). Mobile Phones 1. Explain why Internet-capable phones first caught on in Japan and parts of Southeast Asia. 2. Note that in the United States, smartphones and the high-capacity networks that make them functional began appearing in 2008. Tablet Devices 1. Introduce the terms tablet devices and phablets. 2. Use Figure 6-6 to illustrate the growth in worldwide sales of tablet devices. 3. Note that Apple’s iPad tablet devices run the company’s proprietary iOS operating system. Most other manufacturers’ tablet devices run the Android operating system. 4. Use Figure 6-7 to illustrate several examples of smartphones, tablet devices, and phablets used today. 5. Introduce the term Wireless Application Protocol (WAP). Mobile Device Operating Systems 1. Note that Apple and BlackBerry use their own proprietary operating systems. 2. Introduce the most common third-party operating systems today are Android and Windows Phone. Mention that Android, the fastest growing and most widely used was developed by Google and is open source. Windows Phone is a proprietary operating system sold by Microsoft. 3. Use Figure 6-8 to illustrate the change in U.S. market shares for leading smartphone operating systems during recent years. 4. Introduce the terms jailbreaking and rooting. Teaching Tip Learn more about Android at: http://developer.android.com/guide/basics/what-is-android.html Mobile Apps 1. Explain why most mobile phones use a common operating system. 2. Introduce the term apps. Note that companies would license apps from software developers and then charge subscribers a monthly usage fee for each app. 3. Point out that Apple turned this revenue strategy on its head when AT&T agreed to be Apple’s sole carrier for the iPhone and agreed to allow Apple to sell apps for the phone directly. 4. Discuss the role of the Apple App Store and the Google Play store in distributing mobile apps. Note that a number of apps do nothing more than provide a quick gateway to a company’s Web site. 5. Explain how some mobile app sellers include an advertising element in their revenue models. 6. Discuss how the use of mobile devices for banking and financial services is growing. Explain how a growing number of hospitals and clinics are providing apps that give doctors access to detailed information needed for treating patients. 7. Note that a growing number of hospitals and clinics are providing apps that give doctors access to detailed information needed for treating patients. 8. Discuss how mobile devices utilize global positioning satellite (GPS) service capabilities. Teaching Tip Read more about the “The VERY BEST iPhone Apps For 2016” at: http://www.knowyourmobile.com/apple/apple-iphone-apps/20020/best-iphone-apps-2015-ios-9-wwdc-2015 Mobile Payment Apps 1. Introduce the term mobile wallets. 2. Briefly discuss the development of retail store technologies in the U.S. that allow the use of smart phones as payment devices. Teaching Tip Learn more about mobile wallet technology at: https://www.chasepaymentech.com/mobile_wallet_technology.html Online Auctions 1. Explain that one of the Internet’s strengths is that it can bring together people who share narrow interests but are geographically dispersed. Online auctions can capitalize on that ability by either catering to a narrow interest or providing a general auction site that has sections devoted to specific interests. 2. Explain how online auctions create a natural social network. Auction Basics 1. Discuss the history of auctions dating back to 500 BC. 2. Introduce the terms bids, bidders, private valuations, auctioneer, and shill bidders. English Auctions 1. Introduce the terms English auction, ascending-price auction, open auction (or open-outcry auction), minimum bid, and reserve price (or reserve). 2. Introduce the term Yankee auctions. Note that although all successful bidders (except possibly the lowest successful bidder) receive the quantity of items on which they bid, they only pay the price bid by the lowest successful bidder. 3. Review the drawbacks for both sellers and bidders in an English auction. Introduce the term winner’s curse. Dutch Auctions 1. Note that the Dutch auction (also called descending-price auctions) is a form of open auction in which bidding starts at a high price and drops until a bidder accepts the price. 2. Point out that a Dutch auction is often better for the seller because the bidder with the highest private valuation will not let the bid drop much below that valuation for fear of losing the item to another bidder. 3. Note that Dutch auctions are particularly good for moving large numbers of commodity items quickly. Teaching Tip To learn more about Dutch auctions, see: http://collectibles.about.com/library/articles/blebaydutch.htm. First-Price Sealed-Bid Auctions 1. Explain that in sealed-bid auctions, bidders submit their bids independently and are usually prohibited from sharing information with each other. 2. Note that in a first-price sealed-bid auction, the highest bidder wins. If multiple items are auctioned, successive lower (next highest) bidders are awarded the remaining items at the prices they bid. Second-Price Sealed-Bid Auctions 1. Explain that a second-price sealed-bid auction is the same as the first-price sealed-bid auction except that the highest bidder is awarded the item at the price bid by the second-highest bidder. 2. Discuss why a seller would even consider such an auction. 3. Mention that second-price sealed-bid auctions are commonly called Vickrey auctions, named for William Vickrey, who won the Nobel Prize in Economics for his research on this auction type. Teaching Tip To learn more about Vickrey auctions, see: http://www.maxi-pedia.com/vickrey+auction Open-Outcry Double Auctions 1. Note that the Chicago Board Options Exchange conducts open-outcry double auctions of commodity futures and stock options. The buy and sell offers are shouted by traders standing in a small area on the exchange floor called a trading pit. 2. Point out that double auctions, either sealed bid or open outcry, work well only for items of known quality, such as securities or graded agricultural products, which are regularly traded in large quantities because such items can be auctioned without bidders inspecting the items before placing their bids. Double Auctions 1. Describe double auctions, in which buyers and sellers each submit combined price-quantity bids to an auctioneer who matches sellers’ offers (starting with the lowest price and going up) to buyers’ offers (starting with the highest price and then going down) until all the goods offered for sale are sold. 2. Explain that although the specialist system has been in use for more than a century, critics have charged that specialists can and do use their knowledge to enrich themselves at the expense of investors. 3. Mention that in 2007, the New York Stock Exchange added an electronic trading system that automatically matches buyer and seller offers and bypasses specialists. This system now handles most of the trading volume on the exchange. Reverse (Seller-Bid) Auctions 1. Explain that in a reverse auction (also called a seller-bid auction), multiple sellers submit price bids to an auctioneer who represents a single buyer. 2. Most reverse auctions involve businesses as buyers and sellers. 3. Refer to Figure 6-9 to summarize key characteristics of each of the seven major auction types. Quick Quiz 2 1. (True or False) Shill bidders can artificially inflate the price of an item and may be prohibited from bidding by the rules of a particular auction. Answer: True 2. A(n) ____ is the price at which an auction begins. Answer: minimum bid 3. In ____ auctions, bidders submit their bids independently and are usually prohibited from sharing information with each other. Answer: sealed-bid 4. Second-price sealed-bid auctions are commonly called ____. Answer: Vickrey auctions Online Auctions and Related Businesses 1. Note that although the online auction business is changing rapidly as it grows, three broad categories of auction Web sites have emerged: general consumer auctions, specialty consumer auctions, and business-to-business auctions. 2. Introduce the term consumer-to-business. General Consumer Auctions 1. Use this section to discuss the most successful consumer auction Web site today: eBay. 2. Note that the most common format used on eBay is a computerized version of the English auction. 3. Introduce the terms minimum bid increment and proxy bids. General Consumer Auctions: The Lock-in Effect 1. Point out that by being the first major consumer auction site and by investing in substantial general media advertising, eBay was able to establish itself early. 2. Discuss the unsuccessful attempts of Yahoo! and Amazon.com in sustaining their Web auction sites in the U.S. and Yahoo! and eBay in the Japanese online auction market. 3. Introduce the term lock-in effect. Specialty Consumer Auctions 1. Students should be aware that rather than struggle to compete with a well-established rival such as eBay in the general consumer auction market, a number of firms have decided to identify special-interest market targets and create specialized Web auction sites that meet the needs of those market segments.’ 2. Use JustBeads.com, Cigarbid.com and Wine bid as examples. Consumer Reverse Auctions 1. Introduce the term reverse bid. 2. Point out that many people think of Priceline.com as a seller-bid auction site. Group Shopping and Coupon Sites 1. Introduce the terms group purchasing site and group shopping site. 2. Describe the types of products that work well for group shopping sites. 3. Note that Merc at a and LetsBuyIt.com closed their doors after failing to find consistent sources of products that sold well on their sites. 4. Use Groupon as an example of a successful group shopping business site. Business-to-Business Auctions 1. Introduce the term liquidation brokers. 2. Point out that two of the three emerging business-to-business Web auction models are direct descendants of the two traditional methods for handling excess inventory. 3. Note also that a growing number of hospitals and other organizations are using online auctions to fill temporary employment openings. Business-to-Business Reverse Auctions 1. Explain that not all companies are enthusiastic about reverse auctions. Some purchasing executives argue that reverse auctions cause suppliers to compete on price alone, which can lead suppliers to cut corners on quality or miss scheduled delivery dates. 2. Note that others argue that reverse auctions can be useful for nonstrategic commodity items with established quality standards. 3. Discuss how using reverse auctions replaces trusting relationships with a bidding activity that pits suppliers against each other and is seen by many purchasing managers as a step backward. 4. Use Figure 6-10 to review the supply chain characteristics that support or discourage reverse auctions. Teaching Tip Learn more about reverse auctions at: http://purchasingauctions.com/what-is-a-reverse-auction/ Auction-Related Services 1. Mention that the growth of eBay and other auction sites has encouraged entrepreneurs to create businesses that provide auction-related services of various kinds. Auction Escrow Services 1. Note that a common concern among people bidding in online auctions is the reliability of the sellers. 2. Introduce the term escrow service. 3. Review additional ways wary bidders in low-price auctions can protect themselves. Auction Directory and Information Services 1. Describe how eCommerce Bytes is an auction information site that publishes articles about developments in the online auction industry. 2. Use Price Watch as an example of a site that lists current selling prices for computer hardware, software, and consumer electronics items. Auction Software 1. Point out that both auction buyers and sellers can purchase software to help them manage their online auctions. 2. Mention that Auction Hawk and Vendio sell auction management software and services for both buyers and sellers. 3. Introduce the terms sniping software and snipe. Quick Quiz 3 1. Bidders can enter a(n) ____, which automatically increases to the next highest increment needed to exceed any bid, up to a bidder-specified maximum bid. Answer: proxy bid 2. Smaller businesses often sell their unusable and excess inventory to ____, which are firms that find buyers for these items. Answer: liquidation brokers 3. A(n) ____ is an independent party that holds a buyer’s payment until the buyer receives the purchased item and is satisfied that the item is what the seller represented it to be. Answer: escrow service 4. The act of placing a winning bid at the last second is called a(n) ____. Answer: snipe Class Discussion Topics 1. To what do you attribute eBay’s popularity? 2. With respect to online auctions, what are some of the risks faced by sellers? 3. Discuss some of the marketing tactics used by Web sites to promote their auctions. Additional Projects 1. Would you consider Twitter to be a sticky Web site? In about 140 words, give reasons for your answer. 2. The online auction company eBay is discussed at length in the chapter. Using the Internet, research eBay’s competitors. Select one such competitor and write one or two paragraphs on how this company distinguishes itself from eBay. Additional Resources 1. 15 Social Media Statistics That Every Business Needs to Know: https://www.aabacosmallbusiness.com/advisor/15-social-media-statistics-every-business-needs-know-001509118.html 2. Marketing: 10 Ten Social Media Trends to Watch in 2016: http://www.business2community.com/social-media/marketing-top-10-social-media-trends-watch-2016-01421356#0xbmyrs8b9G4dHdZ.97 3. 5 Trends That Will Change How Companies Use Social Media in 2016:http://www.fastcompany.com/3054347/the-future-of-work/5-trends-that-will-change-how-companies-use-social-media-in-2016 4. Mobile Commerce: http://www.ecommercetimes.com/perl/section/m-commerce/ 5. Steve Case: In the third wave of the Internet, startups will need to work with governments: http://pando.com/2014/04/03/steve-case-in-the-third-wave-of-the-internet-startups-will-need-to-work-with-governments/ Key Terms  Apps: application software that can run on mobile phones.  Ascending-price auction: an auction where bidders publicly announce their successive higher bids until no higher bid is forthcoming. Also called an English auction, open auction or open-outcry auction.  Auction consignment services: take an item and create an online auction for that item, handle the transaction, and remit the balance of the proceeds after deducting a fee that ranges from 25 to 50 percent of the selling price obtained.  Auctioneer: manages the whole auction process.  Bidders: potential buyers.  Bids: prices a bidder is willing to pay for the item.  Bulletin board systems (BBSs):computers that allowed users to connect using dial-up connections through telephone lines to read and post messages in a common discussion forum that resembled an electronic version of a physical bulletin board.  Consumer-to-business: electronic commerce that occurs in general consumer auctions.  Crowdfunding: social networking sites that provide funds for a business idea or entrepreneurs who can sell partial ownership in their ventures to investors.  Descending-price auctions: a form of open auction in which bidding starts at a high price and drops until a bidder accepts the price. Synonymous with Dutch auctions.  Double auction: buyers and sellers each submit combined price-quantity bids to an auctioneer. The auctioneer matches the sellers’ offers (starting with the lowest price and then going up) to the buyers’ offers (starting with the highest price and then going down)until all the quantities offered for sale are sold to buyers.  Dutch auction: a form of open auction in which bidding starts at a high price and drops until a bidder accepts the price. Synonymous with descending-price auctions.  English auction: an auction where bidders publicly announce their successive higher bids until no higher bid is forthcoming. Also called an ascending-price auction, open auction or open-outcry auction.  Escrow service: an independent party that holds a buyer’s payment until the buyer receives the purchased item and is satisfied that the item is what the seller represented it to be.  First-price sealed-bid auction: auction where bidders submit their bids independently and are usually prohibited from sharing information with each other. The highest bidder wins. If multiple items are auctioned, successive lower (next highest) bidders are awarded the remaining items at the prices they bid.  Group purchasing site: a site where the seller posts an item with a tentative price. As individual buyers enter bids on the item, the site operators negotiate with the seller to obtain a lower price. The posted price will decrease as the number of bids increases, but only if the number of bids increases. Synonymous with group shopping site.  Group shopping site: a site where the seller posts an item with a tentative price. As individual buyers enter bids on the item, the site operators negotiate with the seller to obtain a lower price. The posted price will decrease as the number of bids increases, but only if the number of bids increases. Thus, a group shopping site builds up the number of buyers sufficiently to encourage the seller to offer a quantity discount. Synonymous with group purchasing site.  Idea-based social media: abstract communities based on the connections between ideas.  Idea-based social networking: people participating in idea-based social media.  Jailbreaking: modifying an Apple iPhone’s operating system.  Liquidation brokers: firms that finds buyers for unusable and excess inventory.  Location aware services: customized advertising or other services transmitted by Web sites to mobile devices based on the mobile devices transmitted location.  Lock-in effect: name used by economists to describe the basic economic fact where existing auction sites, such as eBay, are inherently more valuable to customers than new auction sites.  Massive open online course (MOOC): online course that is offered at no cost and can attract hundreds of thousands of students.  Meetups: sites that allow people to discuss issues, plan strategies, and arrange in-person meetings.  Microblogs: Web sites such as Twitter that function as a very informal blog site with entries (messages, or tweets) that are limited to 140 characters in length.  Microlending: the practice of lending very small amounts of money to people who are starting or operating small businesses, especially in developing countries.  Minimum bid: the price at which an auction begins.  Minimum bid increment: the amount by which one bid must exceed the previous bid.  Mobile commerce (m-commerce): confluence of technologies made doing business online using mobile devices.  Mobile wallets: mobile phones that function credit cards.  Monetizing: the conversion of existing regular site visitors seeking free information or services into fee-paying subscribers or purchasers of services.  Open auction: an auction where bidders publicly announce their successive higher bids until no higher bid is forthcoming. Also called an English auction, ascending-price auction or open-outcry auction.  Open-outcry auction: an auction where bidders publicly announce their successive higher bids until no higher bid is forthcoming. Also called an English auction, ascending-price auction or open-outcry auction.  Open-outcry double auctions: auction conducted by the Chicago Board Options Exchange where buy and sell offers are shouted by traders standing in a small area on the exchange floor called a trading pit.  Open-source software: software developed by a community of programmers who make the software available for download at no cost.  Participatory journalism: trend toward having readers help write their own news.  Phablet: a combination of “phone” and “tablet”.  Private valuations: the amounts a bidder is willing to pay for an item that is up for auction.  Proxy bid: a bid that automatically increases to the next highest increment needed to exceed any bid, up to a bidder-specified maximum bid.  Reserve: a minimum acceptable price established by sellers.  Reserve price: a minimum acceptable price established by sellers.  Reverse auction: multiple sellers submit price bids to an auctioneer who represents a single buyer.  Reverse bid: site routes the visitor’s request to a group of participating merchants who reply to the visitor by e-mail with offers to supply the item at a particular price.  Reward-based crowdfunding: investors pay in advance for products (or services) to be delivered when the company makes them using the invested funds.  Rooting: modifying an Android operating system.  Sealed-bid auctions: bidders submit their bids independently and are usually prohibited from sharing information with each other.  Second-price sealed-bid auction: the same as the first-price sealed-bid auction except that the highest bidder is awarded the item at the price bid by the second-highest bidder.  Seller-bid auction: multiple sellers submit price bids to an auctioneer who represents a single buyer.  Shill bidders: people employed by the seller or the auctioneer who can make bids on behalf of the seller.  Short messaging service (SMS): allows mobile phone users to send short text messages to each other.  Snipe: the act of placing a winning bid at the last second.  Sniping software: observes auction progress until the last second or two of the auction clock. Just as the auction is about to expire, the sniping software places a bid high enough to win the auction (unless that bid exceeds a limit set by the sniping software’s owner).  Social networking: The intra-community interaction among members of a virtual community.  Social networking site: Web sites that facilitate interactions among members of a virtual community.  Social shopping: the practice of bringing buyers and sellers together in a social network to facilitate retail sales.  Tablet devices: a device that is smaller (with fewer capabilities)than a laptop computer, yet larger than a smartphone.  Texting: Using SMS.  Tweets: short messages sent from one Twitter user to another.  Usenet newsgroups: message posting areas on Usenet computers in which interested persons (primarily from the education and research communities) can discuss specific topic areas.  Vickrey auctions: synonymous with second-price sealed-bid auctions. Named for William Vickrey, who won the 1996 Nobel Prize in Economics for his studies of the properties of this auction type.  Virtual community: a gathering place for people and businesses that does not have a physical existence. Also called a Web community or an online community.  Virtual learning network: distance learning platforms such as Blackboard for student-instructor interaction.  Winner’s curse: the psychological phenomenon where bidders risk becoming caught up in the excitement of competitive bidding and then bidding more than their private valuations.  Wireless Application Protocol (WAP): allows Web pages formatted in HTML to be displayed on devices with small screens, such as mobile phones.  Yankee auctions: English auctions that offer multiple units of an item for sale and allow bidders to specify the quantity they want to buy. Instructor Manual for Electronic Commerce Gary P. Schneider 9781305867819