CH-11-12 Payment Systems for Electronic Commerce – Electronic Commerce : Chapter Notes

This Document Contains Chapters 11 to 12 Chapter 11 Payment Systems for Electronic Commerce 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 Financial technology (or fintech) is the use of powerful computers connected through the Internet that use tools such as Web services to improve the quality while reducing the costs of existing financial services and creating new ones. One of these new products is payment services that are not operated by banks including PayPal, Amazon Payments, Android Pay, Apple Pay, Good Wallet, Square and Venmo. These allow users to pay for online purchases and enable other cash transfers among individuals. Financial technology has also revolutionized lending. Online loan facilitators such as the Lending Club and Funding Circle take banks out of the industry value chain for loan services. These firms can reduce lender risk and costs. In this chapter your students will learn how these financial technologies operate in online payment systems and in stored-value cards as well as how existing forms of payment, such as credit cards are used in online businesses. Learning Objectives In this chapter, students will learn: • What the most common online payment systems are and how they function • How payment cards are used in online retail transactions • What stored-value cards are and how they are used in electronic commerce • What challenges and opportunities are presented by the use of digital cash • How digital wallets facilitate online transactions through computers and mobile devices • How the banking industry uses Internet technologies Teaching Tips Common Online Payment Methods 1. Mention that cash, checks, credit cards, and debit cards are the four most common methods used in the world by consumers to pay for purchases. Also, note that the most popular consumer electronic transfers are automated payments of auto loans, insurance payments, and mortgage payments made from consumers’ checking accounts. 2. Use Figure 11-1 as an aide to discuss the forecasted forms of payment for U.S. online transactions for 2018. 3. Discuss how online payments can be convenient for customers and can save companies money. Electronic Bill Presentment and Payment Systems 1. Explain that systems are designed to deliver bills and accept payment for them but that success depends on them being easy to use and less time consuming than traditional methods of paying bills. 2. Introduce the terms biller-direct EBPP systems and consolidator EBPP system. Micropayments and Small Payments 1. Define the term micropayments. Note that many industry observers see a need for a micropayments processing system on the Web, but no company has gained broad acceptance of its system. 2. Introduce the term small payments. Discuss why the use of small payments has been held back. 3. Mention that one of the largest small payments markets today is for music downloads. Payment Cards 1. Note that businesspeople often use the term payment card as a general term to describe all types of plastic cards that consumers (and many businesses) use to make purchases. 2. Introduce the terms credit card, card not present transactions, debit card, electronic funds transfer at point of sale (EFTPOS) cards, charge card, store charge cards/store-branded cards, gift cards, prepaid cards and single-use cards. Teaching Tip To learn more about payment cards, see: https://www.gov.uk/invoicing-and-taking-payment-from-customers. Advantages and Disadvantages of Payment Cards 1. Discuss several features of payment cards that make them a popular choice for both consumers and merchants in online and offline transactions. 2. Introduce the term interchange network. Payment Acceptance and Processing 1. Explain why most online and mail order merchants do not charge payment card accounts until they ship merchandise. 2. Mention that processing a payment card transaction online involves two general processes, the acceptance of payment and clearing the transaction. Open and Closed Loop Systems 1. Introduce the term closed-loop system. 2. Use Figure 11-2 to illustrate the basic interactions among the entities involved in a closed loop payment card system. 3. Introduce the terms open-loop system, credit card associations, and customer issuing banks/issuing banks. 4. Use Figure 11-3 to illustrate the basic interactions among the entities involved in an open loop payment card system. Merchant Accounts 1. Introduce the terms acquiring bank, merchant account, chargeback, acquirer fees, interchange fees, card verification numbers (CVNs). 2. Explain that fewer than 15 percent of all credit card transactions are completed online, but those transactions are responsible for about 64 percent of the total dollar amount of credit card fraud. 3. Note that the CVN has several different names and acronyms: card security code (CSC), card verification data (CVD), card verification value (CVV or CV2), card verification value code (CVVC), card verification code (CVC), verification code (V-Code or V Code), and card code verification (CCV). Payment Card Transaction Processing 1. Review Figures 11-2 and 11-3 to illustrate the basic processes involved in handling payment card transactions (including both credit cards and debit cards) in closed loop and open loop systems. 2. Introduce the terms Automated Clearing House (ACH), payment processing service providers/payment processors, front-end processor/payment gateways and back-end processor. Teaching Tip To learn about“5 Things to Know About Digital Payments,” see: http://www.pfsweb.com/blog/5-things-to-know-about-digital-payments/. Stored-Value Cards 1. Briefly explain that today, most people carry a number of plastic cards – credit cards, debit cards, subway cards, charge cards, driver’s license, health insurance cards, employee or student identification cards, and others. Most of these cards can store information electronically using either a magnetic strip or a microchip that is embedded into the card. 2. Note that 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. 3. Introduce the terms stored-value card and near field communication. 4. Point out that stored-value cards are safer than conventional credit cards because the information stored on a smart card can be encrypted. 5. Students may be surprised to learn that, in Europe and Japan, stored-value cards are being used for telephone calls at public phones and for television programs delivered by cable to people’s homes. The cards are also very popular in Hong Kong, where many retail counters and restaurant cash registers have smart card readers. 6. Describe the use of stored-value cards in the United States. Teaching Tip To learn more about stored-value smart cards, see: http://www.smartcardbasics.com/smart-card-overview.html. Digital Cash 1. Introduce the term digital cash. 2. Explain that a successful electronic cash system will need common standards so that one issuer’s digital cash can be accepted by another issuer. As of now, each has its own standards so none have become widely accepted. 3. Describe how digital cash can be held in online storage or offline storage. 4. Mention that Bit con is the most well-known digital cash provider today and introduce the term cryptocurrency. 5. Emphasize the concerns about electronic payment methods: privacy and security, independence, portability, and convenience. Introduce the term anonymous digital cash. The Double Spending Issue 1. Introduce the term double-spending, using Figure 11-4 to illustrate this issue. Teaching Tip To learn more about fraud involving E-money, see: http://resources.infosecinstitute.com/e-money-fraud. Advantages and Disadvantages of Digital Cash 1. Note that transferring digital cash on the Internet costs less than processing credit card transactions. 2. Note also that digital cash does not require that one party obtain an authorization, as is required with credit card transactions. 3. Introduce the term money laundering and explain why this is a disadvantage of digital cash. 4. Explain why digital cash has not been nearly as successful in the United States as it has been in Europe and Asia. Teaching Tip For further information about the advantages and disadvantages of digital cash, see: How to Explore the Advantages and Disadvantages of Electronic Cash. Quick Quiz 1 1. A(n) ____,offered by companies such as American Express, carries no spending limit, and the entire amount charged to the card is due at the end of the billing period. Answer: charge card 2. A(n) ____ is a bank that does business with sellers (both Internet and non-Internet) that want to accept payment cards. Answer: acquiring bank 3. ____ is a general term that describes any value storage and exchange system created by a private (nongovernmental) entity that does not use paper documents or coins and that can serve as a substitute for government-issued physical currency. Answer: Digital cash, e-cash, electronic cash 4. ____is spending a particular piece of digital cash twice by submitting the same electronic currency to two different vendors. Answer: Double-spending Digital Wallets 1. Introduce the terms digital wallet. Software-Based Digital Wallets 1. Introduce the term server-side digital wallet. Note that the main weakness of server-side digital wallets is that a security breach could reveal thousands of users’ personal information to unauthorized parties. 2. Introduce the term client-side digital wallet. Note that a disadvantage of client-side wallets is that they are not portable. 3. Explain most security analysts agree that storing sensitive information on client computers is safer than storing that information on the vendor server because it requires attackers to launch many attacks on user computers, which are more difficult to identify (even though the user computers are less likely than a vendor server to have strong security features installed). 4. Mention that Google Wallet, Microsoft Windows Live ID, and Yahoo! Wallet are the most widely used server-side digital wallets in use today. Teaching Tip To learn more about Yahoo! Wallet, see: https://info.yahoo.com/privacy/us/yahoo/wallet/details.html. Hardware-Based Digital Wallets 1. Point out that smartphones and tablets, as mobile devices, are candidates to become hardware-based digital wallets that can store a variety of identity credentials (such as a driver’s license, medical insurance card, store loyalty cards, and other identifying documents). 2. Note that security and privacy are concerns with mobile device digital wallets. Internet Technologies and the Banking Industry 1. In this section, you will present an outline of how Internet technologies are providing new tools and creating new threats for the banking industry. Check Processing 1. Mention two disadvantages of using paper checks. One is the cost of transporting tons of paper checks around the country. Another is the delay (float) that occurs between the time that a person writes a check and the time that check clears the person’s bank. 2. Describe the Check Clearing for the 21stCentury Act (Check 21). Mobile Banking 1. Discuss the potential of mobile commerce in the banking industry using smart phones. Payment System Threats: Phishing and Identity Theft 1. Note that online payment systems offer criminals and criminal enterprises an attractive arena in which to operate. 2. Point out that, although phishing expeditions can be launched against all types of online businesses, they are of particular concern to financial institutions because their customers expect a high degree of security to be maintained over the personal information and resources that they entrust to their online financial institutions. Phishing Attacks 1. Identify the basic structure of a phishing attack using the sample phishing e-mail message shown in Figure 11-5. Teaching Tip To learn more about phishing attacks, see: http://www.emc.com/collateral/fraud-report/rsa-online-fraud-report-012014.pdf. 2. Introduce the term spear phishing. Using Phishing Attacks for Identity Theft 1. Introduce the terms organized crime/racketeering and identity theft. 2. Students will find it interesting to learn that the Internet has opened new opportunities for organized crime in its traditional types of criminal activities and in new areas such as generating spam, phishing, and identity theft. 3. Use Figure 11-6as an aide in discussing the types of personal information that identity thieves most want to obtain. 4. Introduce the terms zombie farm, pharming attack, collectors, and cashers. Phishing Attack Countermeasures 1. Explain that phishing can be an extremely profitable criminal activity and, as more companies increase their defenses, analysts expect phishing perpetrators to become even better at working around those defenses. Quick Quiz 2 1. A(n) ____ stores a customer’s information on a remote server belonging to a particular merchant or wallet publisher. Answer: server-side digital wallet 2. A(n) ____ is a plastic card with an embedded microchip that can store information. Answer: stored-value card, smart card 3. When the e-mails used in a phishing expedition are carefully designed to target a particular person or organization, the exploit is called____. Answer: spear phishing 4. ____ is a criminal act in which the perpetrator gathers personal information about a victim and then uses that information to obtain credit. Answer: Identity theft Class Discussion Topics 1. Why is the idea of using digital cash still so popular despite the many failures in the last few years? 2. Why do you think micropayments have not been implemented very well on the Web thus far? Additional Projects 1. Research the Web to find a recent computer virus. Write two to three paragraphs describing features of the virus. 2. Provide answers to the following questions: • How would you recognize a phishing scam? • How does one avoid becoming a victim of a phishing scam? • What kind of information should you protect? Additional Resources 1. PayPal’s challenge in the mobile digital wallet wars: Best of the Web: http://www.smartcompany.com.au/technology/35691-paypal-s-challenge-in-the-mobile-digital-wallet-wars-best-of-the-web.html 2. Identity Theft News: http://www.utica.edu/academic/institutes/cimip/mediacenter/itnews.cfm 3. Consumer Alert: Debit card fraud at Walmart discovered in 16 states: http://www.csoonline.com/article/2991557/loss-prevention/consumer-alert-debit-card-fraud-at-walmart-discovered-in-16-states.html 4. Smart Card Alliance: EMV FAQ http://www.smartcardalliance.org/pages/publications-emv-faq Key Terms  Acquirer fees: fees charged by the acquiring bank for providing the payment card processing service.  Acquiring bank: a bank that does business with sellers (both Internet and non-Internet) that want to accept payment cards.  Anonymous digital cash: digital cash that, like bills and coins, cannot be traced back to the person who spent it.  Automated Clearing House (ACH): a network of banks.  Back-end processor: a banking service provider that takes transactions from the front-end processor and coordinates information flows through the interchange network to settle transactions; handles chargebacks and any other reconciliation items through the interchange network and the acquiring and issuing banks, including the ACH transfers.  Biller-direct EBPP systems: systems used by large companies who want to manage billing and payment themselves.  Card code verification (CCV): a three- or four-digit number that is printed on the credit card, but is not encoded in the card’s magnetic strip, which establishes that the purchaser has the card (or has seen the card) and is likely not using a stolen card number.  Card not present transactions: credit card transactions in which the card holder is not at the merchant’s location and the merchant does not see the card; includes mail order, online, and telephone sales.  Card security code (CSC): see card code verification.  Card verification code (CVC): see card code verification.  Card verification data (CVD): see card code verification.  Card verification numbers (CVNs):see card code verification.  Card verification value (CVV or CV2): see card code verification.  Card verification value code (CVVC): see card code verification.  Cashers: participants in a phishing scam who use the acquired information.  Charge card: carries no spending limit, and the entire amount charged to the card is due at the end of the billing period.  Chargeback: a process that occurs when a cardholder successfully contests a charge; the merchant bank must retrieve the money it placed in the merchant account.  Check 21: a U.S. law that permits banks to replace the physical movement of checks with transmission of scanned images.  Client-side digital wallet: an electronic or digital wallet that stores a consumer’s information on the consumer’s own computer.  Closed loop systems: payment card arrangements involving a consumer, a merchant, and a payment card company (such as American Express or Discover) that processes transactions between the consumer and merchant without involving banks.  Collectors: in a phishing attack, the elements that collect data from the potential victim.  Consolidator EBPP system: system in which another company (the consolidator) aggregates all a customer’s bills on its system.  Credit card: 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 associations: member-run organizations that issue credit cards to individual consumers.  Cryptocurrency:  Customer issuing banks: member-run organizations that issue credit cards to individual consumers. Also called credit card associations.  Debit card: a payment card that removes the amount of the charge from the cardholder’s bank account and transfers it to the seller’s bank account.  Digital cash: a general term that describes any value storage and exchange system created by a private (nongovernmental) entity that does not use paper documents or coins and that can serve as a substitute for government-issued physical currency.  Digital wallet: 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.  Double-spending: spending a particular piece of electronic cash twice by submitting the same electronic currency to two different vendors.  Due diligence: background research procedures; includes checking the new customers’ credit histories and banking records.  Electronic bill presentment and payment system (EBPP): designed to deliver bills and accept payment for them online.  Electronic funds transfer at point of sale (EFTPOS) cards: another term for debit cards, usually used outside of the United States.  Financial technology: the use of powerful computers connected through the Internet that use tools such as Web services to improve the quality while reducing the costs of existing financial services and to create entirely new types of financial products and services.  Fintech: an abbreviation for financial technology.  Float: delay that occurs between the time a person writes a check and the time the check clears the person’s bank.  Front-end processor: a banking service provider that obtains authorization for a transaction by sending the transaction’s details to the interchange network and storing a record of the approval or denial.  Gift cards: prepaid cards sold with the intention that they be given as gifts.  Hardware-based digital wallets: smartphones and tablets used as mobile devices that can store a variety of identity credentials (such as a driver’s license, medical insurance card, store loyalty cards, and other identifying documents).  Identity theft: 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 up charges on the accounts and then disappears.  Interchange fees: fees charged by a card association to an acquiring bank that are usually passed to the merchant.  Interchange network: 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.  Issuing banks: member-run organizations that issue credit cards to individual consumers.  Merchant account: an account that a merchant must hold with a bank that allows the merchant to process payment card transactions.  Micropayments: Internet payments ranging from a few cents to approximately one dollar.  Money laundering: 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.  Near field communication (NFC):technology that allows contactless wireless transmission of data over short distances.  Open loop system: a payment card arrangement involving a consumer and his or her bank, a merchant and its bank, and a third party (such as Visa or MasterCard) that processes transactions between the consumer and merchant.  Organized crime: unlawful activities conducted by a highly organized, disciplined association for profit.  Payment card: a general term for plastic cards used instead of cash to make purchases, including credit cards, debit cards, and charge cards.  Payment gateways: see front-end processor.  Payment processing service providers: a service provider either to assist small companies in processing payment card transactions or to handle the entire function for them.  Payment processors: a service provider either to assist small companies in processing payment card transactions or to handle the entire function for them.  Pharming attack: the use of a zombie farm, often by an organized crime association, to launch a massive phishing attack.  Prepaid cards: purchased cards that contains a limited value and that can be used for making purchases from retailers.  Racketeering: unlawful activities conducted by a highly organized, disciplined association for profit.  Server-side digital wallet: an electronic or digital wallet that stores a customer’s information on a remote server that belongs to a particular merchant or to the wallet’s publisher.  Single-use cards: payment cards with disposable numbers, which gives consumers a unique card number that is valid for one transaction only.  Small payments: payments between $1 and $10.  Spear phishing: a phishing expedition in which the e-mails are carefully designed to target a particular person or organization.  Store charge cards: a charge card issued by a specific retailer.  Store-branded cards: a charge card issued by a specific retailer.  Stored-value cards: a plastic card with an embedded microchip that can store information.  Verification code (V-Code or V Code): see card code verification.  Zombie farm: a large number of computers on which a hacker has planted zombie programs. Chapter 12 Planning for Electronic Commerce 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 When she was three years old, Michelle Crosby’s parents began a bitter and protracted divorce that exposed her to lawyers and the legal system. She grew up to become a successful business lawyer in Boise, Idaho, but her unpleasant childhood memories stayed with her. After completing mediation training at Harvard University, she returned to Boise and started a divorce mediation service. Crosby wanted to expand her business using online advertising to drive the creation of a national network of offices, but local bankers balked at funding the enterprise. In 2013, Crosby left her home in Boise to spend three months at a startup coaching enterprise called Y Combinator. She had been selected for the program by Y Combinator after completing an application and a grueling 10-minute interview that Crosby described as harder than either of the two bar exams she had taken. Y Combinator accepts a small number of applicants for its programs twice each year. After supplying a small amount of money (generally under $100,000), Y Combinator works closely with startups to develop their businesses and, at the end of the three-month coaching period, arranges “Demo Day” presentations to investors. Crosby is now back in Boise, operating her business, We vorce. In the year following her presentation at Y Combinator, she obtained more than a million dollars from investors and was operating divorce mediation centers in five states. Her online service, We vorce Anywhere, offers the services of “divorce architects” that can guide couples through a mediated settlement that can save them thousands of dollars in legal fees. In this chapter, you will learn more about businesses such as Y Combinator and how online business startups plan, manage, and find investors for their ideas. You will also learn how larger businesses manage their online business implementations. Learning Objectives In this chapter, students learn about: • How to identify benefits and estimate costs of online business initiatives • How online business startups are evaluated and financed • When and how to outsource online business initiative development • How to manage and staff electronic commerce implementations Teaching Tips Identifying Benefits and Estimating Costs of Online Business Initiatives 1. Begin the discussion by explaining that a successful business plan for an electronic commerce initiative should include activities that identify the initiative’s specific objectives and link those objectives to business strategies. Identifying Objectives 1. Note that the objectives that businesses typically strive to accomplish through electronic commerce include: increasing sales in existing markets, opening new markets, serving existing customers better, identifying new vendors, coordinating more efficiently with existing vendors, and recruiting employees more effectively. Linking Objectives to Business Strategies 1. Introduce the terms downstream strategies and upstream strategies. 2. Review the bulleted list of business activities that are inspired by electronic commerce. Note that the success of these activities can be difficult to measure. 3. An important point to make is that in the second wave of electronic commerce, 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. Note that on 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. Emphasize that in the third wave, the most profound change is likely to be the increase in electronic commerce activities by smaller businesses. Identifying and Measuring Benefits 1. When identifying benefit objectives, managers should try to set objectives that are measurable, even when those objectives are for intangible benefits. Teaching Tip Initiate a discussion of tangible versus intangible benefits that might apply to an electronic commerce Web site. 2. Introduce the term metrics. 3. Refer to Figure 12-1 to illustrate the measuring of benefits of electronic commerce initiatives. 4. Explain that, 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. Note that 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. Identifying and Estimating Costs 1. Note that at first glance, the task of identifying and estimating costs may seem much easier than the task of setting benefits objectives. However, many managers have found that information technology project costs can be as difficult to estimate and control as the benefits of those projects. Total Cost of Ownership 1. Introduce the term total cost of ownership (TCO). 2. Note that 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), Internet connections, design work outsourced, salaries and benefits for employees involved in the project, and the costs of maintaining the site once it is operational. Teaching Tip To learn more about TCO, see: http://www.business-case-analysis.com/total-cost-of-ownership.html. Opportunity Cost 1. Introduce the term opportunity cost. 2. Point out that good managers try to think of opportunity costs whenever they make business decisions of any kind Web Site Costs 1. Discuss the topic of Web site costs. 2. Students may find it interesting to know that 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). 3. Point out that the annual cost of operating an online business Web site generally ranges between 50 and 200 percent of the initial cost of the site. 4. Refer to Figure 12-2 to summarize recent industry estimates for the cost of creating and operating online Web sites for various sizes of businesses. 5. Mention that many industry observers have noted that costs are generally heading downward. 6. Refer to Figure 12-3 to illustrate important Web hosting service features. Funding Online Business Startups 1. Note that in the early days of the Web, many businesses were started by individuals who knew something about computers and technology and who had an idea for a business. 2. Mention that online businesses that are startup companies (rather than ideas launched by existing businesses) cannot, in general, borrow from a bank or offer bonds or stock to investors. Banks are reluctant to lend money on the strength of a good idea alone, and access to stock and bond markets is limited to companies with long track records of profitability. 3. Introduce the terms angel investors, venture capitalists, and initial public offering (IPO). Teaching Tip To learn more about angel investors, see: http://www.smallbusinessnotes.com/business-finances/angel-investors.html. Comparing Benefits to Costs 1. Introduce the terms capital projects (capital investments). 2. Note that a key part of creating a business plan for electronic commerce initiatives is the process of identifying potential benefits (including intangibles such as employee satisfaction and company reputation), identifying the total costs required to generate those benefits, and evaluating whether the value of the benefits exceeds the total of the costs. 3. Use Figure 12-4 as an aid when discussing the cost/benefit evaluation of electronic commerce strategy elements. Return on Investment (ROI) 1. Introduce the term return on investment (ROI). 2. Note that 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). 3. Explain that, in the second wave of electronic commerce, more companies began taking a harder look at Web-related expenditures. Many companies have turned to ROI as the measurement tool for evaluating new electronic commerce projects because that is what they used for other IT projects in the past. 4. Review some weaknesses of using ROI calculations. Quick Quiz 1 1. Businesses use tactics called ____ to improve the value that the business provides to its customers. Answer: downstream strategies 2. ____ are very wealthy individuals, groups of wealthy individuals, or investment firms that look for small companies that are about to grow rapidly. Answer: Venture capitalists 3. Major investments in equipment, personnel, and other assets are called ____. Answer: capital projects, capital investments 4. (True or False): ROI techniques provide a quantitative expression of whether the benefits of a particular investment exceed their costs (including opportunity costs). Answer: True Strategies for Developing Electronic Commerce Web Sites 1. Use Figure 12-5 to discuss the increasing complexity of Web site functions. 2. Note that, as more companies begin to see their Web sites as collections of software applications, they are starting to use software development tools to manage the updating and rebuilding of their Web sites. Internal Development vs. Outsourcing 1. Introduce the term outsourcing. 2. Point out that using internal people to lead all projects helps to ensure that the company’s specific needs are addressed and that the initiative is congruent with the goals and the culture of the organization. Mention that outside consultants or outsourcing companies are seldom able to learn enough about an organization’s culture to accomplish these objectives. 3. Emphasize that the key to success is finding the right balance between outside and inside support for the project. The Internal Team 1. Note the first step in determining which parts of an electronic commerce project to outsource is to create an internal team that is responsible for the project. 2. Caution students about appointing a technical wizard who does not know much about the business and is not well known throughout the company as the electronic commerce project leader. 3. Emphasize that measuring the achievements of this internal team is very important. 4. Introduce the term intellectual capital. 5. Note that the internal team should hold ultimate and complete responsibility for the electronic commerce initiative, from the setting of objectives to the final implementation and operation of the site. Early Outsourcing 1. Explain that, in many electronic commerce projects, the company outsources the initial site design and development to launch the project quickly. 2. Introduce the term early outsourcing. Late Outsourcing 1. Introduce the term late outsourcing. 2. Explain that, although for years late outsourcing has been the standard for allocating scarce information systems talent to projects, electronic commerce initiatives lend themselves more to the early outsourcing approach. Partial Outsourcing 1. Note that in the early outsourcing and late outsourcing approaches, a single group is responsible for the entire design, development, and operation of a project - either inside or outside the company. 2. Discuss the use of partial outsourcing or component outsourcing as an alternative to this approach. 3. Note that one of the most common elements of electronic commerce initiatives that companies outsource using this approach is Web hosting activity. 4. Introduce the term 24/7 operation. 5. Review the services that are candidates for partial outsourcing strategies. These include automated e-mail response, transaction processing, payment processing, security, customer service and support, order fulfillment, and product distribution. Teaching Tip To learn more about current outsourcing topics, see: http://www.cio.com/topic/3195/Outsourcing. Incubators 1. Introduce the term incubator. 2. Note that when the company grows to the point that it can obtain venture capital financing or launch a public offering of its stock, the incubator sells all or part of its interest and reinvests the money in a new incubator candidate. 3. Mention that some companies have created internal incubators. Explain why this tactic was not always successful. 4. Point out that more recently, companies such as Matsushita Electric’s U.S. Panasonic division started internal incubators to help launch new companies that will grow to become important strategic partners. The business ideas developed in the incubator are eventually launched as separate companies that assume ownership of the assets used to create the ideas or products. Teaching Tip Ask students to explain the higher success of strategic partner incubators such as those developed at Matsushita Electric’s U.S. Panasonic division. Are there any drawbacks to this process? Accelerators 1. Introduce the term accelerator. 2. Note the similarities and differences between incubators and accelerators. 3. Introduce the term mentor network. Mention that the greatest benefit to the entrepreneurs is access to that network. Managing Electronic Commerce Implementations 1. Explain that project management, project portfolio management, specific staffing, and postimplementation audits are methods businesses use to efficiently administer their electronic commerce projects. Project Management 1. Introduce the term project management and briefly discuss its history. 2. Introduce the term project management software. Explain that commercial project management software products, such as Oracle Primavera and Microsoft Project, give managers an array of built-in tools for managing resources and schedules. 3. Students might be interested to know that the main causes for information systems project failures are rapidly changing technologies, long development times, and changing customer expectations. Because of this vulnerability, many teams rely on project management software to help them achieve project goals 4. Point out that, although electronic commerce certainly uses rapidly changing technologies, the development times for most electronic commerce projects are relatively short - often, they area accomplished in under six months. This gives both the technologies and the expectations of users less time to change. Project Portfolio Management 1. Introduce the term chief information officer (CIO). 2. Explain that, in project portfolio management, the CIO assigns a ranking for each project based on its importance to the strategic goals of the business and its level of risk (probability of failure). Staffing for Electronic Commerce 1. Note that regardless of whether the internal team decides to outsource parts of the design and implementation activity, it must determine the staffing needs of the electronic commerce initiative. 2. Discuss the following roles: chief information officer (CIO), business manager, project manager, project portfolio manager, account manager, applications specialists, Web programmers, Web graphics designer, content creators, content managers/content editors, social networking administrator, online marketing manager, customer service personnel, systems administrator, network operations, and database administration. 3. Introduce the term call center. Postimplementation Audits 1. Introduce the terms post implementation audit (post audit review). 2. Explain that a postimplementation audit allows the internal team, the business manager, and the project manager to raise questions about the project’s objectives and provide their “in-the-trenches” feedback on strategies that were set in the project’s initial design. Teaching Tip To learn more about postimplementation audits, see: http://www.mindtools.com/pages/article/newPPM_74.htm. Change Management 1. Describe the strategies used for change management, including communication and including employees in the decision making process and planning. Quick Quiz 2 1. A(n) ____ 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. Answer: incubator 2. ____ is a collection of formal techniques for planning and controlling the activities undertaken to achieve a specific goal. Answer: Project management 3. A(n) ____ is a person with specific training or skills in tracking costs and the accomplishment of specific objectives in a project. Answer: project manager 4. A(n) ____ is a formal review of a project after it is up and running. Answer: postimplementation audit, post audit review Class Discussion Topics 1. Discuss the difference between the net present value and the internal rate of return evaluation methods. 2. For companies in the newspaper business, what is the opportunity cost of not having a Web presence? 3. Discuss the advantages and disadvantages of outsourcing. Additional Projects 1. In about 300 words, discuss the key components of a total cost of ownership (TCO) evaluation and the most effective use of TCO information. 2. Use the Web to research the topic of postimplementation audit/post audit review. In two or three paragraphs, discuss the key components of a postimplementation audit and the most effective use of the audit information. 3. Provide answers to the following questions: • Why is change management considered critical in today’s decentralized, network-based environment? • What are the consequences of not implementing change management? Additional Resources 1. Project Management Institute: http://www.pmi.org/ 2. Funding 101: How to Position Your Startup as a Good Investment: http://www.entrepreneur.com/article/226334# 3. Change Management: http://www.change-management.com/tutorials.htm Key Terms  24/7 operation: operates 24 hours a day, seven days a week.  Accelerator: company that performs a similar function to that of an incubator but structure activities differently and tend to work with entrepreneurs who have already developed their idea into a business.  Account manager: keeps track of multiple Web sites in use by a project or keeps track of the projects that will combine to create a larger Web site.  Angel investors: investors who fund the initial startup of a business.  Applications specialists: maintain accounting, human resources, and logistics software.  Business manager: a member of the internal team that sets the objectives for the project.  Call center: a company that handles incoming customer telephone calls and e-mails for other companies.  Capital investments: major investments in equipment, personnel, and other assets.  Capital projects: major investments in equipment, personnel, and other assets.  Change management: the process of helping employees cope with these changes.  Chief information officer (CIO): an organization’s top technology manager.  Component outsourcing: an outsourcing technique where the company identifies specific portions of the project that can be completely designed, developed, implemented, and operated by another firm that specializes in a particular function.  Content creators: people who writes original content for a Web site.  Content editors: people who purchases existing material and adapts it for use on the site.  Content managers: synonymous with content editors.  Customer service: personnel who help design and implement customer relationship management activities in the electronic commerce operation.  Database administration: function that 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.  Downstream strategies: tactics that improve the value that the business provides to its customers.  Early outsourcing: an outsourcing tactic involving the hiring of an external company to do initial electronic commerce site design and development. The external team then trains the original company’s information systems professionals in the new technology, eventually handing over complete responsibility of the site to the internal team.  Incubator: a company that offers start-up companies a physical location with offices, accounting and legal assistance, computers, and Internet connections at a very low monthly cost.  Initial public offering (IPO): the original sale of a company’s stock to the public.  Intellectual capital: the value of the accumulated mass of employees’ knowledge about a business and its processes.  Late outsourcing: outsourcing tactic where a company’s information systems professionals do the initial design and development work, implement the system, and operate the system until it becomes a stable part of the business operation. Once the company has gained all the competitive advantage provided by the system, the maintenance of the electronic commerce system is outsourced so that the company’s information systems professionals can turn their attention and talents to developing new technologies that will provide further competitive advantage.  Mentor network: group of mentors assembled by an accelerator to work with entrepreneurs whose proposals have been accepted.  Metrics: measurements that companies use to assess the value of site visitor activity.  Network operations: staff whose functions include load estimation and load monitoring, resolving network problems as they arise, designing and implementing fault-resistant technologies, and managing any network operations that are outsourced to service providers or telephone companies.  Online marketing manager: an employee who specializes in the specific techniques used to build brands and increase market share using the Web site and other online tools, such as e-mail marketing.  Opportunity cost: describes lost benefits from an action not taken.  Outsourcing: finding a contractor to perform online business site development.  Partial outsourcing: an out sourcing technique where the company identifies specific portions of the project that can be completely designed, developed, implemented, and operated by another firm that specializes in a particular function.  Post audit review: a formal review of a project after it is up and running.  Postimplementation audit: a formal review of a project after it is up and running.  Project management: a collection of formal techniques for planning and controlling the activities undertaken to achieve a specific goal.  Project management software: specific application software to help project managers oversee projects. May provide built-in tools for managing resources and schedules.  Project manager: a person with specific training or skills in tracking costs and the accomplishment of specific objectives in a project.  Project portfolio management: a technique in which each project is monitored as if it were an investment in a financial portfolio.  Project portfolio manager: an employee who is responsible for tracking all ongoing projects and managing them as a portfolio.  Return on investment (ROI): a method for measuring the amount of income (return) that will be provided by a specific current expenditure (investment).  Social networking administrator: person responsible for managing the virtual community elements of the Web operation.  Systems administrator: a member of an electronic commerce team who understands the server hardware and software and is responsible for the system’s reliable and secure operation.  Total cost of ownership (TCO): 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; also includes hardware and software costs.  Upstream strategies: tactics that focus on reducing costs or generating value by working with suppliers or inbound shipping and freight service providers.  Venture capitalists: very wealthy individuals, groups of wealthy individuals, or investment firms that look for small companies that are about to grow rapidly.  Web graphics designer: a person trained in art, layout, and composition and who also understands how Web pages are constructed.  Web programmers: programmers who design and write the underlying code for dynamic database-driven Web pages. Instructor Manual for Electronic Commerce Gary P. Schneider 9781305867819