E-commerce concepts and applications

¶ … E-Commerce on Business Strategy

The purpose of this literary review is to determine the effects and impacts of e-commerce on business strategies and internal processes with particular emphasis on the travel industry.

Our review will include material from several different sources including the Sloan Management Review, Travel Weekly and white papers from Ernest & Young.

We will begin by defining E-commerce and the impact of it in the new economy. Subsequently we will discuss the impacts and effects of e-commerce on business strategies. Finally our discussion will focus on the Travel industry and the impact of e-commerce on Tour operators.

E-commerce

E-commerce is defined as the use of telecommunications, in particular the Internet, to purchase and sell goods and services. (The Macmillan Encyclopedia 2001) The term e-commerce also refers to using electronic means to improve the way a company does business and to create value, or competitive advantages, for the company. Improvements can be in business-to-business, business-to-consumer, and intra-business transactions of information, goods, and funds.("E-Commerce 101," 1999)

Effects and Impacts of E-commerce on Business Strategies and Internal Processes

All of a sudden, electronic commerce seems to be all over the place, leaving traditional companies pondering how to alter business strategies to meet the demand. Is e-commerce just another trend? Do the benefits of this new technology outweigh the risks and difficulties involved in overhauling the business? Should companies be guarded and wait things out? The Sloan Management Review argues, "E-commerce is a force that is not likely to fade....All companies will eventually be forced to rethink their strategies, management structure and business operations in light of the economic benefits that e-commerce enables." (Mass, 2000)

Encarta writes that, "Internet sales and transactions in the retail and services sectors increased significantly from 1999 to 2000." ("Electronic Commerce," 2002) The Encarta article goes on the explain that the United States Bureau of the Census reported that retail e-commerce sales improved 92% from $15 billion in 1999 to $29 billion in 2000, whereas e-commerce service transactions increased 48% from $25 billion to $37 billion. In spite of these dramatic increases, e-commerce is still in its formative years. The U.S. Census Bureau also reported that in the year 2000 retail e-commerce sales denoted less than 1% of all retail sales. ("Electronic Commerce," 2002)

E-commerce and traditional commerce are governed by many of the same principles these principles dictate that buyers and sellers come together to exchange goods and services for money. Instead of conducting business in the traditional way -- e-commerce consumers and produces conduct business through networked computers or the Internet. ("Electronic Commerce," 2002)

E-commerce is popular among buyers because it is convenient. "The benefits to online shopping in a tough economy are the 24/7 access to merchandise, which saves time and money," (Hyman, 2002) Buyers can also visit the Internet to conduct comparison pricing and to buy goods and this can be accomplished without having to leave their homes or offices. In a few instances, consumers can immediately acquire a product or service, such as an electronic book, a music file, or computer software, by downloading it over the Internet. ("Electronic Commerce," 2002")

GartnerG2 survey revealed that 79% of online shoppers value convenience, while only 32% valued price. Forty-four hundred online shoppers were surveyed, 49% referred to convenience as the single most important factor in making a purchase over the Web. On the contrary, 2% revealed that price was the only important consideration. Price and convenience were important for 30% of surveyed online shoppers.. ("Electronic Commerce," 2002)

For sellers, e-commerce offers a way to cut costs and increase their markets. (Electronic Commerce," 2002) Sellers also gain advantage of targeting customers without actively marketing. If information about goods and services is made available on the Internet the intended buyer will get the information, without active advertisement of the goods by the producer. ("CMC E-commerce Suite, 2002)

In addition, sellers do not need to build, staff, maintain a store or print and distribute mail order catalogs. Automated order tracking and billing systems cut additional labor costs, and if the product or service can be downloaded, e-commerce firms have no distribution costs. Because products are sold over the global Internet, sellers have the ability to market their products or services globally and are not restricted by the physical location of a store. Moreover Internet technologies also permit sellers to track the interests and preferences of their customers with the customer's consent and then use this information to build an ongoing rapport with the customer by customizing products and services to meet the customer's wants and needs..(Electronic Commerce," 2002)

E-commerce also has some disadvantages, however. Many of these disadvantages are due to the fact that consumers are reluctant to buy certain products online. For instance, online furniture businesses have been unsuccessful because customers want to test a pricey item such as a sofa before they buy it. Many people feel that shopping is a social experience. These people feel that going to a store or a shopping mall with friends or family, an experience that they cannot be accomplished online. Buyers must also be reassured that credit card transactions are secure and that their privacy is respected. ("Electronic Commerce," 2002)

Scores of e-commerce retail and service businesses failed in the late 1990s and as the 21st century started, and a number of unresolved issues have come to lights as e-commerce transactions have grown in number and value. There are a myriad of issues facing e-commerce business strategies among these are taxation, security, privacy, and profitability. ("Electronic Commerce," 2002)

Taxation is an issue because the Internet surpasses national borders and also state or provincial borders within a nation, the issue of sales taxes on goods or services purchased over the Internet creates a dilemma for many governments that rely on sales tax revenue to finance government programs and services. The Internet is a fundamentally tax-free zone. ("Electronic Commerce," 2002) Even though online sales still account for only about 1% of all retail purchases in the United States, a current University of Tennessee study argues that states lost U.S.$13 billion in tax revenue to e-commerce sales in 2000. (Regan, 2002)

Another study reported in 2001 found that state and local governments in America lost an estimated $13.3 billion in uncollected sales taxes for online purchases made that year. Various state and local governments have lobbied the U.S. Congress attempting to impose some type of uniform sales tax that every e-commerce business would be required to pay. At the other end of the spectrum e-commerce businesses have lobbied against states and local governments, arguing that these mandatory taxes would impose a heavy burden on businesses. The European Union is also taking into consideration a proposal to collect sales taxes on Internet purchases by consumers. The EU has already created a way to impose taxes on business-to-business transactions over the World Wide Web.. (Electronic Commerce," 2002)

Another issue facing businesses is ensuring the security of consumers.

Established encryption methods such as Secure Sockets Layer (SSL), a protocol developed by Netscape Communications Corporation, encode credit card numbers and other information to foil would-be thieves." (Electronic Commerce," 2002) Shoppers can verify if the site they are using is secure by noting the "secure" icon at the bottom of their browser window. Additionally, the address bar of Internet browser will have the "https" prefix instead of the standard "http" prefix when the site is secured. Even so, some customers are reluctant to disclose credit card information over the Web, and it is believed that this type of reluctance has delayed the growth of e-commerce. (Electronic Commerce," 2002)

As an alternative to credit card information some websites allow customers to use digital cash also known as e-cash. When businesses utilize this feature on a website, shoppers can purchase a number of virtual credits through a single supply, and in turn use those credits as dollars when purchasing products or services over the Internet. When customers' checkout, the Internet retailer sends the goods to the buyer and includes the shipping costs with the purchase price. Ironically there are very few e-commerce sites that offer an e-cash surface. ("Electronic Commerce," 2002)

The third issue facing businesses is privacy because many consumers worry about privacy. To combat customer fears, many Internet stores post "privacy statements" that explain to customer their policy of distributing or not distributing customer information to other businesses. This privacy policy may include refusing to give the customer's name or e-mail address to companies that send unsolicited and unwanted commercial e-mail messages, often known as junk mail or spam.

Consumers find such unwarranted solicitation annoying and will tend to abandon online stores that allow such nonsense to continue. Encarta reports that "the U.S. Congress is considering legislation to force online companies to safeguard the privacy of online shoppers.." (Electronic Commerce," 2002)

The final issue facing businesses is profitability. A large portion of e-commerce businesses went bankrupt in 2000 and 2001. Most often these bankruptcies were due to inadequate business strategies and unnecessary spending on advertising and other forms of marketing to attract consumers to their Web sites. The 21st century began with a dot-com bust as opposed to the dot-com boom of the late 1990s. It is estimated that 520 e-commerce businesses either stopped operating or declared bankruptcy in the years between 1999 and 2001. These closures and bankruptcies resulted in the layoffs of almost 100,000 employees, according to Fortune Magazine. Eventually, a number of e-commerce sites started to report profits in 2001 and 2002. Among these e-commerce sites were Amazon.com, Inc., headquartered in Seattle, Washington, which established many of the tools and strategies that are now routine in online retailing, and Expedia, an online travel site.. (Electronic Commerce," 2002)

Delighting customers is the clear determinant of e-business success or failure. Online shoppers want their lives to be made simpler with the offline world as their benchmark," said Chris Zook, who Heads Bain & Company's E-Commerce Practice. "For the most part, their needs are fairly simple: good secure service, fair pricing and timely fulfillment. The few companies that succeed in these areas have significant competitive advantages over their competitors and a business model that, in the long run, is best positioned for long-term success." (Pastore, 2000)

ActivMedia Research's study of e-commerce and profitability identifies four basic online strategies. The first of these strategies is the Niche Defense by Customer Satisfaction, which is a solid, long-term survival strategy. Many of the established offline companies that have a well developed, thriving offline presence usually adopt it. Growth Through Positive Cash Flow is the second strategy, which is undertaken by larger-sized companies for whom the Internet portion of business is a fairly small investment. Investment in Online Growth describes the strategy usually used by a young, financially healthy company that is faced with fierce competition.

Typically websites that are active have many transactions, a range of products and many visitors who frequently make multiple purchases annually. Aggressive Site Promotion businesses that utilize this strategy tend to lose sight of important corridors to success. In particular, these firms do not focus on developing a unique position, and instead make themselves vulnerable to competitors with superior and more differentiable products.

In white papers produced by Ernest & Young, Mark Doll describes the Internet as a dynamic, close-to-perfect information market in which competitors are only 'one click away'. For many retailers e-commerce can be an intimidating environment and an overwhelming challenge. While others, see the potential to dominate a new marketplace and establish themselves as a leader in an untouched customer base. Mark describes this as an intoxicating feeling. "Ernest & Young's e-tailing approach overcomes barriers toward making your online commerce goals a reality."

Ernst & Young LLP Releases e-Commerce White Paper in Conjunction with Real Strategies for Online Retail," 1999)

Business-to-business transactions are currently the dominant e-commerce applications. Additionally, Supply chain management tools dominate business e-commerce applications. Merchandise information delivery, payment terms, and instructions usually sent electronically. (Friel, 1999) This type of application can be incorporated into each party's business strategy. For instance, when a product is purchased off the shelf, a manufacturer will be able to reorder new inventory automatically as the product is scanned at the checkout. The supplier can also distribute daily whatever is required or requested by the customer. As a result the manufacturer can readily model parts inventory for itself so that it posseses as little finished goods as possible, and this continues down the value chain. (Friel, 1999) The business-to-business segment is expected to continue to be the largest e-commerce market. "This segment presents fewer conformity concerns than does the business-to-consumer segment, but businesses do face several definitional, sourcing, and nexus uncertainties." (Nellen, 2001)

Despite the predictions for consumer-driven e-commerce, business readiness far exceeds that of the consumer preparedness.

An increasing readiness for e-commerce is apparent in the business community, with the most notable change in the small business community. In 1995, only 41% of small business treasury personnel were outfitted with a PC and a modem, and an estimated 2% were using the equipment for online banking functions. (Friel. 1999) By 1997, 60% were outfitted with a computer and modem and an increased 18% were either using online banking functions or plan to began doing so this year. The National Association of Purchasing Management reported that 93% of purchasing managers had Internet access at the end of 1997 and an additional 5% of purchasing managers plan to get it soon. It is estimated that Business-to-business transactions currently accounts for 80% of e-commerce. The OECD believes that e-commerce sales were $26 billion in 1998 and will increase to $1 trillion by the year 2005. (Friel. 1999)

The Tourism Industry and Tour Operators

As you can see E-commerce has profoundly affected business strategies and internal processes. This is particularly true within the tourism industry. The January 2002 Jupiter Consumer Survey revealed that 77% of consumers who research and/or purchase their travel online visit more than one Web site to compare prices. The Internet will account for 22% of all travel bookings in 2007 which is an increase from only 11% in 2001. (Greenspan, 2002) "Tourism is an information-intensive industry in which electronic commerce is expected to play a significant role." (Electronic Commerce and Tourism, 2000)

The main factors of the tourism industry are governments, tour operators, hotels, airlines and other transport operators, and tourists or consumers. Each of these factors contributes to the development of the electronic commerce market as it relates to the travel industry. ("Electronic Commerce and Tourism," 2000)

Tourism as a product has a distinguishing feature that has propelled it into the forefront of the electronic commerce revolution: when tourism is sold it is little more than an information product. A consumer acquires product information through a media outlet, friends or a travel agent, based on his or her questions and expressions of interest. Finally the consumer pays for a reservation for travel, logging and other services. (Electronic Commerce and Tourism, 2000)

The travel business has changed dramatically over the past six years. It is estimated that 10 to 20% of U.S. travel agents have gone out of business. The mass departure began in 1995, when airlines started cutting agents' ticket commissions. Over the next three years, fees decreased from 10% for every ticket booked to 5%. The worst aspect of it is that 5% was capped at $50 per ticket; so even if an agent booked a $22,000 Paris-to-New York flight on the Concorde they wouldn't receive anymore than $50. Keep in mind that at the same time, Web sites like Expedia, Hotwire, Priceline and Travelocity arrived, which took business away from offline agents. Online bookings have been increasing dramatically. In the year 2000, they were up 110% for Travelocity and 117% for Expedia. Travelocity expects to be profitable by June; Expedia projects profits in early 2002. (Webber 2001)

The tourism industry is learning first hand that the Internet can satisfy travel nee needs far better than any other existing technology. More than any other means, the Internet empowers consumers to find information quickly and accurately on any destination or recreation that has captured their interest. Consumers have come to expect instant information and, increasingly, the possibility to design or customize the tourism product that is being sought and purchase it online. (Electronic Commerce and Tourism, 2000)

The utilization of the Internet and e-commerce in developed countries for purchasing tourism products is greater than ever.

Of the total e-commerce sales of USD 64 billion in 1999, travel, transport and hotel reservations as a group represented the largest category of Internet transactions, making up 38.5 per cent of total online sales. (Electronic Commerce and Tourism, 2000) major part of these transactions begins and is materialized in the United States of America. It is reported that Fifty- three percent of all travelers in the United States of America use the Internet and are responsible for approximately three-quarters of online sales. Online sales in Europe are forecast to increase substantially. In 1999 only 0.1 per cent of the European travel market, worth GBP 540 billion, was sold online and it is expected that Internet sales will have grown six-fold by 2002. For the United Kingdom there are estimates that 30 per cent of flight-only bookings will be made online by 2003, as well as sales of 15 per cent of standard packaged holidays and 20 per cent of last minute and late packaged holidays. (Electronic Commerce and Tourism, 2000)

According to a survey conducted by the Anite Travel systems, Of the 36 companies in the survey, only three said that e-commerce would not figure in their businesses within the next three years. Nearly two-thirds of respondents (64%)thought Internet-based distribution would account for up to a quarter of turnover in the same period, and 11% expect their entire business to be conducted online by 2002. (No Turning Back: Tour Operators and E-commerce, 2000) Travel Weekly's agency market survey found that a solid majority -- 78% of U.S. agencies -- now can access the Internet on site, a dramatic jump from just 55% of wired agencies back in 1997.Joan Duran, manager of sales and operations at Access Worldwide Travel in New Rochelle, N.Y., says the Internet has made a radical change in the way she looks at the travel business. (O'Meara, 2000)

Much attention has been given to the predicted demise of the travel agent. Travel agents are being replaced by GDS operators who see economic gains in putting their system on the internet and making it directly available to consumers, while saving the costs of commissions and fees paid to agents. The pre-Internet arrangement of travel agents is unsustainable in the new economy. "Agents are exploring their own online strategies as well the possibilities for creating their own CRS and GDS systems. As agents are often too small to pursue global ambitions, one solution may lie in forming business associations of agents. An example of this approach is the United States Travel Agent Registry (USTAR), established in 1996. USTAR brings together 700 ravel agents and has as its main objective to deploy Genesis, its own CRS system." (Electronic Commerce and Tourism, 2000) The primary advantage for the consumer is that Genesis will offer a variety of travel content. "USTAR has also been expanding the Genesis concept beyond its national market and is actively establishing partnerships with similar organizations worldwide." (Electronic Commerce and Tourism, 2000)

E-commerce will eventually become the preferred method used by all Major Tour Operators to sell their products. The savings that they will make will force them to adopt a policy of encouragement (if not insistence) that Agents upgrade their own PC's and Networks to be able to accommodate Internet Bookings." ("E-commerce With Talisman, 1999)

In order to succeed, infomediaries must establish themselves as a credible brand with positive consumer recognition. Players that have a physical presence in the market and have an established business generating sales and earnings have a double advantage. They should be able to build an online brand identity on top of their off-line brand and real world operations where they physically come into contact with and have immediate feedback from customers." In addition, they are in a position to establish and finance their online brand identity in parallel with existing marketing and public relations activities and with funds generated from existing activities. However, pre-Internet players also have important disadvantages. Often a costly network of physical shops and long-standing arrangements encumbers them, with varying degrees of exclusivity, with producers and agents. (Electronic Commerce and Tourism, 2000)

The projected cost savings tour operators have to be weighed against a number of potential factors that could prove faulty for them: including Increased IT investment in buying and running e-commerce system; Increased competition resulting in aggressive discounting and pressure on margins; Increased traffic to call centers as the human interface to customers disappears and; Lower brand loyalty as online shopping encourages consumer promiscuity. (No Turning Back: Tour Operators and E-commerce, 2000)