E-Commerce Communications: Types, Technologies & Global Reach

Introduction to E-Commerce: Definitions and Classifications

Electronic commerce, or e-commerce, is the term used to describe all forms of information exchange and business transactions based on information and communication technologies. There are different formal definitions of e-commerce, but the wide scope involved has resulted in many definitions focusing on only certain aspects. A fairly comprehensive definition covers e-commerce from four different perspectives (Kalakota and Whinston, 1997, p. 38): communications, business process, service, and online. From a communications perspective, e-commerce is the transfer of information, products, services, and payments over communication and electronic networks. The business process perspective concerns the application of information and communications technology for the automation of business activities and transactions. From a service perspective, e-commerce provides solutions to consumers and organizations for enhancing business performance and efficiency, such as improvement in quality, deliverables, and resolving customer complaints quickly. The online element of e-commerce allows the buying and selling of products on the internet and other online systems.

Since e-commerce involves transactions between business partners, there is a common tendency to use the term e-business as an alternative, and the terms are often used interchangeably. It is generally accepted that e-business is a broader concept than e-commerce, encompassing not just buying and selling, but also servicing customers, collaborating with business partners, and carrying out electronic communications within the organization. In the words of Lou Gerstner, who served as Chief Executive Officer of IBM: "E-business is all about cycle time, speed, globalization, enhanced productivity, reaching new customers and sharing knowledge across institutions for competitive advantage" (Turban, Lee, King, and Michael, 2000, p. 78).

Electronic commerce is commonly classified by the nature of the transaction. Business-to-business (B2B) is one of the most common forms of transaction and includes inter-organizational system transactions and electronic market transactions. Business-to-consumer (B2C) includes retailing transactions, with sellers offering goods and services to individual shoppers. In the consumer-to-consumer (C2C) category, the transaction is between consumers themselves, without the intervention of producers; middlemen may or may not be involved. C2C is mostly personal in nature, with examples including the sale of residential property, antiques, cars, and personal computers. Consumer-to-business (C2B) is essentially the reverse of B2C, where individuals sell products and services to organizations or other sellers. A growing type of e-commerce is the non-business variety, wherein academic institutions and non-profit organizations use electronic commerce to reach more people, reduce costs, and improve service. Intra-business or organizational e-commerce refers to activities and transactions within a single organization, used for instant and cost-effective communication among employees spread over wide geographical areas, exchange of business data, and online training (Whiteley, 2000, p. 88).

Electronic Markets: Structure and Function

There are three broad categories of e-commerce: electronic markets, electronic data interchange, and internet commerce. While the categorization is based on differences in application and functional attributes, in practice these categories often overlap. An electronic market is an information system that enables buyers and sellers to exchange information about products and prices (Been et al., 1995, p. 3). The primary function of electronic markets is to assist buyers in searching for required products; for sellers, it facilitates the spread of product information to several buyers simultaneously, thereby enhancing the probability of sale. Electronic markets are generally associated with B2B or B2C categories of e-commerce.

Electronic markets are very effective in commodity markets, where products and price offerings are broadly similar across the entire market. For example, international trade in commodities such as wheat, rice, cotton, edible oils, and metals benefits greatly from electronic markets, where buyers can have multiple options in terms of product specifications, price, and place of delivery, while sellers can access a large number of customers across the world. Given the global reach of electronic markets, buyers increasingly carry out extensive searches until they find the best buy at the lowest cost. There is therefore a view that electronic markets in the commodity business represent a more efficient distribution of market information, which can lead to best buys for buyers but decreasing profit possibilities for sellers (Been et al., 1995, p. 4). A major worldwide application of electronic markets is the commercial airline passenger booking system, through which passengers can locate available seats, decide on the time and type of airline, and bargain for attractive prices.

In electronic markets, two types of buyer–seller relationships exist. First, the linkage between buyer and seller is established at the time of the transaction and may cover only that single transaction. Second, there is a definite purchase agreement between seller and buyer over a period of time, also referred to as a subscription transaction. Electronic markets are invariably built around freely accessible networks, and online service providers generally play the role of market makers. Typically, sellers — in collaboration with market makers — decide which business transactions they will offer in the electronic market. Communication networks are usually determined by both sellers and consumers and may vary for different transactions. A distinct feature of electronic markets is that no joint guidelines are framed in advance between buyer and seller (Amor, 1999, p. 25).

Electronic Data Interchange (EDI): Standards and Evolution

Electronic Data Interchange (EDI) is used for routine transactions that occur on a regular basis in organizations. It is popularly referred to as paperless trading. The International Data Exchange Association has defined EDI as "the transfer of structured data, by agreed message standards, from one computer system to another, by electronic means." This definition comprises four elements integral to all EDI systems. Structured data refers to the codes, values, and pieces of text used in EDI transactions. For instance, in the process of selling products, each customer is assigned a code, each order has a unique identification number, each product has a unique code, and every order is quantified and valued. This method of structuring data is useful because all transactions can be recorded systematically, business done during any period can be estimated quickly, and information can be made available on deliveries, payments received, and amounts due from customers. These valuable data can be stored for years and retrieved as needed for analysis, which can help in formulating future strategies (Berge, 1991, p. 45).

The second component in the definition is "agreed message standards," which implies that any EDI transaction must have a standard format. The objective of a standard format is to enable the business to deal with all customers uniformly and to eliminate confusion when dealing with multiple customers. Purchase orders, work orders, and service contracts in an organization generally have standard formats and are examples of agreed message standards. The third element is "from one computer system to another" — that is, EDI messages are sent from one computer to another; it is not necessary for people to read the message or re-enter it into the receiving system. It is done automatically. For example, there could be an EDI system between a supplier and a buyer such that the buyer places an order on the EDI, which is automatically received and processed at the supplier's end. The final element in the definition is "by electronic means." EDI messages are generally transferred by data communication systems or networks; however, physical transfer using a floppy disk, magnetic tape, or compact disc would also fall within the scope of EDI.

Traditionally, EDI systems functioned on expensive value-added networks, which were generally confined to large companies due to the investment involved. The United Nations EDI for Administration, Commerce and Trade (EDIFACT) is one of the most popular traditional EDI systems. In the United States, ANSI X.12 is widely used. Traditional EDI companies such as IBM and AT&T use leased or dedicated telephone lines or value-added networks for data exchanges. Global manufacturers and retailers such as Unilever, Procter & Gamble, Toyota, and Walmart have used EDI successfully to improve quality and service to customers. However, traditional EDI prevented these large companies from using EDI when dealing with numerous small companies. The advent of the internet has revolutionized EDI usage, enabling all companies, irrespective of size, to communicate effectively. The internet is well suited to EDI for a variety of reasons:

• The internet is a freely accessible network with few geographical or political constraints.
• The global reach of the internet is far superior to any other form of communication medium.
• Internet usage is cost-effective, and costs continue to fall as the number of users increases.
• The internet is user-friendly, self-supportive, and can be accessed from any part of the world.
• Using the internet for EDI is in line with the growing interest of businesses in delivering information electronically, especially through the World Wide Web (Commission of the European Communities, 1992, p. 3).

In view of these advantages, internet-based EDI has the potential to completely replace conventional EDI systems. Internet e-mail can be used in place of value-added networks to support the transfer of data in EDI. Alternatively, companies can create extranet systems through which trading partners can exchange information in web form, whose fields correspond to the fields in EDI messages. A third option is for companies to make use of a web-based EDI hosting service, which enables them to provide their own EDI services over the internet. Netscape Enterprise is an example of web-based EDI software available to companies (Commission of the European Communities, 1992, p. 4).

The central element of EDI is the coding and structuring of data into a common and accepted format, which is no easy task. There are many EDI standards developed in various industry sectors and in specific countries, and there are complex structures and procedures to support them. The need for standards stems from the reality that without a common format, data is meaningless — large amounts of data in various forms create confusion among trading partners, users, and consumers. Since EDI involves the transfer of data from one computer system to another, different formats will not produce the desired results, as processing becomes cumbersome. When the format is standard, it is simple to process and complete transactions to the satisfaction of all concerned. A typical EDI standard attempts to provide a format for data exchange that is standardized and universally available, independent of hardware and software, independent of the special interests of any party in the trading network, and that completely covers data requirements. In essence, EDI standards provide a common language for the transfer of information and data between partners (Hagel and Armstrong, 1997, p. 66).

The evolution of EDI standards is quite complex and began from the formats used for file transfer of data between computer applications. There are three broad stages through which EDI developed into its present form. The earliest stage was the development of formats by organizations that had to process large volumes of data on a routine basis; in this stage, data recipients framed the standard and customers followed it. In the second stage, EDI transformed into an application-independent interchange standard, primarily developed by industry sectors and national bodies to serve the requirements of specific user communities. The third stage of evolution resulted when sector and national standards could not keep pace with the growing requirements of cross-sectoral and international trade, which demanded further standardization between organizations in various countries. Since international trade involved extensive documentation covering shipping, customs, financing, payments, insurance, and statutory procedures, there was a definite need for common formats. This compulsion resulted in the birth of EDIFACT, under the aegis of the United Nations, developed as a universal standard for commercial EDI (Emery, 1999, p. 3).

EDIFACT — an acronym for Electronic Data Interchange for Administration, Commerce and Transport — was originally a European standard. It first appeared in the mid-1980s through the efforts of the United Nations Economic Commission for Europe, supported by the Commission of the European Union. The United Nations promoted the development of standards on trade documentation; a notable effort was the standardization of invoices, which was very important to companies processing large numbers of invoices. EDIFACT truly became international when it was accepted as the world standard by the United States. Although America had its own EDI standard, the American National Standards Institute (ANSI) X12, it decided to adopt EDIFACT as the international standard. The EDIFACT standard, like all standards, focuses on the exchange of electronic documents (Rowan, 1999, p. 32).

There are eleven sectors covered by EDIFACT: transport, customs, finance, construction, statistics, insurance, tourism, healthcare, social administration, public administration, and public procurement. In respect of trading, the documents include orders, dispatch advice, invoices, payment orders, and remittance advice. EDIFACT messages are transmitted in an electronic envelope known as an interchange, within which there can be any number of messages. The messages are comprised of data segments, which in turn have tags and data items. The tag serves as an identifier for the data segment, and the data items or elements provide the codes and values in the document. Once a message is transmitted, users access the data segment relevant to their particular needs. Sectoral and national EDI standards have been quite popular among trade-sector organizations. In the United Kingdom, one of the widely used earlier standards was ODETTE (Organization for Data Exchange by Tele-transmission). TRADACOMS is the UK EDI standard for general trade including retailing, while Germany and France developed SEDOS and GENCOD respectively. Most countries are planning to evolve their standards toward EDIFACT to become truly international (Whiteley, 1995, p. 89).

For ease of use, data transmitted is generally in the form of codes. Products, customers, and prices can be coded rather than sending entire descriptions every time. Codes not only save time but also improve efficiency and reliability. The European Article Number (EAN) and the Universal Product Code (UPC) are used for bar codes on goods in Europe and the United States respectively. The EAN is a 13-digit coding system: the first two digits denote the country, the next five indicate the manufacturer prefix number, the next five provide the item reference, and the final digit is the check digit. For certain merchandise not used in large volumes, an 8-digit EAN is available. For EDI to function and interface with communication networks, software is essential. The efficiency and speed of the EDI system depends on the software and its flexibility to operate on a variety of computers — from a simple personal computer to a complex mainframe — and unless the software runs on various systems, its use may become restricted. EDI software is generally sourced from specialist suppliers.

It is also common for software to be supplied by one of the major trading partners, or provided as part of an application package by the developer as an integral or value-added feature. In some cases, the value-added network supplier may provide the EDI software to enhance business prospects. Third parties may also provide EDI software as a product or service line extension — for example, banks provide software for the collection and accounting of payments in electronic transactions. With advanced technology and the growth of electronic documentation, EDI software suppliers provide additional value-added features, including interfacing with the value-added network, support for multiple EDI standards, sophisticated facilities for formatting internal application data, options for encrypting EDI messages, and options for transactions by facsimile or e-mail to customers not using EDI (Champy, Buday, and Nohria, 1996, p. 26).

EDI can be used in any organization where administrative processes are computerized and standardized transactions are exchanged with other organizations on a regular basis. Bhs, the mega-retailer in fashion goods with about 120 retail outlets across Europe, is one of the most extensive users of EDI. The company places orders with its approximately 400 suppliers through EDI, with the primary objective of ensuring just-in-time supply. In 1994, Bhs estimated it could be processing about four-and-a-half million replenishment decisions every week through the EDI system. The objective of communication processes in EDI is the execution and settlement of exchanges in the trade cycle. A typical communication cycle for executing a purchase order involves the following steps: (1) the customer sends the order to the supplier; (2) the supplier sends the goods and a delivery note; (3) the supplier follows up the delivery note with an invoice; (4) the customer makes payment against the invoice and sends payment advice. This four-step procedure represents an ideal communication process; in practice, transactions are much more complex, requiring flexibility to address situations such as order amendments, order cancellations, and a supplier's inability to execute an order (Norris, West, and Gaughan, 2000, p. 61).

A six-stage maturity model is often used to describe the evolution of EDI (Whiteley, 1995, p. 16). The six stages are discovery, introductory, integration, operational, strategic, and innovative. The first stage, discovery, occurs when an organization realizes the need for EDI to solve administrative problems and address customer requests — a need that intensifies when a competitor has already implemented an EDI system and begun reaping benefits. In the introductory stage, organizations typically start with pilot schemes to evaluate the feasibility of the proposed EDI system, tested with one or a few trading partners. Based on initial results, the pilot scheme is modified, refined, and standardized for implementation with all trading partners. The third stage, integration, involves interfacing the EDI software with business application software to enable automatic electronic transfer of EDI messages; unless proper integration is achieved, the full benefits of EDI cannot be realized. In the operational stage, organizations attempt to realize savings in time and cost and eliminate transactional errors; for significant cost savings, EDI usage must reach a critical mass in terms of the number of partners and the frequency of transactions. The strategic stage allows the organization to make fundamental changes in established business practices to improve efficiency and reduce costs, such as through the development of just-in-time manufacturing and quick-response supply practices, which can drastically reduce processing time and dispense with intermediary functions such as inventory holding. The sixth and final stage, the innovative stage, provides the platform for organizations to change the very nature of their products and services to gain competitive advantage. A good example of EDI-based innovation is Rover Cars, which stopped producing cars for inventory and instead produced only to order following the implementation of EDI. With EDI, Rover was able to reduce the car production cycle from seven weeks to two (Turban, Lee, King, and Michael, 2000, p. 81).

There is a general feeling that the rapid evolution of internet e-commerce has the potential to make EDI redundant. However, the reality is different, as the two systems serve different objectives. Internet e-commerce provides the platform for searching products and making specific purchases. Customers use internet e-commerce to buy at competitive prices and do not pay close attention to the identity of sellers. EDI, by contrast, is an application-to-application interface designed for the routine and repetitive transactions of an organization with numerous customers. It is therefore not feasible to completely replace EDI with internet e-commerce. From the perspective of e-commerce vendors, EDI will remain a central element of the supply chain.

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