Electronic Commerce

1
Electronic Commerce

• Yan Xiong
• College of Business
• CSU Sacramento
• 9/25/03

2
Agenda

• What is Electronic Commerce?
• Understanding the Internet
• IT components of Electronic
  Commerce
• Control issues related to Electronic
  Commerce
• E-Payment

3
In a few years' time, there will be no Internet
companies - there will just be companies - and
all companies that will operate in the future,
will be Internet companies. -A. Grove,
1999
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E-Business

• Electronic business
  (e-business) is the use of information
  technology and electronic communication networks
  to exchange business information and conduct
  transactions in electronic, paperless form.
• Glover, Liddle and Prawitt

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Types of E-Commerce

• Business to Business (B2B)
• Business to Customer (B2C)
• Various others (e.g., Government to Customers)
• Were projected to grow at same rate
• BUT . . . then came dot.com
  failures

6
E-Business Forecast
Forrester and Gartner Groups (2000)
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Where weve been
Add proliferation line
Discovery
High Expectations
Reality Check
Pragmatic Adoption
2002
2001
2000
1999
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Machine to Machine Progression
Forecast
Product Information
Order
Order Ack.
Payment

• Rosettanet standardizes format and choreography
  for transactions
• Web services exposes business capabilities as
  real-time executable functions
• Look for the best of both to merge

Advanced Ship Notice
Invoice
Inventory Reporting
Receipt Notification
Web services
EDI
FTP
Rosettanet
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EDI

• Electronic Data Interchange
• Mature technology (15 years) now being moved to
  Internet
• Mainframe computers
• Batch processing
• Using value added network (VAN)
• Standards have been developed
• Accounting standards recently

10
Typical EDI Transaction
Manufacturer
Purchase Order
Value-Added Network
Purchase Order
Confirmation
Confirmation
Supplier
E-mail using ANSI X12 standard
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EDI Disadvantages

• Changes limited by EDI structure-serial process
• EDI using VANs costly
• Works best between pairs of companies
• Difficult for small firms to participate
• Cisco has small firms use web service

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Financial Electronic Data Interchange (FEDI)

• Use of EDI to exchange
  information is only part of
  buyer-seller relationship in B2B
  electronic commerce
• Electronic funds transfer
  (EFT) making cash payments electronically
• EFT done through Automated Clearing House (ACH)
  network

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Emerging B2B Problems

• Antitrust issues
• Control issues
• Virus and security problems
• Privacy of data issues
• Problems greater than with
  traditional business enterprises
  due to
  multiplicity of players

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B2C Effects

• Globalization of markets
• One-to-one marketing
• Customization of products / services
• Integration of systems with clients
• Dell linked to clients intranets
• Intel has to improve Taiwan Phone
  Company

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B2C Effects

• E-service not even
  envisaged before
• e.g., UPS adding computer setup service to Dells
  provisioning
• Commoditization of products
• Commodity is product with narrow profit margins
  and no major brand differentiation in price
• e.g., printers

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B2C Opportunities

• Companies can create electronic
  catalogs on Web sites to
  totally automate sales order entry
• Electronic commerce applications can also improve
  quality of post-sales customer support

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B2C Opportunities

• For products that can be digitized
• (books, software, music)
• inbound / outbound logistics steps of value
  chain can be performed electronically
• Improve efficiency / effectiveness of value
  chain support activities

18
Bank Per-transaction Costs
E-Business
19
Home Heating Case

• Downes and Mui
• East Coast client
• Part of larger oil and gas
  retail operation
• 17 share of total market
• Only 4 of direct sales to residents

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Home Heating Oil

• OPPORTUNITIES
• Sales to residents accounted
  for 75 of profits
• Sales to independent distributors
  at a much lower margin than to residential
  customers

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Home Heating Oil

• PROBLEMS
• Companys brand name not
  strong
• 70 of residential customers over age
  of 50
• Exit costs too high to walk away from business

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Heating Oil Case

• SOLUTION
• Bypass distributors
• Break industry rules
• Destroy its own Value Chain
• Prospects so poor, they had little to lose
• New Virtual Fuel Company (VFC)

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Virtual Fuel Company

• Early stages
• Customers can order via telephone or Web
• Longer term
• Connect sensors from home heating tanks to
  production facilities
• Over wireless network or internet

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Virtual Fuel Company

• Will be able to tell customer when
  it is time to reorder
• Maybe JIT system?
• Fuel truck pulls up to residence just when
  heating oil tank reaches empty

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New Model Advantages

• No expensive sales or distribution
  function
• Outsource order process
  to customer
• Compete aggressively with local
  dealers on price
• Reverse local dealer advantage of location and
  personal relationships

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Heating Oil Case

• BOTTOM LINE
• . . .a disadvantaged player
  already in the industry decided to solve its
  problem by wrecking the business model for
  everyone.
• Downes and Mui

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But . . . .

• . . .what does this have to
  do with accounting?
• electronic transactions more difficult to track /
  control
• fuzzy borders between firms (e.g.,
  vendors / customers)
• revenue recognition
• auditing becomes more difficult

28
So . . .

• . . . lets learn some more about
  this beast that we have to
  tame
• how the Internet works
• IT components
• control issues
• e-payments

29
Agenda

• Understanding the Internet

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Internet Layers
Infrastructure Layer
Application Layer
Intermediary Layer
Commerce Layer
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Infrastructure Layer

• Companies providing products
  and services to create
  Internet provider (IP) network
  infrastructure
• Includes
• Internet Service Providers (ISPs)
• security vendors
• fiber optics vendors
• telecommunications companies

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Application Layer

• Enables business activities
  to be performed online
• Provides software production and services to
  facilitate Web transactions
• Includes
• Web development software
• search engine software
• Web databases

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Intermediary Layer

• Increases efficiency of
  electronic markets by facilitating interaction
  between buyers and sellers
• Acts as mechanism for transaction processing
  through previous layers
• Includes
• brokerages
• online travel agents
• online advertising

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Commerce Layer

• Sales of products and
  services over the Internet to consumers and
  businesses
• Includes
• e-tailers
• manufacturers selling online
• subscription-based services
• online entertainment
• airlines selling tickets online

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Definitions

• IP Internet protocol
• IP Address message destination
• Message Packet String of data, each carrying IP
  and IP Address
• Regional Node Meshing of transmission lines

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CONNECTION OPTIONS
Dial-up Modem
ISP
You
Internet Service Provider
Neighborhood
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Connection Options

• Dialup Modem can make local call
  to access Internet
• DSL Modem regular phone service and Internet
  service, on same line at same time
• Cable Modem the more neighbors accessing node at
  same time, the slower the connection

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E-mail Messages
IPO
Domain Name Server (DNS)
Message sits on the E-mail server until receiver
logs on then message sent.
log-on
Recei- vor
E-mail Server
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Servers

• High capacity computer
• contains network software
• Handles
• communication
• storage
• resource sharing
• Application software / data common to all
  users

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Internet Protocols

• Protocol guidelines computers use
  to talk to one another
• Internet Protocol (IP)
  for moving raw data
• Transmission Control Protocol
  (TCP) for making sure that data
  arrives intact
• Putting them together TCP / IP

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Agenda

• IT components of Electronic
  Commerce

42
Types of Networks

• Global networks used by many
  companies to conduct e-
  commerce and to manage internal operations
  consist of
• Private portion owned or leased by the
  company
• The Internet

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Private Portion

• Local area network (LAN) system of
  computers and other devices
  (printers) located in close proximity
  to each other
• Wide area network (WAN) covers a wide
  geographic area

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LAN

• Nodes in close proximity
  to each other
• e.g., same building
• Owned by using organization
• e.g., not leased from carrier

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Why a LAN?

• Simplicity
• Group production
• Data sharing
• Faster data transfer
• Cheaper
• Easier resource control

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WANs

• Companies typically own all
  equipment for local area
  network (LAN)
• Usually dont own long-distance data
  communications connections of wide area network
  (WAN)
• Either contract to use value-added network (VAN)
  or use the Internet

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Intranets

• Internal networks connecting to
  main Internet
• Can be navigated with same browser software,
  but are closed off from general
  public

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Extranets

• Link the intranets of two or
  more companies
• Either Internet or VAN can be
  used to connect companies forming extranet
• Value-added networks (VAN) more reliable and
  secure than Internet
• but more expensive

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Network Types

• Value-added Network (VAN)
• large-scale telecommunications networks
• leased connections to clients
• charge based on usage
• Virtual Private Network (VPN)
• less expensive (public network)
• encrypt all packets

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What is a VPN?

• Info-Tech Research Group DotComAdvisor
• Network encrypted with special
  security protocol
• Requires a server for authenticating
  remote users

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Why VPNs?

• Low implementation cost
• few thousands of for each 20 to
  50 simultaneous users
• Low maintenance costs
• eliminates large bank of modems
• ISP handles this

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Why VPNs?

• Long distance savings
• Local connections
• Savings often pay for VPN in a few
  months

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Whats VPN Downside?

• Some security problems
• Integration with other network technologies
• access and use

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Communications Channels

• Medium that connects sender and
  receiver
• standard telephone lines
• coaxial cables
• fiber optics
• microwave systems
• communications satellites
• cellular radios and telephones

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Client-Server

• Many WANs, LANs set up
  as client/server systems
• Each desktop computer is client
• Client send requests for data to server
• Servers perform preprocessing on data
  base and send only relevant subset of
  data to client for local processing

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Agenda

• What is Electronic Commerce?
• Understanding the Internet
• IT components of Electronic
  Commerce
• Control issues related to Electronic
  Commerce
• E-Payments

57
E-Commerce Threats

• High value and complexity
  of E-Commerce initiatives
• Outside threats from automated attack
  tools
• Lack of attention to security fundamentals
• Myriad points of access with which security
  managers must be concerned
• Computer Technology Research
  Corporation, 2000

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Types of Threats

• Interception
• Redirection (spoofing)
• Impersonation
• Identification
• Exploitable Program Errors
• Weak Client Security
• Deloitte and Touche

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Auditing Challenges

• Increased complexity of auditing
  through computer
• Integrity and reliability of clients
  networks
• Extension of audit to trading partners systems
• Increased skills required by smaller auditing
  firms
• small firms going on-line

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Control Issues

• E-commerce creates control
  issues
• Validity of transactions
• Authorization of transactions
• Safeguarding of assets
• Safeguarding privacy

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Control Issues

• Fundamental control objective
  all transactions are valid
• In e-commerce, transaction validity requires two
  things
• Authenticate identity of parties
• Ensure that information is not altered during
  transmission between buyer and seller

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Control Issues

• Proper authorization of transactions
  essential to protect each party from
  unilateral repudiation of
  transaction by other party
• Both organizations and individuals want to
  safeguard their assets

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Control Issues

• E-commerce threats
• loss of confidentiality
• unauthorized access
• loss of data
• Although electronic commerce introduces new
  threats not present in traditional methods, it
  also provides possibility of more effective
  controls

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Agenda

• What is Electronic Commerce?
• Understanding the Internet
• IT components of Electronic
  Commerce
• Control issues related to Electronic
  Commerce
• E-Payments

65
E-Payment Methods

• Magnetic Strip Card
  (e.g., ATM cards)
• Smart Cards
• contains microprocessor
  
  and storage unit
• store 100 times more data
• popular in Europe
• requires US equipment investment

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SET Protocol

• Secure Electronic
  Transaction (SET)
• Master Card / Visa
• Provide secure payment environment for
  transmission of credit card data
• Number SET users increased by 300 since
  implementation in 1998

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SET Features

• Confidentiality (encryption)
• Data integrity
• digital signatures / message digests
• Cardholder / merchant authentication
• digital signatures / certificates
• Platform interoperability
• defined protocols / message formats

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Topics Covered

• What is Electronic Commerce?
• Understanding the Internet
• IT components of Electronic
  Commerce
• Control issues related to Electronic
  Commerce
• E-Payment