the technology of e-commerce - john wiley &...

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The Technology of E-Commerce

© HBS, All Rights Reserved2

The Internet: An Historical Understanding

‘The past is never dead; it is not even past.”- William Faulkner

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1961-64: The Big Idea

Leonard Kleinrock (1961) Idea of “Packet Switching”

– Don’t think about computer communication as taking place over a single wire

– Think of it as a series of information ‘packets’ that take a suitable path through a network of wires

RAND report by Paul Baran(1964)

– Proposes ‘bomb-proof’ network- Any node or link can “go down”

without crippling info flow

Nothing, yet– Packet switching not

demonstrated until 1969

The Internet Is...

1960 ‘70 ‘80 ‘90 ‘93 ‘95

What Happens:

Timeline:‘00

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ARPANET commissioned by DoD4 hosts:- UCLA- Stanford- UCSB- University of Utah

A functioning packet-switched network

The Internet Is...What Happens:

1960 ‘70 ‘80 ‘90 ‘93 ‘95Timeline:

‘00

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1969: The First Nodes

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Ray Tomlinson of BB&N writes e-mail program- Addressing scheme using

‘@’

Telnet- Operates remote machines

File Transfer Protocol - ftp- Move files between

machines

A functioning packet-switched network... with information sharing and ‘telepresence’’


1960 ‘70 ‘80 ‘90 ‘93 ‘95Timeline:

‘00

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1972-3 The First Uses


Cerf & Kahn develop idea of ‘internetworking’- How to hook up physically

separated networks of computers?

- ‘Gateways’- Demo in 1977

A functioning packet-switched network... with information sharing and ‘telepresence.’... where computers can sign up in groups.


1976: Queen of England sends e-mail!

1960 ‘70 ‘80 ‘90 ‘93 ‘95Timeline:

‘00

ARPANET CSNET

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1973-7 Networking Networks

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ARPA publishes TCP/IP* protocol suite.- The standard is “OPEN”- Free to obtain, use, and

copy the specs.

A functioning packet-switched network... with information sharing and ‘telepresence’... where computers can sign up in groups... and everyone knows the rules and has the tools.


*Transmission Control Protocol / Internet Protocol

1960 ‘70 ‘80 ‘90 ‘93 ‘95Timeline:

‘00

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1982: Setting the Standards


Tim Berners-Lee develops the WWW protocols- For sharing scientific information- Allow info. in many formats (text,

sound, graphics) to be combined and passed around

PGP is released- ‘Hard’ e-mail encryption

A functioning packet-switched network with information sharing and ‘telepresence.’where computers can sign up in groups and everyone knows the rules and has the tools, where you can find everyone else no matter how big it gets (which opens possibilities about where you can make a buck)

That will be multimedia, easy to navigate, and safe


1991: NSFNET = 44.7Mbps, 10 billion packets / month

1960 ‘70 ‘80 ‘90 ‘93 ‘95Timeline:

‘00

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1991: The Souls of a New Machine

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Protocols: The Importance of Being Open

WWW uses Hypertext Transport Protocol (http)– 1991 extension to high level Internet protocols

• ftp, gopher, telnet, etc.– Built on TCP/IP

• Transport Control Protocol / Internet Protocol

Protocol = language (or code)Languages/protocols exist at many levels

– Vietnamese/English vs. Mandarin/English– Levels now formalized (many competing partitions)

“Closed” protocols (under strong proprietary control)– Navajo/Cherokee, to Japanese– Apple Quicktime– MS Word storage format

Open protocol (not under proprietary control) – English, French (sort of)– All Internet protocols (telnet, ftp, gopher, http, TCP/IP, etc.)

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The Internet and the World Wide Web

Internet = TCP/IP

WWW = HTTPFTP

Telnet

Etc.

Low-level protocols

Physical

Application

Presentation

Session

Transport

Network

Data Link

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More later..

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Internet for Business

Internet Extranets Intranets

• Public, international availability

• Marketing and Sales Channels

• Consumer Information• Information-based

businesses• Can be specialized (Cisco)• Most visible use

Degree of Privacy

• Groups of Companies• EDI, Channel Management• Exchange of CAD information• Business-to-business use• Fastest growing segment• Most important use?

• Internal to Company• Dissemination of

Information• Multi-site operation• Communications• Archives• Training• Collaboration


Business to Business E-Commerce

$5.1 trillion in non-financial revenue by 2006Over $200 billion in savings

*Gartner, IDC

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2000 2003 2006

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Some Characteristics of Information Technology Markets

Switching Costs– Lock-in benefit to seller, often underestimated by

purchasersNetwork Effects– Real and Virtual; Positive Feedback

Differentiated Products and Prices– Information priced on willingness to pay rather than

on variable cost of production (which is ~ 0)


Do companies use the net?

Source: Forrester

Companies continue to believe in the promise of the Internet andare putting it into practice

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Who’s doing it …….?

Forecast Revenues for Internet Retail Commerce

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Apparel

Auto/Auto Parts

Books/Music/Video

Computer Hardware/Software

Consumer Electronics

Home

Travel

Other

$billion

200320052008

Source: Forrester


Business to Business

0% 5% 10% 15% 20% 25% 30% 35%

Services

Manufacturers

Financial Services

Retail

Total

Percent of Revenues Coming From Internet Transactions

20082003

Source: Forrester

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Primary Sources of B2B Growth

Market MakingInter-Business Processes–Clearly linked…–…but with different challenges


Market Making(Hubs, Portals, Infomediaries, etc., ad nauseam!)

Aggregate buyers and sellers– Often people who otherwise wouldn’t have met

Reduce transaction costs– Especially search cost…

Create critical mass to keep market liquid– Where can I buy a 5-year-old solder bath?

~ $20bn spent through ‘hubs’ in 2003

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Why are hubs so attractive?

Linear and Squared value (The “Network Effect”)Buy.com– Scale economies in purchasing– Value (roughly) linear in number of users

Freemarkets.com– Value goes as the square of the number of users / links

in the network (v ~ n(n-1)/2)


Two general types of B2B Hub

Vertical Hub– Focused on one industry segment

• e.g. Cattle, steel

Functional Hub– Focused on a common process or requirement

across businesses• e.g. Maintenance, HR

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Vertical Hubs

The likely success of a vertical hub increases with: – Fragmented buyers and sellers. – Inefficient existing supply chain. – Domain knowledge

• Creating master catalogs and sophisticated searching. – Adjacent vertical hubs for leveraging existing

supplier or buyer base.


Examples of Vertical Hubs(Many of these are now defunct/changed)

– Altra Energy (energy)– Band-X (telecommunications)– Cattle Offerings Worldwide (beef and dairy) – SciQuest.com (life sciences)– e-Steel (steel)– Floraplex (florists) – IMX Exchange (mortgages)– PaperExchange (paper)– PlasticsNet.com (plastics)– Ultraprise (secondary mortgage exchange)

Vertical hubs typically start out by automating and hosting the procurement process for a vertical supply chain, and then supplement their offerings with industry-specific content.

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Functional Hubs

Automate the same process or function acrossdifferent industries– Degree of process standardization. – Process knowledge and work-flow automation

expertise. – Complementing process automation with deep

content. – Ability to customize the business process to respond

to industry-specific differences.


Functional Hubs: Examples

Examples: (A number of these are now defunct/changed)

– Processors Unlimited (reverse logistics) (bought by USF)– MRO.com (maintenance, repair, and operating procurement)– Employease (employee benefits administration) – Celarix (global logistics monitoring and tracking) – BidCom (project management) – Adauction (media buying)– YOUtilities (energy management)

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Challenges for B2B hub buildersDomain expertise:– To understand market, products, T&C, credit– Build entry barrier

Acquisition of participants– By direct means (not banner ads)– Knowledge of business processes

Retention of customers– Increase switching costs by embedding the hub in

participants’ business processes– Make alternatives “further than a mouse click away”

Shaping and Defining the business model (first mover)


Business Models for Market Makers

1. Catalog models- Aggregate suppliers - Small transactions, predictable price, pre-qualified buyerswww.mro.com

2. Auction models- Bring geographically dispersed people together- Hard-to-find, one-off or ‘perishable’ productswww.imark.com, www.adauction.com

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Business Models for Market Makers

3. Exchange models- Match bid-ask, settlement and clearing mechanism- Commodity or near-commodity itemswww.paperexchange.com , www.esteel.com

4. Barter models- Inflationary economies- Manufacturing capacity


CATALOG (Chemdex, PlasticsNet.com, SciQuest.com)

AUCTION (AdAuction, IMark.com)

EXCHANGE (e-Steel, PaperExchange, Ultraprise)

Function Demand/supply aggregation

Spatial matching Temporary matching

Buyer benefit Lower search and transaction costs; broader supply base

Catalog benefits, plus better matches, better prices

Auction benefits; peak-load demand management; hedge in volatile markets

Seller benefit Broader customer access, lower transaction costs

Catalog benefits, plus better pricing

Auction benefits; liquidate excsupply; manage volatility

Application MRO products; pre-planned purchases; fragmented supplier base

Used capital equipment; perishable capacity; hard-to-specify products

Near-commmodities; high-fixecost assets; volatile markets

Prices Pre-negotiated, usually static

Most attractive bid, prices move in one direction

Marketwide bid-ask; moves upand down

Buyers be Sellers?

No Sometimes Yes

Challenges Creating master catalog; gaining supplier critical mass

Liquidity, misrepresentation/fraud, fulfillment

Asset specificity; off-exchangetrade

With acknowledgements to Mohanbir Sawhney and Steven Kaplan

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Technologies for Markets

Catalog• Ariba• Commerce One • IBM

Auction• Moai Technologies• OpenSite Technologies

Exchange• Tradex Technologies (Acquired by Ariba 12/99)


But this is not enough…A communication standard, such as XML, knows nothing about business protocols– It’s just a language one can use to communicate with other parties

So, one still has to answer such questions as:What do I have to tell you to make it easy for you to buy something?What do I need to do to tell you that something is out of stock?

Which raises the question: Should there be a common language, say, for RFPs (Request for price quotation)?

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Common standards at this level

Industry specificSubject to similar hijack threats (opportunities) as lower-levels“If you don’t speak our language, you can’t play in our sandpit”…Who defines these in an industry? Should it be the largest company? A hub player? What happens if nobody takes the lead?


Building the new B2B standards…

COLL

ABO

RATI

ON

SPEED OF IMPLEMENTATION

SLOW FAST

LOW

HIG

H

ENTERPRISE

INDUSTRY ASSOCIATIONS

BUSINESS CONSORTIA

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PARTNER INTERFACE PROCESSPIP vs. EDI

Process-centricReal-timeAll inter-enterprise processes Internet-enabledXMLGlobalCheap/fast to implementAll businessesStandard industry dictionaries

Message-centricBatch10%VAN-enabledX.12 /EDIFACTRegionalExpensive/slow implement.Large businessesCustomized vocabulary

PIP EDI


Standards for Exchanges

Alphabet

Grammar

Dialog

Words

XML

Framework

Dictionary

human-to-humanbusiness exchange

Partner-to-Partner eBusiness exchange

Sound Internet

Business Process

Telephone

Business Process

Telephone

DIALOG PIP

eBusiness Process

Ecom Application

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FINANCIERDeutsche Financial

MANUFACTURER3Com, Cisco, Compaq, HP, IBM, Intel, NEC, Quantum, Siemens, Solectron,

Toshiba

eTECHNOLOGISTGEIS, pcOrder, SAP

ENDUSERAMEX, GSA, Lucent

RESELLER/SICompUSA, Computacenter,

EDS, Inacom, Insight, MicroAge, Office Depot

SHIPPERFedEx, UPS

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1

3

3

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SOFTWARE PUBLISHERMicrosoft, Netscape

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WHOLESALE DISTRIBUTORArrow, Avnet, CHS,

Ingram Micro, Tech Data

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Managing Board(34)

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Transmission security concerns fadeMost communications traffic (voice, data, video, etc) mergesInternet becomes backbone of business communicationVolume of connected devices explodes (inventories, cars, fridges, people?)

The Internet is ubiquitous andessential

What Will Happen?:

1960 ‘70 ‘80 ‘90 ‘93 ‘95Timeline:

‘99

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The Future

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