IS3167 Vle

Management and innovation
of e-business
A. Cordella, A. Martin, M. Shaikh S. Smithson
IS3167, 2790167
2011
Undergraduate study in
Economics, Management,
Finance and the Social Sciences
This subject guide is for a 300 course offered as part of the University of London
International Programmes in Economics, Management, Finance and the Social Sciences.
This is equivalent to Level 6 within the Framework for Higher Education Qualifi cations in
England, Wales and Northern Ireland (FHEQ).
For more information about the University of London International Programmes
undergraduate study in Economics, Management, Finance and the Social Sciences, see:
www.londoninternational.ac.uk
This guide was prepared for the University of London International Programmes by:
S. Smithson, PhD, FBCS, Senior Lecturer in Information Systems, Department of Management,
London School of Economics, University of London, www.lse.ac.uk
A. Cordella, PhD, Lecturer in Information Systems, Department of Management, London
School of Economics, University of London, www.lse.ac.uk
A. Martin, Research Student, Department of Management, London School of Economics,
University of London, www.lse.ac.uk
M. Shaikh, PhD, Researcher, Department of Management, London School of Economics,
University of London, www.lse.ac.uk
This is one of a series of subject guides published by the University. We regret that due to
pressure of work the author is unable to enter into any correspondence relating to, or arising
from, the guide. If you have any comments on this subject guide, favourable or unfavourable,
please use the form at the back of this guide.
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Published by: University of London
University of London 2010
Reprinted with minor revisions 2011
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Contents
Contents
Chapter 1: Introduction ......................................................................................... 1
Aims and objectives ....................................................................................................... 2
Learning outcomes ........................................................................................................ 3
How to use this subject guide ........................................................................................ 3
Structure of the guide .................................................................................................... 4
Syllabus ......................................................................................................................... 6
Essential reading ........................................................................................................... 7
Further reading.............................................................................................................. 8
Online study resources ................................................................................................... 8
Other resources ............................................................................................................. 9
Using the essential textbook ........................................................................................ 10
Examination structure .................................................................................................. 11
Examination advice...................................................................................................... 12
Chapter 2: E-business technology and infrastructure ......................................... 13
Aims of the chapter ..................................................................................................... 13
Learning outcomes ...................................................................................................... 13
Essential reading ......................................................................................................... 13
Further reading............................................................................................................ 13
Additional resources .................................................................................................... 14
Introduction to e-business technology .......................................................................... 14
Networks and the internet ........................................................................................... 14
Networking standards ................................................................................................. 15
The web ...................................................................................................................... 15
Web 2.0 ...................................................................................................................... 16
Peer-to-peer networks ................................................................................................. 17
Cloud computing ......................................................................................................... 18
Mobile computing and m-commerce ............................................................................ 19
Technologies for supply chain management ................................................................. 20
Security technologies for e-business ............................................................................ 21
Conclusion .................................................................................................................. 22
A reminder of your learning outcomes.......................................................................... 22
Self-test questions ....................................................................................................... 23
Chapter 3: Economic theories of e-business ........................................................ 25
Further reading............................................................................................................ 25
Introduction ............................................................................................................... 26
The transaction cost model .......................................................................................... 27
Types of transaction costs ............................................................................................ 28
ICT and disintermediation ............................................................................................ 30
Infomediaries .............................................................................................................. 31
Case study .................................................................................................................. 32
Myths of the dot.com boom ......................................................................................... 32
Conclusion .................................................................................................................. 33
i
167 Management and innovation of e-business

Chapter 4: Business-to-consumer (B2C) systems and strategies.......................... 35
Further reading............................................................................................................ 36
Introduction ................................................................................................................ 36
Business models and revenue models .......................................................................... 37
Revenue strategy issues ............................................................................................... 37
Understanding shoppers .............................................................................................. 38
Reasons for consumer adoption ................................................................................... 39
Consumer buying behaviour ........................................................................................ 40
Website usability and design ........................................................................................ 40
Case studies ................................................................................................................ 42
B2C failures................................................................................................................. 43
B2C problems.............................................................................................................. 44
Key success factors ...................................................................................................... 44
Conclusion .................................................................................................................. 45
Chapter 5: Marketing for e-business .................................................................... 47
Further reading............................................................................................................ 47
Introduction to marketing ............................................................................................ 48
Customer segmentation and the 4 Ps: product, price, place and promotion ................... 48
The customer lifecycle .................................................................................................. 49
Customer relationship management ............................................................................. 49
Case study .................................................................................................................. 50
Advertising and branding ............................................................................................. 51
The e-business contribution to marketing ..................................................................... 52
New media marketing ................................................................................................. 52
Personalisation and mass customisation ...................................................................... 53
Search engine optimisation .......................................................................................... 54
Affiliate marketing ....................................................................................................... 54
Online advertising ....................................................................................................... 54
Viral marketing ............................................................................................................ 55
Multi-channel integration ............................................................................................ 56
Dynamic pricing ........................................................................................................... 57
Consumer profiling and privacy concerns...................................................................... 58
Conclusion .................................................................................................................. 58
Chapter 6: Business-to-business (B2B) models and strategies............................. 61
ii
Contents
Further reading............................................................................................................ 61
Introduction ............................................................................................................... 62
B2B structures ............................................................................................................. 63
Key attributes of e-marketplaces .................................................................................. 66
E-procurement ............................................................................................................ 67
Procurement participants ............................................................................................. 67
Benefits of e-procurement .......................................................................................... 68
Problems and risks of e-procurement ........................................................................... 68
Case study examples ................................................................................................... 69
Conclusion .................................................................................................................. 70
Chapter 7: Supply chain management ................................................................. 73
Further reading............................................................................................................ 74
Introduction to supply chain management .................................................................... 74
Information and uncertainty ......................................................................................... 76
Push and pull supply chain models ............................................................................... 77
Restructuring supply chains with e-business technology ............................................... 78
Value chains and value networks ................................................................................. 78
Vendor-managed inventory .......................................................................................... 79
Case study .................................................................................................................. 80
Virtual organisation .................................................................................................... 80
Third party logistics ...................................................................................................... 80
Implementation of integration ..................................................................................... 82
SCM strategy ............................................................................................................... 83
Conclusion .................................................................................................................. 84
Chapter 8: Web 2.0 in business and society ........................................................ 85
Further reading............................................................................................................ 86
Introduction ................................................................................................................ 86
Collaborative components of web 2.0 .......................................................................... 87
Business interest in web 2.0 ........................................................................................ 91
Enterprise 2.0? ........................................................................................................... 92
Chapter 9: New forms of organisation ................................................................ 95
Further reading............................................................................................................ 96
iii
Introduction to new forms of organisation ................................................................... 96

What is the function of an organisational form? ........................................................... 97
Traditional organisational forms and their problems .................................................... 98
New organisational forms ............................................................................................ 99
Virtual organisations.................................................................................................. 100
Virtual teams and offshoring ...................................................................................... 100
Teleworking and mobile working ............................................................................... 101
Mobile working ......................................................................................................... 102
Open source production............................................................................................. 102
Case study ................................................................................................................ 104
Problems with NOFS .................................................................................................. 105
Conclusion ................................................................................................................ 106
A reminder of your learning outcomes........................................................................ 106
Self-test questions ..................................................................................................... 107
Chapter 10: Security issues in the digital environment .................................... 109
Aims of the chapter ................................................................................................... 109
Learning outcomes .................................................................................................... 109
Essential reading ....................................................................................................... 109
Further reading.......................................................................................................... 109
Additional resources .................................................................................................. 109
Introduction .............................................................................................................. 110
Five goals of information systems security .................................................................. 110
Technological dimensions ......................................................................................... 110
Threats and attacks ................................................................................................... 111
Human and organisational dimensions ...................................................................... 112
Managing e-business security .................................................................................... 112
Information security policies....................................................................................... 113
User authentication ................................................................................................... 115
Conclusion ................................................................................................................ 116
Chapter 11: Conclusion and implications for e-business strategies .................. 119
Aims of the chapter ................................................................................................... 119
Learning outcomes .................................................................................................... 119
Essential reading ....................................................................................................... 119
Further reading.......................................................................................................... 119
Additional resources .................................................................................................. 120
Summary of the subject guide .................................................................................... 120
E-business strategy .................................................................................................... 123
The formulation of an e-business strategy .................................................................. 123
Case study 1: The transformation of music retailing through B2C innovation ............... 125
Case study 2: AutoCorp ............................................................................................. 127
Generic e-business sell-side strategies ........................................................................ 129
Conclusion ................................................................................................................ 129
Appendix: Sample examination paper ............................................................... 131
iv
Chapter 1: Introduction
167 Management and innovation of e-business is a 300 course
offered on the Economics, Management, Finance and the Social Sciences
(EMFSS) suite of programmes.
It is a subject which provides students with insights and an understanding
of the past, present and future of e-business systems. In less than two
decades, e-business has grown from a hobby for computer geeks to
become an essential channel for:
Communication, with the growth of email and instant messaging for
internal and external business communications.
Marketing, by giving firms the opportunity for one-to-one marketing.
Sales, such that the online travel business makes up around 50 per cent
of the US market.
Advertising: Googles 2008 advertising revenue was $21.1 billion.
Distribution of digital goods, with the huge growth of music downloads.
Recruitment: Monster UK hold three million CVs = 13 per cent of the
UKs working population.
And many, many more functions.
As early as 1999, it was widely claimed that the internet is ushering
in an era of change that will leave no business untouched and, unlike
much of the hype surrounding new technology, it is hard to deny that
this proposition is correct. During the course of one of our e-business
research projects (Clegg et al., 2005), one of the interviewees told us
that: E-business is like an octopus: it has tentacles in all a companys
operations. This is a powerful image and in this course we will show
how e-business stretches throughout the organisation and along the
whole value chain from raw materials to the final consumer. Along the
way e-business has transformed organisations and their relationships with
customers and trading partners.
The web is now indispensable in both business and everyday life as we use
it to search for information on anything from cinema times to share prices
and medical information. And now (in 2010), web 2.0 offers the prospect of
taking all these developments a stage further with social networking, wikis
and blogs. For virtually all of us, e-business has quite simply changed our lives.
Many students approaching this course may think that it is going to be
a technical course but, while you do need to understand the technology
(and this is covered in Chapter 2), most of this course is concerned with
the management, business and social aspects of e-business. We treat
the technology as a tool and prefer to study the impact of its use, rather
than how to build the tools. Common misunderstandings are that either
e-business is somehow an amateur activity that takes place in garages
or else its a licence to print money. Neither is correct. Large companies
expend considerable resources on their e-business systems and, with
relatively few exceptions, websites and their associated systems are now
highly professional. Similarly, although some individuals (for example,
Larry Page and Sergey Brin, co-founders of Google; Mark Zuckerberg,
Dustin Moskovitz and Chris Hughes, co-founders of Facebook) have
become very rich through e-business, the strong tradition is that
information on the web is free. Many of the products sold on the web are
highly discounted which has meant that high profits and excess rents are
1
few and far-between and new business models are being widely explored
to leverage the power of the technology for profit.
What you will take away from this course is an understanding of how
and why e-business developed so quickly and where it fits within modern
business and society. It is a particularly relevant course for those of you
who want to go on to careers in customer-facing or coordinating activities
as e-business has transformed much of the retail sector as well as the ways
that organisations function internally, in addition to how they collaborate
with their trading partners.
We teach a very similar course at LSE where it is offered as a Summer
School course. Our particular interests are in both B2C (business-toconsumer) and B2B (business-to-business) systems, and we also have
an interest in the subject from the perspective of innovation. Our
background is in management and economics, and it is theories from
these disciplines that we employ in analysing e-business. We feel that, due
to its pervasiveness in business and organisational life, it has links with
all management and social science course offered by the International
Programmes, from the principles of marketing to sociology. E-business
also represents an important evolution from the days when computerbased information systems were mostly internal to the organisation to
today, when e-business provides both a shop window, through websites,
and a transaction and coordination mechanism, through payment
systems and supply chain management. Thus, e-business represents a
practical culmination of information systems thinking from the past four
decades and this course links theoretically and in practice with all other
information systems courses.
We hope that you enjoy studying this course and encourage you to engage
fully with the topic as it is significant to both your career and everyday life.
Aims and objectives

This course presents an up-to-date analysis of the management, innovation
and information systems aspects of the use of e-business technology.
It combines transaction cost economics with a decades experience of
e-business development to discuss e-business trends and strategies. This
is a management information systems course and not a technical course.
It considers the organisational, managerial, technological and theoretical
aspects of e-business and how these elements can be combined to produce
innovation in business models, processes and products.
The aims of the course are to:
explain the growth of e-business to date, both business-to-consumer
and business-to-business, using relevant theories from business,
management and the social sciences
examine the interaction between technological trends and the business
and social context of e-business, including the diffusion of social
networks and web 2.0 developments
identify innovations within the domain of e-business by presenting
cases of the innovative use of e-business technologies
present relevant theories from business, management and the social
sciences that help to explain the development and growth of e-business
discuss different e-business (business) models and strategies, including
global supply chain management and electronic markets
introduce the notion of new organisational forms, such as virtual

organisations, electronic markets and open source production, which
depend upon e-business technology.
Learning outcomes
By the end of studying this course, you should have achieved certain key
learning outcomes. By a learning outcome we mean an area of the subject
in which you have acquired knowledge and skills, and are able to present
relevant information, alternative analyses, reasoned arguments and
exercise your own judgment.
Upon completion of this course, you should be able to:
explain the history of e-business from the dot.com boom to the present
day
critically discuss successful and failed e-business ventures
assess the role of innovation in e-business
explain the key elements of e-business technology including websites,
inter-organisational networks and social networks
describe the social and legal context within which e-business has
prospered
explain the growth of social networks and their impact on e-business
analyse and criticise the business models underlying e-business
proposals and existing e-business systems
discuss the changing structure of business-to-business e-business and
the shifting role of intermediation
apply economic theories, such as transaction cost analysis, to explain
the economics of e-business
explain the interaction between the needs of business and the potential
of e-business technology to produce new organisational structures
and different ways of working (e.g. outsourcing, mobile working and
teleworking)
discuss the key innovations in business models, products and processes
and how e-business contributes to innovation through, for example,
open source development and open innovation.
This set of learning outcomes is provided here as a high-level overview of
the positive outcomes of your study. As you tackle the course you should
return to this list from time to time and note down those that you feel
you have made progress with and those that you need to work on more.
You must also remember that the overall aim of the subject is to develop a
critical and reflective appreciation of the impact of e-business technology
and innovation on business activities.
How to use this subject guide

This subject guide is written to provide an interpretive guide for the study
of the courses set textbook: Chaffey (2009) E-business and e-commerce
management. The guide is not and cannot be a substitute for the
book itself. You should purchase a copy of this textbook and be familiar
with, understand and be able to apply most of its contents. We strongly
recommend that you first read through the whole subject guide and then
read the relevant chapters of the textbook, in the order suggested in the
subject guide. The aim of the subject guide is to help you to interpret
3
the syllabus and guide you through the textbook. It outlines what you are
expected to know, understand and apply for each area of the syllabus and
suggests relevant readings, including references to the textbook, to help
you to understand the material.
It is important that you appreciate that different topics are not self
contained. There is a degree of overlap between them and you are guided
in this respect by the cross-referencing between chapters. In terms of
studying this subject, the chapters of this guide are designed as selfcontained units of study but, for examination purposes and to understand
the realities of e-business fully, you need to have a good understanding of
the subject as a whole. This includes both technological and management
issues, as well as organisational, social and (a few) legal issues. Business
is fundamentally about people and e-business is about the utilisation of
particular technologies in business.
You should also understand the connections to other courses you have
studied, including units from management, sociology and economics.
The implementation of e-business technology has resulted in changes in
organisations, society and the global economy through, for example, virtual
organisations, social networking and global supply chain management. As
you read about these topics in the guide, you should reflect on how these
changes link to your understanding of these disciplines.
At the end of each chapter you will find a checklist of your learning
outcomes, which is a list of the main points that you should understand
once you have covered the material in that chapter and the associated
readings.
Structure of the guide

Chapter 2: E-business technology and infrastructure
The aim of this chapter is to provide you with a basic understanding
of how e-business technologies work. This is not a computer science or
technological course as such, and you do not need to understand the
detailed computational techniques involved, nor do you need to be able
to write computer programs. We discuss the most common hardware
and software configurations and architectures used to support e-business
activities, treating the components as black boxes. You do not need to
open these boxes; that is the job of technicians and not of managers.
However, you do need to understand what each box contributes to the
overall e-business network. In this chapter we discuss, for example,
electronic data interchange (EDI) and web 2.0 design tools. In the Further
reading, we provide references for you should you wish to examine
individual technologies in more depth. While these technologies are
constantly changing and improving, the basic concepts are stable and a
good understanding of them will not become out of date overnight. This
chapter will be of particular interest to those of you following the BSc
Information Systems and Management degree.
Chapter 3: Economic theories of e-business

This chapter presents the transaction costs theoretical framework to
explain the deployment of and challenges faced by e-business strategies.
This framework provides a robust explanation of the basic economics
of e-business. On this basis, the chapter discusses how information and
communications technology (ICT) can be designed and deployed to reduce
the costs of transactions and hence to change the structure and dynamics
4
of markets for products and services exchanged through e-business. The

chapter also discusses the theoretical implications of disintermediation and
re-intermediation (the changing roles of intermediaries or middle men),
according to the economics of transaction costs.
Chapter 4: Business-to-consumer (B2C) systems and strategies

This chapter focuses on the B2C, or retail, side of e-business, which
drove the development of most of the early websites, such as Amazon
and eBay. Here we describe the most common business models, such as
pure play and clicks-and-mortar, and revenue models, such as catalogue
and subscription. We identify the key revenue strategy issues and relate
them to the newer business models available in the digital economy.
Because of the easy access to these websites we encourage you to explore
the issues through practical activities and B2C case studies. Some of the
latter involve large well-known companies, while others are much less
familiar. Last but not least, this chapter reviews the practical challenges of
implementing B2C systems emerging from a variety of factors, including
security, privacy, service quality and legal protection, online consumer
behaviour, and regional and cultural differences.
Chapter 5: Marketing for e-business

This chapter discusses the marketing opportunities and challenges faced
by companies investing in online business. Similarities and differences
between online and off-line marketing strategies are discussed. The
chapter focuses on the importance and risks of multi-channel marketing
as a contemporary approach to managing customer relationships. It
also deals with the problems of implementing customer relationship
management systems that link directly to customer-facing websites.
Chapter 6 Business-to-business (B2B) models and strategies

This chapter discusses the various B2B models and strategies that have been
developed over recent years. The different organising structures of B2B
activities (buyer-oriented, seller-oriented and intermediary-oriented) are
presented and compared, together with an analysis of some of the important
issues arising from implementing these structures. In addition, we discuss
e-procurement, the application of e-business technology to the procurement
process whereby businesses obtain supplies of raw materials, components and
the operational goods and services needed to run the companies.
Chapter 7: Supply chain management

The growing importance of global supply chains has shifted this topic from
the relative obscurity of operations management and logistics to become
a central issue within e-business. These supply chains have facilitated
the globalisation of both production and consumption as companies seek
low-cost sources of production and attractive new markets across the
world. To make such supply chains work effectively, new technologies and
new strategies are utilised within supply chain management. This chapter
describes how the technologies are employed, and how the relationships
between trading partners are being changed.
Chapter 8: Web 2.0 in business and society

The introduction of web 2.0 tools, such as wikis, blogs and social
networking websites, has seen a major change in the role of e-business
users, both in their working and personal lives. There has been a shift
from passive consumption, the hallmark of B2C under web 1.0, to a much
more active participation. As well as changing particular aspects of social
5
behaviour, these tools offer businesses a new way to engage with their
employees, trading partners and customers. This chapter describes the
various tools and discusses how they are being used and how they are
changing many aspects of everyday life.
Chapter 9: New forms of organisation

Organisational structures remain a chronic problem for companies as they
search for ways to improve their efficiency and effectiveness. In a dynamic
business environment, they strive to be flexible and innovative while
squeezing costs and improving coordination. E-business technologies, from
the internet to web 2.0 tools, offer the opportunity to change the way
that work is performed, including mobile work, telework and open source
production. This chapter discusses these new alternatives and reviews
the experiences of various companies to date. However, such changes to
organisations, and even the implementation of e-business itself, can result
in severe problems of organisational change. This chapter reviews the
issues involved in this difficult area.
Chapter 10: Security issues in the digital environment

A large amount of information has to be exchanged to enable, support
and validate online transactions. It is crucial to the continuing growth of
e-business that this information, and the underlying transactions, remain
secure. Consumers and businesses have to be able to trust each other
as well as the underlying infrastructure and e-business technology that
provide a potential tool for criminal endeavours. This chapter discusses
the information management strategies that may be put in place to
preserve, secure and validate the quality of e-business transactions. It
not only covers technical solutions but also discusses the social, legal and
institutional aspects of security in the digital environment.
Chapter 11: Conclusion and implications for e-business strategies

This chapter summarises the arguments within the subject guide and
consolidates the various threads that run through the guide before arguing
that e-business is becoming a competitive necessity in many industries, as
well as becoming pervasive throughout organisations. This chapter reviews
the key models for creating and analysing the e-business strategies of
companies and shows how these conceptual tools can be used to design
and implement e-business solutions. A number of case studies are included
in this chapter, in order to demonstrate how the technologies and business
models have been combined strategically in the pursuit of profit (both
successfully and unsuccessfully).
Syllabus
This course covers a broad spectrum of todays management opportunities
and risks in virtual markets, including:
history and foundations of online business
the use of transaction cost theory to explain the economics of e-business
e-business models: business-to-business (B2B) and business-toconsumer (B2C) business models and strategies for e-business global
supply chain management, electronic markets
B2B systems, intermediation, e-procurement and IT in supply chain
management
B2C strategies online consumer behaviour, regional and cultural
differences and e-marketing
6
e-business environment legal, ethical and security issues; lessons from

the dot.com boom and bust
new organisational forms virtual organisations, electronic markets
and hierarchies
social networks and web 2.0 developments
innovations involving e-business technologies; the role of open
innovation in product and process development.
Essential reading
The main text is:
Chaffey, D. E-business and e-commerce management. (Harlow: Financial Times/
Prentice Hall, 2009) fourth edition [ISBN 9780273719601].
It is always preferable that you have access to the latest editions of

books. The worlds of business and information technology move very
rapidly, as does our understanding of what is important and relevant in
their interaction. If, during the period that this subject guide is in print, a
new edition of the textbook is produced, you should assume that the new
edition is the valid edition for study.
It is essential that you support your learning by reading as widely as
possible and by thinking about how the issues apply in the real world.
To help you read extensively, you have free access to the Online Library
where you will find the full text or an abstract of the journal articles listed
in this guide. You should use the same username and password to access
this resource as you use for the Student Portal. The Online Library can be
accessed via the Student Portal at https://my.londoninternational.ac.uk
(see below). In addition to the textbook, there are certain key articles that
you should read for each chapter:
Boyd, D.M. and N.B. Ellison Social network sites: definition, history and
scholarship, Journal of Computer-Mediated Communication 13 2008,
pp.21030.
Bughin, J., M. Chui and B. Johnson The next step in open innovation, The
McKinsey Quarterly June 2008, pp.19.
Chu, C. and S. Smithson E-business and organizational change: a
structurational approach, Information Systems Journal 17(4) 2007,
pp.36989.
Clegg, C.W., C. Chu et al. Sociotechnical study of e-business: grappling with
an octopus, Journal of Electronic Commerce in Organizations 3(1) 2005,
pp.5371.
Cordella, A. Transaction costs and information systems: does it add up?,
Journal of Information Technology 21(3) 2006, pp.195202.
Howcroft, D. After the goldrush: deconstructing the myths of the dot.com
market, Journal of Information Technology 16(4) 2001, pp.195204.
Kasper-Fuehrer, E.C. and N.M. Ashkanasy The interorganizational virtual
organization, International Studies of Management and Organization 33(4)
2004, pp.3464.
Lee, H.L. Aligning supply chain strategies with product uncertainties,
California Management Review 44(3) 2002, pp.10519.
Lee, H.L., V. Padmanabhan and S. Whang The bullwhip effect in supply chains,
Sloan Management Review 38(3) 1997, pp.93102.
Ljungberg, J. Open source movements as a model for organizing, European
Journal of Information Systems 9 2000, pp.20816.
Lohse, G.L. and P. Spiller Electronic shopping, Communications of the ACM
41(7) 1998, pp.8187.
7

Malone, T.W., J. Yates and R.I. Benjamin Electronic markets and electronic
hierarchies, Communications of the ACM 30(6) 1987, pp.48497.
OReilly, T. What is web 2.0: design patterns and business models for the
next generation of software, Communications and Strategies, First Quarter
2007, pp.1737. Available online: http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1008839
Picot, A., C. Bortenlanger and H. Rohrl The organization of electronic markets:
contributions from the new institutional economics, Information Society
13(1) 1997, pp.10723.
Riggins, F.J. A framework for identifying web-based electronic commerce
opportunities, Journal of Organizational Computing and Electronic
Commerce 9(4) 1999, pp.297310.
Riggins, F. J. and S. Mitra An e-valuation framework for developing netenabled business metrics through functionality interaction, Journal
of Organizational Computing and Electronic Commerce, 17(2) 2007,
pp.175203.
Sull, D. and S. Turconi Fast fashion lessons, Business Strategy Review 19(2)
2008, pp.511.
Further reading
Please note that as long as you read the Essential reading you are then free
to read around the subject area in any text, paper or online resource. You
will need to support your learning by reading as widely as possible and by
thinking about how these principles apply in the real world. To help you
read extensively, you have free access to the virtual learning environment
(VLE) and University of London Online Library (see below).
Other useful texts for this course include:
Farhoomand, A. Managing (e)business transformation: a global perspective.
(Basingstoke; New York: Palgrave Macmillan Houndmills, 2004) [ISBN
9781403936042].
Schneider, G. Electronic commerce. (Boston, MA: Thomson Course Technology,
2010) ninth annual edition [ISBN 9780538469241].
Turban, E., J. Lee, D. King, T. Peng Liang and T. Turban Electronic commerce:
a managerial perspective. (Upper Saddle River, NJ; London: Pearson
Education, 2009) sixth edition [ISBN 9780137034659 (pbk)].
Online study resources

In addition to the subject guide and the Essential reading, it is crucial that
you take advantage of the study resources that are available online for this
course, including the virtual learning environment (VLE) and the Online
Library.
You can access the VLE, the Online Library and your University of London
email account via the Student Portal at:
http://my.londoninternational.ac.uk
You should receive your login details in your study pack. If you have not,
or you have forgotten your login details, please email uolia.support@
london.ac.uk quoting your student number.
The VLE
The VLE, which complements this subject guide, has been designed to
enhance your learning experience, providing additional support and a
sense of community. It forms an important part of your study experience
with the University of London and you should access it regularly.
The VLE provides a range of resources for EMFSS courses:

Self-testing activities: Doing these allows you to test your own
understanding of subject material.
Electronic study materials: The printed materials that you receive from
the University of London are available to download, including updated
reading lists and references.
Past examination papers and Examiners commentaries: These provide
advice on how each examination question might best be answered.
A student discussion forum: This is an open space for you to discuss
interests and experiences, seek support from your peers, work
collaboratively to solve problems and discuss subject material.
Videos: There are recorded academic introductions to the subject,
interviews and debates and, for some courses, audio-visual tutorials
and conclusions.
Recorded lectures: For some courses, where appropriate, the sessions
from previous years Study Weekends have been recorded and made
available.
Study skills: Expert advice on preparing for examinations and
developing your digital literacy skills.
Feedback forms.
Some of these resources are available for certain courses only, but we
are expanding our provision all the time and you should check the VLE
regularly for updates.
Making use of the Online Library

The Online Library contains a huge array of journal articles and other
resources to help you read widely and extensively.
To access the majority of resources via the Online Library you will either
need to use your University of London Student Portal login details, or you
will be required to register and use an Athens login:
http://tinyurl.com/ollathens
The easiest way to locate relevant content and journal articles in the
Online Library is to use the Summon search engine.
If you are having trouble finding an article listed in a reading list, try
removing any punctuation from the title, such as single quotation marks,
question marks and colons.
For further advice, please see the online help pages:
www.external.shl.lon.ac.uk/summon/about.php
Other resources
You should also make a habit of regularly consulting weekly and
monthly journals and newspapers and in this way keeping up with trends
in the area. You must remember that new ideas, new technologies and
new applications of technology are usually first reported in newspapers
and magazines, sometimes years before they find their way into textbooks
or journal articles. Reading such contemporary accounts will also help you
to develop your sense of judgment about all sorts of e-business issues. Bear
in mind, however, that you should not believe everything you read. You
must always take a critical perspective on what you read.
Most broadsheet or business newspapers, such as the Financial Times or

the Wall Street Journal, have regular e-business articles. In recent years the
Financial Times has published a regular series of supplements on mastering
management, and these supplements have all included much relevant
material on e-business. In addition, most countries have local publications
devoted to computers and information systems, and these can also provide
useful material for study. This includes news of local and global e-business
initiatives and issues, examples or case studies of e-business in use, and
discussion of relevant development and management practices. Among the
best-known publications that may be found in libraries are the following:
The Economist (www.economist.com): although this is not a computer

magazine, it does contain regular articles on aspects of e-business
E-commerce Times (www.ecommercetimes.com)
Financial Times Digital Business (www.ft.com/technology/digitalbusiness)
Wired Magazine (www.wired.com).
These magazines are representative of distinct types of reading. In your
reading, and for developing wider perspectives on this subject, you should
try to read regularly from all these types of publication. It is a very good
practice to keep a file of cuttings, photocopies and articles collected
throughout your period of study. When you come to the end of the unit,
such a resource can be very valuable as a revision aid and as a panorama
of contemporary e-business issues and debates.
Using the essential textbook

When you first look at the recommended text Chaffey (2009) E-business
and e-commerce management you may be surprised at the quantity of
information it contains and the complex layout of material. Because this book
covers an extensive and complex subject area it is useful, as you start to study
for this subject, to take some time to explore this subject guide to know how
to approach the rich and complex information you will find in the textbook.
The chapters of the book also contain many pictures, screen shots, tables,
figures and diagrams. These are intended to be read along with the text,
and to help the reader to understand and absorb key ideas. They are not
a substitute for reading and thinking about the text. It should be obvious
that there are too many figures to memorise them all, so do not try! What
you should be able to do is understand and analyse these figures in light of
the overall schema provided by this subject guide.
The books chapters and those in the subject guide are organised according to
a slightly different structure. You have to keep in mind that the two readings
are complementary but that the underlying structure of the course is provided
by the subject guide and not the textbook. You should read the textbook, plus
any other reading indicated by the guide, once you have understood what the
course is aiming at. This understanding is provided by the subject guide.
The set textbook has a website at www.pearsoned.co.uk/chaffey and you
should take a look at the site and what it offers. You will also note that the
textbook contains relatively few other web addresses. This is very sensible,
since web addresses and resources change rapidly, and it is much easier to
update a website than a published book. Thus the books website contains
links to other sites that relate to individual chapters. The same problems
relate to placing web addresses in this guide they may well change but
a few are included here that you may find useful:
10
www.datamation.com the website of Datamation magazine

http://foldoc.doc.ic.ac.uk the free online dictionary of computing
maintained at Imperial College, University of London. This is mostly
about computer technology, but it includes useful coverage of some
information systems topics
www.britannica.com the website of the Encyclopaedia Britannica;
this is a good source of material on the history of communications and
the computer
http://en.wikipedia.org/wiki/Main_Page this open source
encyclopedia embodies the strengths (and a few of the weaknesses) of
wikis, a key web 2.0 tool, and there is no better way to understand the
technology than by using it
http://home.aisnet.org this is the main website for the academic
information systems community in universities around the world and it
has links to many other sites
http://arstechnica.com/business this website contains technologyrelated content such as technology, science and gaming news.
Examination structure
Important: the information and advice given here are based on the
examination structure used at the time this guide was written. Please
note that subject guides may be used for several years. Because of this
we strongly advise you to always check both the current Regulations for
relevant information about the examination, and the VLE where you
should be advised of any forthcoming changes. You should also carefully
check the rubric/instructions on the paper you actually sit and follow
those instructions.
Remember, it is important to check the VLE for:
up-to-date information on examination and assessment arrangements
for this course
where available, past examination papers and Examiners commentaries
for the course which give advice on how each question might best be
answered.
The assessment for this course is based wholly on an unseen written
examination. The examination paper is three hours in duration and
you are expected to answer three questions, from a choice of six.
You should ensure that you answer all three questions, allowing an
approximately equal amount of time for each question, and attempting all
parts or aspects of a question.
The Examiners attempt to ensure that all of the topics covered in the
syllabus and subject guide are examined. Some questions could cover
more than one topic from the syllabus since the different topics are not self
contained and will require you to refer to many aspects of the syllabus. A
Sample examination paper appears at the end of this subject guide.
The Examiners commentaries contain valuable information on how to
approach the examination and so you are strongly advised to read them
carefully. Past examination papers and the associated commentaries are
valuable resources when preparing for the examination.
11
Examination advice
Answer the question asked
Your answer needs to address the question asked and not another that you
have seen on a past exam paper or that you would prefer to answer. To
avoid this mistake, it is useful to clearly identify the precise question you
are answering from the outset. Similarly, you should also define the key
terms relating to that question. It is helpful to the Examiners if, in the first
paragraph, you briefly indicate what your answer to the question will be;
the main points you will put forward in support of this position; and the
order in which these will be discussed (this is often called signposting; for
more on this tactic see Structure below).
Support ideas with examples
Wherever possible, provide concrete examples and illustrations so that
your answer is based upon solid empirical evidence. This evidence can
be provided by, among others: defining key terms and concepts; citing
a particular event, decision, policy, etc. to back up a generalisation;
providing dates whenever possible; and, of course, referring to the
relevant material provided in the Essential reading.
Structure
To the Examiners, the structure and coherence of your argument are just
as important as your knowledge and understanding of the syllabus. To
help organise your thoughts quickly, it is always sensible to compose an
essay plan before you actually begin writing. In this way you will know
in advance what you are going to say and in what order, which will make
the writing easier. Your answers should always include an introduction
that identifies the question, defines key terms or concepts, and provides
signposts so that the Examiners can follow your argument in the main
body; a main body which develops your answer by discussing the key
points on which it is based and supporting these with examples; and a
conclusion which recaps your answer and offers final reflections (why the
question is important, further implications of your answer, etc.).
12
Chapter 2: E-business technology and

infrastructure
Aims of the chapter
The main aim of this chapter is to provide you with a brief introduction
to the information and communications technology (ICT) underlying
e-business. While it is essential to build up a basic conceptual foundation
in the technology, in order to appreciate the technological possibilities and
constraints, you should be careful not to become obsessed or blinded by
technological detail. Technology is but one of the essential components of
e-business. Key concepts in this area are:
networks and the internet
networking standards
the web
web 2.0
peer-to-peer networks
cloud computing
mobile computing and m-commerce
technologies for supply chain management
security technologies for e-business.
Learning outcomes
By the end of this chapter, and having completed the essential reading and
activities, you should be able to:
identify the different types of networks and explain their functions, as
well as discussing the importance of network standards
explain the structure and functioning of the web (in conceptual terms),
including the technologies underpinning web 2.0
discuss the concepts underlying cloud computing and mobile
computing and explain how these relate to the internet
explain the principles of the ICTs that are used to support supply chain
management
describe the (software) technologies that provide the security function
in e-business systems.
Essential reading
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 3.
Further reading
Angeles, R. RFID technologies: supply chain applications and implementation
issues, Information Systems Management 22 (1) 2005, pp.5165.
13
The Chaffey textbook covers the material in sufficient depth but the
following textbooks are alternatives:
Bocij, P., D. Chaffey, A. Grasely and S. Hickie Business information systems:
technology, development and management. (London: Financial Times Pitman,
2008) fourth edition [ISBN 9780273716624 (pbk)] Chapters 3, 4 and 5.
Curtis, G. and D. Cobham Business information systems: analysis, design and
practice. (New Jersey: Pearson Education, 2008) sixth edition [ISBN
9780273713821 (pbk)] Chapters 1, 3 and 4.
Additional resources
There are a number of UK magazine websites that you can use to keep upto-date with technical developments and find out more about the detail of
technology:
Computer Weekly (mobile computing): www.computerweekly.com/
Home/mobile-computing.htm
Computer Weekly (network infrastructures): www.computerweekly.
com/Home/network-infrastructure.htm
Computing (IT security): www.computing.co.uk/categories/security
Introduction to e-business technology

This chapter explores the technical aspects of e-business technology,
including standards (widely accepted norms or requirements that
establish technical criteria and processes, often set by industry bodies),
protocols (rules used by computers to communicate across a network),
platforms (hardware or software frameworks that allow software to run),
architectures (designs of information systems) and communications
infrastructures (such as computer and mobile phone networks). We
provide some descriptions of the key concepts and terms which you are
expected to know and understand; however, you do not need to describe
these in your examination unless you are explicitly asked to do so.
Networks and the internet

Individual computers consist of both hardware (input devices, output
devices, memory and central processing units) and software (operating
systems, utilities and applications). These form the bases of all computing
activities. Connecting computers together involves forming networks.
Networks are what make e-business so interesting: they open up exciting
opportunities for communication, collaboration and markets. There are
several types of networks. Some important ones include:
local area networks (LANs) a network covering a small physical area,
such as a small office
wide area networks (WANs) a network that covers a broad
geographical area
virtual private networks (VPNs) commonly used to secure
communications through the public internet
internetworks (e.g. intranets, extranets and the internet).
Note that these network types are not mutually exclusive. For example, the
internet is both a WAN (because it spans the globe) and an internetwork
(because of the protocols it uses).
14
Intranets are private networks that operate within organisations. These

are used by businesses that want to restrict access to important or sensitive
information. Intranets also aim to simplify access to information for
employees. Extranets extend beyond the boundaries of companies to
include suppliers, customers and other collaborators. Extranets are used
extensively to support supply chain management (see Chapter 7 of this
subject guide). Particularly interesting for this course is the internet, a
so-called network of networks, which enables communication between
millions of computers worldwide. As Chaffey (2009) explains, the internet
can be understood as a large client/server system.
Client computers provide the interface to human users and perform
local processing think of your personal computer at home. Servers, on
the other hand, are computers dedicated to providing services across the
network. Email is an example of a service commonly delivered by servers.
Firewalls can be used to protect the security of information flowing
over an intranet or extranet. Firewalls are software on servers where a
companys network interfaces with the internet. Firewalls are required
to prevent unauthorised users from accessing private networks. We will
pick up on the topic of security in Chapter 10 of this subject guide, but for
now it is important for you to understand that good information security
is more than a technical issue social and organisational aspects are also
central to appropriate information security.
Networking standards
The internet and similar networks are based on a set of technical
communications protocols, where a protocol is a highly restricted form of
language shared by computers which enables them to communicate with
each other. While you are not expected to learn the detail of the technical
side of e-business, a basic understanding of certain protocols is necessary in
order to appreciate what makes e-business possible and how it is changing.
The most important of these protocols are the Transmission Control
Protocol (TCP) and the Internet Protocol (IP). These are usually written
together as TCP/IP as they operate very closely together. The Transmission
Control Protocol layer of TCP/IP breaks files into efficiently sized chunks
of data, known as packets. Packets are units of data that are routed
between an origin (often a server) and a destination (such as a client) on
the internet. The Internet Protocol communicates these chunks of data
using a technique known as packet-switching. Once they all arrive
at their destination they are re-assembled into the original file (by the
Transmission Control Protocol). Some important applications of TCP are
email, file transfer and the web.
The web
It is important to understand that the internet and the web are not the
same thing. The web is part of the internet a very important part but
theres more to the internet than just the web. The web is based on the
Hypertext Markup Language (HTML) standard, which is how we publish
information on web pages. HTML has many different functions, including
hyperlinks, which allow users to move easily from one document or web
page to the next.
15
For users to experience the web, they must have what is known as a web
browser installed on their computer. This is a software application that
permits them to connect to servers to access and view content online. Web
browsers are becoming increasingly important applications because they
are seen as being central to the future of the users computing experience.
In the past, web browsers were just one of many different software
applications, including word processors and media players. However, the
move towards what has been termed cloud computing means that
activities such as word processing or the creation of databases are done
through the browser, on servers in the cloud. We further explore the
cloud computing trend below.
The Hypertext Transfer Protocol (HTTP) is a standard for transferring
requests for the delivery of web pages from servers to browsers. The
transfer involves sending and receiving packets of data. You will probably
be familiar with HTTP from your experiences of surfing online, as all web
addresses start with http://. The technical name for web addresses is a
Uniform (or universal) Resource Locator (URL). What follows the http://
is known as a domain name. For example, the domain name for the
London School of Economics and Political Science is www.lse.ac.uk.
Domain names are important because they provide a shortcut to websites
online. All domain names map onto what are known as Internet Protocol
(IP) addresses. For example, the IP address for the LSE is 158.143.96.8.
URL: http://www.lse.ac.uk
Domain name: www.lse.ac.uk
IP address: 158.143.96.8.
You will probably agree that it is much easier to remember your favourite
sites domain names than it is to memorise the numerous IP addresses,
which is what makes domain name mapping so important. This mapping
takes place as part of the Domain Name System (DNS) and is fundamental
to the internets architecture.
Domain names are also important for companies from a marketing point
of view. Many companies view their portfolios of domain names as brand
assets. Imagine how many domain names Coca-Cola, a global company
with a very recognisable brand, must register in all the different countries
in which it operates (e.g. http://www.coca-cola.co.uk; http://www.cocacola.com.sg; http://www.coca-colaindia.com; http://www.coca-cola.com.
cn, and so on).
Activity
Go to http://www.lookupserver.com and find the IP address that corresponds to your
favourite websites domain name (e.g. facebook.com). This is called a forward DNS
lookup. The reverse of this process is called, as you might have guessed, a reverse DNS
lookup. What other information is made available in this process?
Web 2.0
Recently there has been much discussion about the emergence of a new
version of the web web 2.0. Proponents argue that there are important
differences between the original web, first popularised in the 1990s,
and web 2.0. The original web was typically composed of static pages,
written by a sites owners or administrators, and infrequently updated. In
contrast, web 2.0 is said to run on dynamic, user-generated content. It is
supposedly more interactive and participatory than the old web, although
16
critics continue to debate these distinctions. The popular site Wikipedia,

where users participate and collaborate to generate content, is a notable
example of the new wave of websites that rely on user-generated content
and governance. Other examples of web 2.0 type technologies include
web logs (popularly known as blogs) and social networking sites. As
these technologies present interesting opportunities and challenges for
business and society, we devote Chapter 8 of this subject guide to a more
comprehensive discussion of web 2.0. At this point, we will just consider
the key technical issues.
From the technical perspective, web 2.0 is different in terms of the extent
to which it relies on certain new scripts and technologies. There are two
in particular Javascript and Ajax which we note here. (Note that you
will not need to know how to use these for this course.)
Javascript is a scripting language used in web design to write functions
that enhance user interfaces and the dynamics of web pages. Javascript
makes pages more interactive by permitting, for example, a web form to
validate that the information a user has entered into forms is acceptable
before submitting it to a server. Javascript is behind most of the pop-up
boxes that we encounter online. Ajax stands for asynchronous JavaScript
and XML (dont worry about remembering that) and is a new approach
to designing web applications. Ajax is actually a set of technologies, not
a single technology, that work together to retrieve data from servers
asynchronously (that is, with no timing requirements for the transmission
of data). It runs in the background and does not interfere with the display
and behaviour of a web page. Whereas a typical web 1.0 page would
require you to click a link or submit a form and then wait for a new page
to load, Ajax allows users to update content on pages without leaving the
page. To give you an idea of how these technologies are being used, web
applications such as Googlemail and the photo-sharing site Flickr use Ajax,
as does Amazons user-rating system.
Another web 2.0 technology that you should be aware of is the widget:
a block of executable code that is installed within web pages. Importantly,
this code is reusable, often written by third parties, and its content is live
and dynamic. Widgets are what make on-screen tools such as clocks, stock
market tickers and flight arrival schedules possible.
Peer-to-peer networks
The traditional internet architecture is the client/server relationship
described above, whereby user clients rely on servers to transfer data
across networks. However, there are other ways to configure network
relationships online. One such innovative architecture is known as peerto-peer (P2P) networking. P2P networks are composed of users, known
as peers, who share their computing resources with other peers, without
the involvement of intermediaries such as network hosts or servers. Peers
are thus both suppliers and consumers of resources. P2P networks are
ad-hoc networks in the sense that new nodes (peers) can be added or
existing ones removed without a significant impact on the performance
of the network. These architectures are dynamic and distributed. Their
distributed nature means that they are more robust than client/server
configurations as there is no single point of failure in the system. Figure
2.1 below shows the basic difference between the client/server and
peer-to-peer architectures. How do you think each model affects how
organisations communicate, operate and coordinate work?
17
Figure 2.1: Client/server versus peer-to-peer architectures
P2P networking was first popularised during the Napster1 period, when
file-sharing first took off, and has yet to lose pace. History shows us that
these new internet architectures arguably revolutionised the entertainment
industry. While the use of peer-to-peer technology as a platform for
distributing content such as music and video is very significant to
e-business (see Chapter 11 of this subject guide), we must also consider
the other business models and technology applications that can take
advantage of peer-to-peer architectures. For example, Skype, the successful
start-up company providing a free software application to make voice calls
over the internet, runs on a P2P model. It uses P2P networks to transfer its
Voice over Internet Protocol (VoIP) data from caller to caller.
Cloud computing
Related to peer-to-peer networking is the emerging concept of cloud
computing. Cloud computing enables users to access and use web
applications that reside in vast data centres located around the world
instead of on their own personal computers. It is called cloud computing
because most network diagrams denote the internet as a cloud (see Figure
2.2 below). These applications based in the cloud are supposed to benefit
from massive on-demand scalability and can be dynamically provisioned
to achieve economies of scale, saving businesses money. Importantly, these
resources are provided as a service over the internet and are often billed
like utilities.
Figure 2.2: Cloud computing

18
1
Napster was originally an
online music file-sharing service
which operated from June
1999 to July 2001. It was shut
down over legal claims that it
infringed copyright. Its demise
led to new, decentralised P2P
models for sharing files. The
Napster brand was later sold to
a file-sharing company offering
a pay service.
In a way, cloud computing resembles previous network architectures.

Recall the client/server relationship we covered before. Cloud computing
is similar to the client/server architecture in that the cloud consists of
a series of high-performance servers that offer content. The difference
between client/server models and the cloud computing model is that the
software and the data reside on the servers in the cloud, and not on the
client machines, as is the case with traditional client/server architectures.
The reason for this is that companies offering cloud services believe that
users want their information to be accessible from anywhere and available
on multiple platforms: mobile phones; across computers at home and at
work; and shared with friends, family and colleagues. The idea is to store
everything out there so that an employee or work team, for example, can
access it whenever and from wherever it is needed. However, with the
move to the cloud comes a new set of concerns regarding the possibility of
network disruption and data not being available, the security of data that
are stored in the cloud, user privacy and others.
Activity
Many free, web-based email services rely on cloud computing to store users data in the
cloud so that they can access it wherever, whenever. Webmail is just the tip of the cloud
computing iceberg. What services do you regularly use that employ cloud computing
solutions? For a start, think of all the different Google applications that you might use.
These are based on cloud computing. What others are there? How would you go about
finding out where and how their data are stored by the services?
Mobile computing and m-commerce

So far we have focused on information technologies in terms of personal
computers. We typically think of computers as the machines that sit on our
desks. However, recent developments in mobile phone technology mean
that todays mobile phones are effectively computers. This is interesting
because it means that most of us have computers with us wherever we
are. This realisation has led analysts to begin exploring the idea of mobile
commerce, or m-commerce. There are a wide range of products and
services that open up when we begin to treat the mobile phone as a
networked computer:
Mobile ticketing the replacement of paper tickets with electronic
tickets that can be sent to a mobile phone or personal data assistant
(PDA) via a text message or short message service (SMS).
Mobile vouchers offering discounts to customers directly through
their mobile phones. When combined with location-based services,
mobile vouchers can be sent to customers as they pass certain retail
areas.
Location-based services mobile phone service providers constantly
triangulate a users location in a certain area and this location data can
be used for marketing purposes (e.g. directing customers to a particular
restaurant nearby).
Mobile banking using mobile phones to conduct basic banking
activities such as transfers, balance checks and payments.
Mobile marketing and advertising marketing directly to customers
through their mobile phones.
Think of some more examples of mobile commerce applications. Are there
any limitations to mobile commerce that business should be aware of?
19
Activity
Consider the different computing technologies that we as consumers have access to,
including desktop computers, laptops, netbooks, e-readers, smart mobile phones, MP3
players and digital cameras, and even recent gizmos such as the iPad. What are the main
differences between these various technologies? How did you choose these points of
difference? In what ways are these technologies similar to one another? Are we gradually
moving towards technological convergence, whereby different gadgets perform the
same computing tasks, or are there still important differences between technologies?
Remember that our mobile phones are increasingly sophisticated devices, equipped with
computer processors, digital cameras and internet capacity.
Technologies for supply chain management

As well as general-purpose technologies and architectures, e-business
technologies are also applied in more specific situations; for example, in
supply chain management. When extranets are used to coordinate and
manage supply chains (see Chapter 7 of this subject guide), they often
involve electronic data interchange (EDI). EDI is a generic term that refers to
the structured exchange of data or documents between organisations using
information technology. It is a format that pre-dates the internet, with various
international technical standards. And despite the current of innovation that
has taken place in e-business over the past couple of decades, the EDI format
is still widely used by many companies in their supply chain activities.
Radio frequency identification (RFID) is a so-called automatic
identification technology, which permits the identification of items
without direct human intervention. Its predecessor, bar coding technology,
relied on line-of-sight transmission of data along the supply chain and
often required human beings to intervene in the process. However, by
using radio signals, RFID can automate the product identification process,
and thus promises many benefits to supply chain management.
RFID offers many potential advantages over previous supply chain
technologies. For one, by automating the process, it can reduce labour costs.
The RFID tags themselves allow significantly larger amounts of data to be
stored on the products (e.g. serial number, colour, size, price), leading to
better intelligence along the supply chain. Additionally, the tags increase
inventory visibility for partners and improve response times to customer
demands and market trends. RFID also permits asset tracking, which can
help reduce shrinkage and, in the case of a product being recalled, allows
partners to locate and remove faulty goods quickly. Depending on how it is
implemented, RFID can help facilitate item-level tracking, whereby tags
are stored in each individual product (as opposed to pallet or case-level
tracking). Item-level tracking opens up many opportunities for increased
intelligence along the supply chain, for example in terms of theft detection,
stock monitoring and product customisation.
However, a decision to implement RFID at the item-level must be carefully
considered. RFID tags can be expensive, although prices are decreasing
as the technology matures. Consider that at any given time, there are
thousands if not millions of products moving along the typical supply
chain, and you will see that the technology costs can accumulate quickly.
The reliability of RFID is also a concern, as certain metals interfere with the
radio frequencies used by RFID. Thus, managers in some industries need to
understand these technical limitations before choosing RFID for managing
supply chains. For example, motorcycles are built with various metal
components, and so item-level RFID may prove problematic for their supply
chains. If you wish to read more about RFID, please refer to Angeles (2005).
20
Rubee is a similar technology to RFID, with some important differences.

Whereas RFID relies on radio signals to transmit data, Rubee uses
magnetic signals, enabling it to transmit data through both metal and
liquid. This makes Rubee useful for the harsh environments where RFID
often fails, for example in warehouses where there are lots of metal
structures. However, despite this major advantage, there are disadvantages
to using the technology, including slow data transmission speeds and small
packet sizes. Its relatively slow speeds make Rubee unsuitable for the
warehouse environment where many products are moving rapidly through
the building. Nonetheless, it is a technology that businesses are closely
watching as a potential supply chain game-changer.
The advantages and disadvantages of using RFID or Rubee will always
depend on the particular implementation. Organisations have different
business objectives which affect their supply chain strategy. If speed or
quality of product information is a concern, then perhaps RFID is a good
option for supply chain managers. If keeping costs low or minimising
information technology investment is a priority, then perhaps RFID is
not the best way forward. In such a case, sticking with legacy bar code
systems, for example, might make the best business sense. Or perhaps an
older EDI-based system is best.
At the time of writing (2010), RFID is being introduced into various
industries, such as fashion, clothing and fast-moving consumer goods
(FMCG), but it is not in general use yet as, for example, some industries
are still developing appropriate standards that are essential for
communication.
A software technology that is particularly important to large organisations,
both internally and for communicating along the supply chain, is
that of enterprise resource planning (ERP) systems. These are large,
complex suites of software that serve to integrate the various common
functions (e.g. accounting, production, human resources) and data of an
organisation. Considered as internal systems, these are of limited interest
to e-business, which is fundamentally inter-organisational. However, using
EDI protocols and extranets, the ERP systems of the companies along
the supply chain can be connected together and hence can talk to each
other in order to provide seamless communication between the various
departments of different companies. Ciscos supply chain, for example,
depends upon interconnected ERPs.
Security technologies for e-business

Data security is a top concern for organisations, especially as they continue
to invest in new e-business technologies. One important way to secure
data is by encrypting it. Based on cryptography, encryption is the process
of using algorithms (detailed sets of instructions) to make information
unreadable to anyone except those who have special knowledge in the
form of a key. This key makes information readable again, through a
process called decryption. Encryption can be used to protect data as it
moves around networks or while it sits on storage devices.
Businesses can use encryption in different ways. Weve already mentioned
VPNs, which often use encryption techniques. VPNs work by sending data
through tunnels over a shared public infrastructure, such as the internet.
Other data cannot enter these tunnels unless they are also appropriately
encrypted. VPNs are commonly used by employees of firms who are
temporarily away from their home office, for example consultants at a
clients site, to gain access to the companys internal networks.
21
Another business application that uses encryption is the digital

signature. These are not actually signatures in the normal sense, but
rather a way of using mathematical techniques to secure digital messages
or documents. Digital signatures provide assurances to the recipient that a
message is from a known sender, and that it has not been tampered with.
These can be used in financial transactions or other environments where
protection against fraud and forgery is important.
Transport layer security (TLS) and secure sockets layer (SSL) are protocols
for transmitting information privately over the internet. These protocols
have many important B2C applications. For example, many websites
use them to collect sensitive information such as credit card numbers
during online transactions. TLS and SLS use cryptographic techniques
to allow client/server applications to communicate data so that the data
are impossible to eavesdrop on or tamper with. You might be familiar
with these protocols. If youve ever noticed how certain URLs start with
https:// then you have experienced SSL in action.
We pick up on these security technologies again in Chapter 10 of this
subject guide, where we elaborate on them and also consider how
organisational, social, legal and institutional aspects of information
security complicate e-business.
Conclusion
This chapter provides an overview of the main technological architectures
for e-business. It describes the basic technological infrastructures which
enable network technologies and explains how different protocols
enable and support these architectures. Specific emphasis is given to the
discussion of supply chain management technologies and to emerging
phenomena, such as web 2.0. Security challenges and problems are
introduced.
Most of the aspects discussed in this chapter will be complemented by
additional material presented in the following chapters. This chapter
provides an introduction to the background technological knowledge
needed to understand more specific aspects of e-business discussed
elsewhere in the subject guide.
A reminder of your learning outcomes

Having completed this chapter, and the essential readings and activities,
you should be able to:
identify the different types of networks and explain their functions, as
well as discussing the importance of network standards
explain the structure and functioning of the web (in conceptual terms),
including the technologies underpinning web 2.0
discuss the concepts underlying cloud computing and mobile
computing and explain how these relate to the internet
explain the principles of the ICTs that are used to support supply chain
management
describe the (software) technologies that provide the security function
in e-business systems.
22
Self-test questions
1. Discuss the similarities and differences between the internet and cloud
computing. What are the main business opportunities offered by cloud
computing?
2. Mobile technologies offer new business opportunities. Discuss, with
examples, whether mobile technologies can be a real substitute for
traditional wired technologies.
Note: these self-test questions are not Sample examination questions.
They are intended to help you test your understanding of the issues
discussed above. Sample examination questions tend to drawn on your
knowledge of the issues covered in different chapters, whereas the self-test
questions test your knowledge of the chapter in which they appear.
23
Notes
24
Chapter 3: Economic theories of

e-business
Aims of the chapter
The principal aim of this chapter is to explore the economics of e-business
markets and, through the use of transaction cost theory, to show how
e-business technology impacts the organisation and structure of markets.
In particular, we discuss the phenomenon of disintermediation, where
traditional intermediaries (or middlemen) are eliminated through the
introduction of e-business. Key concepts in this chapter include:
the transaction cost model
types of transaction costs
ICT and disintermediation
the myths of the dot.com boom.
Learning outcomes
explain transaction cost theory and identify the main types of
transaction costs
analyse the impact of e-business technology on transaction costs
explain how and why disintermediation occurs in electronic markets
discuss the impact of e-business technology on the organisation of
markets with examples from the real world
explain the myths that were current during the dot.com boom.
Essential reading
Cordella, A. Transaction costs and information systems: does it add up?,
Journal of Information Technology 21(3) 2006, pp.195202.
Howcroft, D. After the goldrush: deconstructing the myths of the dot.com
market, Journal of Information Technology 16(4) 2001, pp.195204.
Malone, T.W., J. Yates and R.I. Benjamin Electronic markets and electronic
hierarchies, Communications of the ACM 30(6) 1987, pp.48497.
13(1) 1997, pp.10723.
Further reading
Ciborra, C.U. Teams, markets and systems: business innovation and information
technology. (Cambridge: Cambridge University Press, 1996) [ISBN
9780521574655] Chapters 1 and 6.
Hagel, J. and J. Rayport The new intermediaries, McKinsey Quarterly (4) 1997,
pp.5470.
Williamson, O.E. The economic institutions of capitalism. (New York: Free Press,
1985) [ISBN 9780684863740].
25
BNET (http://resources.bnet.com/topic/transaction+costs.html) is
quite a good resource for practitioner-oriented white papers and case
studies, with various items on transaction costs.
The Ronald Coase1 Institute (http://coase.org/linksandresources.htm)
offers various papers on new institutional economics and transaction
cost theory.
Introduction
The purpose of this chapter is to introduce the most common theories
that have informed the management and economics of e-business. The
chapter will mainly focus on transaction cost theory and conceptual
approaches to intermediation and disintermediation. In order to match the
literature on the theories, in this chapter we refer to e-business technology
as ICT (information and communication technology) and hence you
should treat these terms as being synonymous.
The main economic theory you need to understand is the transaction
cost model. Examining how markets are organised and how and why ICT
can be designed and implemented to facilitate the functioning of market
mechanisms, we discuss the fundamental factors that produce electronic
markets. We therefore present and discuss a limited version of transaction
cost theory, focusing on those factors that affect the exchange of goods and
services in a market context. We discuss the circumstances under which
ICT can make market mechanisms more efficient. For a more detailed
presentation of transaction cost theory, you can refer to Ciborra (1993)
and Williamson (1985). Cordella (2006) presents a useful discussion of
the application of transaction cost theory to information systems and we
recommend that you read this article.
The basic assumption of transaction cost theory is that economic
agents (buyers and sellers) face costs to make the exchange of goods and
services possible (see Picot et al., 1997). These costs are not necessarily
reflected in the price at which goods and services are exchanged. These
costs, called transaction costs, are mostly related to information processing
costs: not all the information needed by buyers and sellers about the
object of the exchange is available; it is costly to process the available
information, etc. We identify the different types of information processing
costs that individuals face, namely search costs, contracting costs
and control costs. We also elaborate on how ICT might contribute to
lower transaction costs, which, in turn, makes the exchange of goods and
services more efficient, and therefore improves the overall efficiency of the
economic system within which these exchanges take place.
After introducing the basic elements of transaction costs, we discuss
how ICT can affect the roles of the different economic agents involved
in the exchange of goods and services. Disintermediation is a typical
example: this is the process by which the number of economic agents
involved in an exchange (i.e. resellers, wholesalers and mediators)
is reduced. Disintermediation typically occurs because ICT does for
free what intermediaries do for a fee. Following the transaction costs
argument, ICT provides better opportunities to process information
related to the exchange, reducing the need for support for buyers and
sellers in managing the essential information needed for the exchange.
26
1
Note: Ronald Coase
was an International
Programmes student!
ICT therefore reduces the need for third party services and hence the costs
faced by buyers and sellers. The first reason why disintermediation occurs
is therefore rooted in transaction cost theory. Moreover, building on Picot
et al. (1997), we discuss how and when ICT-led disintermediation occurs.
The transaction cost model

In the transaction cost model, markets are viewed as organisational
structures which coordinate buyers and sellers by matching the
reciprocal expectation related to the price-quantity/quality relationship.
The transaction (exchange) is therefore coordinated on the basis of a
contractual arrangement which specifies buyers and sellers, the object
of the exchange and the price at which the transaction will take place. If
you take as the elementary unit of analysis the transaction or exchange
between at least two individuals, you can envisage the information-related
problems that create uncertainty regarding the object of the exchange and
the relationship between price and quantity/quality, which is fundamental
to the decision of the two parties to engage in the transaction. Looking
at the transaction as the unit of analysis, we can identify how and where
ICTs can be used to facilitate access to this information and why ICT can
be used to reduce the transaction costs. If you consider the market as a
network of exchanges and contracts between buyers and sellers,
both cooperation and conflict should be taken into account because
individuals might withhold information during the process of exchange.
This in fact can generate extra profits and higher revenues for either
buyers or sellers.
Every business activity is characterised by a certain amount of uncertainty
and this may stem from the task, the technology or the environment.
However, the transaction cost framework considers another, rather
distinct, form of uncertainty, namely behavioural or strategic uncertainty,
which has its origins in the conflict of interests that exists between buyers
and sellers. The information that buyers or sellers receive or gather may
well be unreliable, with the result that they have to undertake excessive
information processing in order to evaluate its reliability. The fact that
information is obtained from human sources means that it cannot be
trusted a priori. In fact, humans can exploit the use of information to
obtain extra profit. This strategic consideration is due to the fact that
interdependent strategic intents are affecting the exchange and use of
available information. Buyers and sellers cannot be seen as solo chess
players whose only opponents are the technology, a random environment
or nature. Put differently, in order to pursue individual interests, buyers
and sellers are willing to manipulate, omit or even distort information
to gain extra value from the exchange. In so doing, they pollute the
information setting within which the exchange takes place.
Needless to say, this generates the need to invest in sophisticated
solutions to double check information. Buyers and sellers cannot trust
the information that is exchanged, so they have to invest in solutions
that reduce the risk of becoming exposed to polluted information. This
leads to an increase in transaction costs, which explains the design of
information systems that aim to make more reliable and transparent the
information exchanged between buyers and sellers. As we discuss below,
specific intermediaries infomediaries become highly relevant to
facilitating transactions in situations where complex information settings
make it difficult for buyers and sellers to finalise the exchange.
27
Types of transaction costs

The transaction cost model assumes that the market is a bundle of
transactions or exchanges between individuals who behave so as to
optimise their revenues from the exchange. The transaction cost model
defines this behaviour as opportunistic. As noted above, transactions
entail costs in terms of resources that need to be deployed to complete
an exchange of goods or services between the parties (i.e. buyers and
sellers). Hence, transaction costs reflect the imperfections of the market
mechanism in allocating resources on the basis of the price-quantity
relationship. There is always some information-related problem that
makes it difficult, and therefore expensive, to finalise the transaction.
You may view transaction costs as the economic equivalent of friction in
physical systems: the higher the friction in a physical system, the more
the systems movement is impeded. By the same token, the higher the
transaction costs, the lower the degree of economic activity occurring in
the market. Costless transactions only take place in an ideal world where
there are no friction, impediments or barriers to the immediate perception
of the equity of the exchange (i.e. perfect knowledge of the price-quantity/
quality relationship).
Factors that may contribute to the cost of a transaction in the real world
can be identified as follows:
Searching for the product or service in question, as well as for the true
price at which the sale/purchase ought to take place. There are two
types of search costs: (1) the costs associated with searching for the
actual product or service, and (2) the costs involved in determining the
best price at which the product or service could be bought.
Carefully crafting the contract that regulates the exchange, so as to
avoid later claims.
Monitoring its execution so as to pinpoint responsibilities and penalties
if modifications have to be made to the original contract.
Finally, checking the reputation of the partners in order to minimise
subsequent surprises related to the undiscovered properties of the
transaction.
These costs are generally defined as the costs of gathering
information, evaluating alternative options, negotiating
and contracting. They are the consequences of the complexity and
uncertainty of the economic system. Uncertainty and complexity can be
related to either human behaviour or environmental or unpredictable
events.
More specifically, we may group the information-processing costs related
to transacting through negotiation of an exchange into four main classes:
search costs: the costs necessary to set up the minimal social unit for
the exchange (i.e. identify the party with which one wishes to conduct
the transaction)
contracting costs: the costs related to the negotiation of the terms
of the trade and drawing up the contract which regulates the exchange
control costs and regulation costs: these costs relate to the
implementation of the contract under conditions of uncertainty, the
policing of deviations from the contract terms and the enforcement of
sanctions to restore conditions suitable to the terms agreed.
28
Each of these affects a segment of the transaction lifecycle, which can be

divided into three stages:
search
contracting
control/regulation.
In the transaction cost model, we may conceive of information technology
as a mediating technology because it mediates the transactions or
exchanges between the parties. Information technology can reduce the
costs of transacting (i.e. the information costs) because it enables more
information to be communicated in the same amount of time. Information
technology can also contribute to better linkage between buyer and seller,
as well as more efficient and effective contracting processes between the
parties through brokerage effects. However, considering that the increased
amount of information being communicated in the same time unit might
increase the information processing costs that the transacting parties need
to endure, information technology does not necessarily lead to lower
transaction costs.
In the transaction cost model, information technology is seen as a factor
that can decrease the costs of transacting, thus improving the functioning
of the market or sustaining market-like forms of organisation. The logic
behind this argument is that the lower the transaction costs, the more
efficient the market will be. The more you use information technology, the
lower the transaction costs and, therefore, the more efficient the market
will be as an allocation mechanism.
The strength of the transaction cost perspective is that it offers a compact
set of concepts and a unifying language to analyse and interpret a variety
of micro and macro phenomena, such as vertical integration between
firms, employment contracts and internal labour relations, anti-trust
laws and interventions, and even the emergence and failure of economic
institutions.
Nevertheless, it has two major limitations. First, transaction cost
economics is based on a sophisticated but still narrow view of the agent
as economic man, who maximises utility despite the limits of their
rationality. Therefore altruistic behaviour, for example, is beyond its
scope. Second, the approach presents a static, comparative view of why
different economic institutions exist, develop or decay. Transaction cost
economics suggests that, for a given level of uncertainty and trust between
the parties, there are usually a limited number of governance structures
that are efficient and will survive in the long run. When circumstances
change, an efficient governance structure must adapt swiftly or it will
be swept away by competition. The approach is silent, however, on the
forces that make certain economic organisations stickier than others. In
sum, transaction cost economics seems to assume an implicit notion of
frictionless change. It ignores the widespread role of transition costs in
socio-economic organisations undergoing continuous change.
Activity
Consider this problem: if coordination costs encompass both transaction costs and
information processing costs, could information technology raise coordination costs
despite reducing the transaction costs? Discuss in detail how this might occur, justifying
your answer with examples.
29
ICT and disintermediation

Traditionally, disintermediation in this context has been seen to occur
when ICT implementations enable economic agents to bypass third parties
and directly engage in economic activities with their counterparties. In
the context of the web, it has come to signify the disappearance of a wide
variety of middlemen, or intermediaries, and the creation of an enhanced
sales network in which customers deal directly with service providers. The
result is supposed to be a frictionless economic environment that reduces
both inefficiencies and transaction costs.
Understanding the impact of e-commerce on intermediaries requires an
appreciation that:
ICT supports many business activities and, as a result, it can lead to
changes in market configurations; in particular, it changes the role of
intermediaries in matching supply and demand.
ICT can reduce transaction costs by eliminating the need for
intermediaries that used to make the transaction possible:
disintermediation occurs because ICT does for free what an
intermediary does for a fee.
Figure 3.1: Progressive disintermediation of a consumer distribution channel
Chaffey (2009) Chapter 2 demonstrates the costs saved in a

conventional producer-wholesaler-retailer-consumer value chain by,
first, disintermediating (eliminating) the wholesaler and then, secondly,
disintermediating both the wholesaler and the retailer. In the latter case,
the price to the consumer becomes the same as that charged originally by
the producer to the wholesaler and is less than half the old price that the
retailer charged the consumer. This happens because ICT can reduce search
costs, contracting cost, control and regulation costs through facilitating the
exchange of information between economic agents (described by Malone
et al., 1987 as electronic communication effects) and because it makes it
easier to match buyers and sellers (Malones electronic brokerage effects).
There are therefore valid economic incentives for both producers and
consumers to bypass intermediaries and push them out of the value chain.
Intermediaries add significant costs to the value chain and, by suppressing
them, the profit margins of producers can increase while at the same
time offering lower prices to consumers. Advanced uses of ICT and the
30
evolution of electronic marketplaces have reduced the transaction costs

for producers, thus enabling them to internalise activities that had to be
served by intermediaries in a traditional market. This has created the
opportunity to distribute profits within the value system by driving the
intermediaries to extinction. Under such a scenario, producers can benefit
from increasing their profit margins and passing part of their savings to
consumers who thus enjoy lower prices and greater choice.
Infomediaries
Intermediaries are profoundly affected by the adoption and diffusion of ICT in
markets. ICT changes the way in which information is accessed and therefore
allows agents to bypass traditional intermediaries to execute transactions.
It must, however, be noted that a new form of intermediation is emerging
alongside the wide adoption of ICT. Electronic markets are characterised
by a very rich information setting which, in certain circumstances, makes it
difficult to find the right information needed by the agents. If you are looking
for information on a specific product, you will find it difficult to identify the
right website to support your search without the use of a search engine such
as Google. Search engines are intermediaries which reduce the cost of gaining
access to and using information. These intermediaries, given the nature of
their task, are defined as information brokers or infomediaries (Hagel and
Rayport, 1997). Chaffey (2009) Chapter 2 discusses the role of these new
intermediaries and describes in detail their different forms and business
models. You should refer to Table 2.5 in his book, where he distinguishes the
various types of portal and electronic marketplace. Here we discuss in greater
detail the reason why the importance of these intermediaries is increasing in
the digital economy while, in the same context, traditional intermediaries are
becoming disintermediated.
In the previous section, we discussed how ICT can reduce transaction
costs by reducing search, contracting and control costs. However, we also
argued that ICT can lead to situations where the increased amount of
information being communicated might increase the information processing
costs that the transacting parties need to endure. This is the context where
infomediaries become very important and gain business opportunities.
ICT in fact generates new transaction costs which have to be borne by the
economic agents in the e-business context. These new transaction costs are
generated by the increasing amount of information that has to be processed
to conclude a transaction. In e-business the number of buyers and sellers is
normally greater than in the traditional market. Buyers can buy from any
digital seller so that place and time boundaries become irrelevant. Similarly,
sellers can access buyers located all around the word. This increases the
search, contracting and control costs. Thus, many potential buyers and
sellers have to match their interests, negotiate the terms of the exchange
and enforce forms of control in order to be sure that what has been agreed
upon is effectively exchanged.
ICT therefore has a twofold effect. On one side, ICT reduces the need for
traditional intermediaries but, on the other hand, it creates opportunities
for new intermediaries such as infomediaries. It is in fact possible
for specific intermediaries to reduce transaction costs facilitating the
exchange, retrieval and processing of the information needed to exchange
goods and services in electronic markets. These intermediaries act as
infomediaries (information intermediaries) as they intermediate the
exchange, use of and access to information. By reducing the information
costs they provide valuable support to electronic markets.
31
Infomediaries are therefore a new type of intermediary which is very

important in e-business as they make it possible to manage the rich
information environment within which electronic transactions take place.
Without infomediaries it would be too complex to manage transactions
in digital markets: the search, contracting and control costs would
become too high. Infomediaries reduce the transaction costs created by
the increased volume of information produced in the digital economy.
Infomediaries are therefore specific intermediaries which help to reduce
specific transaction costs typically found within e-business.
Case study
Chaffey (2009) in Chapter 2 includes a short case study of lastminute.com
(Case Study 2.2). This is a good description of who set up lastminute.com,
why and how. It tells of the vagaries involved in setting up a new venture
but, of more interest here, it also discusses transaction value. lastminute.
com was an inspirational idea that reduced transaction costs for consumers
while at the same time providing an avenue of revenue for supplier
companies that was not possible before intermediaries like lastminute.com.
Read the case study and then flip to Table 2.5 in Chaffey (2009). Skim
through the various intermediary types listed in the table and think
through where you would place lastminute.com and why. Is it a search
engine if yes, then what sort? Or do you think it is more a marketplace?
Does it help you to compare prices? Look at the examples provided in the
same table by Chaffey (2009) to give you some help. It might help to think
about what service and value this site brought to its customers: was it
simply lower prices or some other added value?
Activities
1. Identify examples of infomediaries that you regularly use or have come across do
not just copy the ones listed by Chaffey (2009). What roles do these infomediaries
play? How important are those roles to e-business?
2. Consider the impact of online grocery shopping on the value chain. Does it
disintermediate? Or has it brought forth new intermediaries (or infomediaries)?
3. Identify examples of where ICT does not disintermediate the value chain. Why is this
so?
Myths of the dot.com boom

While transaction cost theory provides a real insight into the way that
markets changed as a result of the introduction of e-business, you should
be careful not to use it in an excessively deterministic way. Like all
economic theories, transaction cost theory has certain assumptions built
into it and those assumptions may not always hold in the real world. It is
surprisingly easy to exaggerate the predictive power of any theory. People,
especially consumers, do not always behave like economic man and they
do not always change their behaviour to adopt beneficial innovations
immediately. Moreover, if you look elsewhere in economics, you will find
various examples of manias or speculative bubbles where investors force
up the price of shares in a particular company or sector way past their real
value. A good example of this is the dot.com boom of the late 1990s when
e-business was touted to revolutionise whole industries overnight.
32
Howcroft (2001) provides a very good analysis of this phenomenon and

you should read her paper carefully. In particular, she highlights certain
myths that were prevalent at the time of the boom. These were:
the myth of the new economy
the myth of success
the myth of the entrepreneurial geek
the myth of the level playing field
the myth of innovation
the myth of the virtual
the myth of the online shopping experience.
Looking back now, it is very easy to poke fun at some of the myths; for
example, the myth of the level playing field. Large companies will always
have more resources to plough into their websites than smaller firms. On the
other hand, the myth of the online shopping experience is less laughable, as
the years go by and B2C e-business becomes more widely accepted.
Conclusion
This chapter provides the theoretical background to the study of many
aspects of e-business. It ties in with the ideas of transaction cost economics
and disintermediation to provide an analytical framework for the study of
the economic impact of ICT on markets. The chapter explains, from a macro
level perspective, the impact of ICT on the value chain and explains how and
why disintermediation occurs. It will be clear as you work through the rest of
this subject guide that these concepts underpin many e-business strategies.

explain transaction cost theory and identify the main types of
transaction costs
analyse the impact of e-business technology on transaction costs
explain how and why disintermediation occurs in electronic markets
discuss the impact of e-business technology on the organisation of
markets with examples from the real world
explain the myths that were current during the dot.com boom.
Self-test questions
1. In the context of a B2B transaction, what are the main classes of
information processing costs? Give specific examples of each of these
costs, using the example of a shop buying Christmas trees from a
supplier. When, and how, might they be incurred in this case?
2. How can transaction cost theory explain disintermediation and
infomediation?
3. Outline the myths that circulated during the dot.com boom. Which
of these do you believe were completely unfounded, and could never
become a reality?
33
Notes
34
Chapter 4: Business-to-consumer (B2C)

systems and strategies
Aims of the chapter
The aims of this chapter are to provide a summary of the basic concepts of
business-to-consumer (B2C) e-business and to examine the lessons learnt
from more than 10 years of experience in this area. B2C is a relatively
mature field that has seen a number of high-profile commercial successes,
as well as various failures. Key concepts in this area are:
business models and revenue models
revenue strategy issues
understanding shoppers
website usability and design
case studies (of mature and successful companies)
failures
problems
key success factors
innovation.
Learning outcomes
identify the business models and revenue models of individual B2C
companies, as a prelude to further analysis
analyse the revenue strategy issues that pertain to any given B2C
operation
identify the roles of website visitors to any particular site
analyse why some websites are successful in terms of consumer
adoption and purchases, while others are less successful
distinguish the quality of different websites in terms of their usability
from the perspective of consumers
advise B2C start-up companies concerning the factors that are
important for success in this highly competitive field.
Essential reading
Prentice Hall, 2009) fourth edition [ISBN 9780273719601]. See chapter
references in the text below.
Lohse, G.L. and P. Spiller Electronic shopping, Communications of the ACM
41(7) 1998, pp.8187.
Riggins, F.J. A framework for identifying web-based electronic commerce
opportunities, Journal of Organizational Computing and Electronic
Commerce 9(4) 1999, pp.297310.
35
Further reading
Fomin, V.V., J.L. King, K.J. Lyytinen and S.T. McGann Diffusion and impacts
of e-commerce in the United States of America: results from an industry
survey, Communications of the Association for Information Systems 16(28)
2005.
Ives, B. and G. Piccoli Custom made apparel and individualized service at
Lands End, Communications of the AIS 11 2003, pp.7993.
Phan, D.D., J.Q. Chen and S. Ahmad Lessons learned from an initial
e-commerce failure by a catalog retailer, Information Systems Management
Summer 2005, pp.713.
Treiblmaier, H. Web site analysis: a review and assessment of previous
research, Communications of the AIS 19(39) 2007, pp.80643.
For papers on various topics in e-business, including B2C, see the MIT
website: http://ebusiness.mit.edu
The European Commission maintains a useful website with reports
on B2C (and B2B) implementation within the European Union: www.
ebusiness-watch.org
One of the leading writers on web usability is Jakob Nielsen, whose
publications are available at www.useit.com/jakob/publications.html
Introduction
The start of commercial web-based e-business is usually dated back
to 1995 at the very beginning of the dot.com boom. The business-toconsumer (B2C) retail market was the first to be targeted. The glamour
of online retail beckoned and e-business entrepreneurs flocked to try to
grab a piece of the action, backed by thousands of investors. In that year,
companies like Amazon, eBay and Yahoo began operations and, at the
time of writing (2010), these old giants are still forces to be reckoned
with in the market, albeit in varying degrees of financial health.
As B2C dates back to the mid-1990s, we can no longer say that it is a new
phenomenon, although in many parts of the world it began much later.
However, we would argue that it is not a mature commodity, like much
of IT (e.g. personal computers). Rather, it is well established but still
evolving. It is a recognised sales and marketing channel for, among others,
air tickets, books, computers, groceries and share trading, such that it is
the first port of call for many consumers in these markets.
How big a slice of the total retail market belongs to e-business? This
is a difficult question, as statistics vary. It all depends on what you
consider comprises the total retail market and how you count it as well
as the e-business part. The figures currently given for the UK and USA
vary between around 5 per cent and 17 per cent but, even at the lower
end of the scale, you can see that e-business makes up a substantial
proportion, although the forecasts swirling around the dot.com era that
by 2015 it would account for over half of all retailing are likely to remain
pipedreams. Nevertheless, the statistics from Data Monitor (2009) shown
in the table below are impressive (see also Fomin et al., 2005).
36
USA
UK
Market value (2007)
$142 bn
$29 bn
Increase over 2006
24%
35%
Forecast (2012)
$277 bn
$90 bn
Forecast increase over 2007
96%
205%
Market segmentation
19% electronics
41% books, music, videos
Market segmentation (2)
USA has 65% of global

online retail market
UK accounts for 39%

of European market
Table 4.1: Recent statistics concerning the B2C market
Business models and revenue models

Certain basic business models are widely used to classify B2C
companies and operations:
Pure play refers to companies, such as Amazon, that only operate
online while clicks-and-mortar companies, such as Tesco, operate using
both channels. Pure play companies have the advantage of being able
to specialise in e-business and focus on their online offerings while
clicks-and-mortar companies have the advantage of co-specialised
assets (e.g. shared warehouses, economies of scale and their existing
brand power and consumer base).
Vendors (e.g. Tesco) sell directly to consumers while brokers (e.g.
online travel agents) match buyers and sellers.
Vendors sell either content (e.g. Financial Times) or products or services
(e.g. e-banking).
Similarly, they are to a greater or lesser extent specialised (niche
suppliers for highly specific markets) or generalised (e.g. Amazon).
They may employ electronic distribution (e.g. iTunes) or physical
distribution (e.g. Tesco).
Their website may offer only information about their products or
services or carry out transactions or provide long-term after-sales
support.
Revenue strategy issues

Three issues are especially pertinent to B2C, compared to conventional
retailing:
Channel conflict and cannibalisation

This occurs when the new online sales channel does not attract new
business but merely cannibalises (takes sales away from) an existing
channel (e.g. a firms traditional shops). The online channel may be
cheaper per transaction for the firm but two channels are necessarily more
expensive to operate than one. One solution is to move resources away
from the conventional channel, but this may mean a reduction in service
quality (fewer staff, reduced opening hours) and a consequent loss of
revenue. A good example of this is banking. With online banking, should
banks close branches, reduce opening hours and cut staff in branches, or
tolerate the increased costs of the additional channel?
37
A possible strategy is to examine the value proposition for the various

customer segments and differentiate the channels, setting incentives and
constraints to persuade particular segments to shift to a particular channel.
Alliances
Online retailers may have considerable expertise in the design and
operation of websites, and perhaps in one particular product line (e.g.
Amazon and books), but they have the capacity to sell other product lines
(e.g. electronics). A common strategy is for the online retailer to partner
with a category manager with expertise in, say, electronics. Similarly,
order fulfilment involves the online retailer providing the customers
while the partner attends to distribution and logistics.
Customer acquisition
Unlike conventional stores that have a physical presence on the high
street and can attract passing trade, B2C e-business relies on extensive
advertising and marketing efforts to attract customers to the website.
Understanding shoppers
In any retail operation, it is essential to understand shoppers (or
consumers), but B2C e-business is arguably slightly different from
conventional retailing. For example, website visitors may be less likely
to purchase products or services, compared to most conventional shops.
Just because people visit a website does not mean they are likely to buy
a product. These visitors have various roles, partly because accessing a
website is much easier than having to spend time and energy travelling to
a conventional shop.
Roles of website visitors

Browsers
These visitors are just looking; they are very unlikely to buy. They may
be surfers who like to surf around the web, looking for entertainment,
or seekers who require particular information but are unlikely to pay
for it.
Buyers
They already know exactly what they want and they are ready to make
their purchase. Typically they require quick, easy service.
Shoppers
They are interested in the product (e.g. a digital camera) and will
probably buy one eventually somewhere. They usually require product
reviews, comparison tools and feature lists to help them decide which
product is the best for them.
People obviously change roles, depending on the context, but those
described above are the main roles. However, researchers have identified
additional roles:
simplifiers want convenience
bargainers want the best deal
connectors want social contact
routiners regular visitors to a site for news and general interest
(e.g. sports fans who follow a particular team and like a daily/weekly
update on their teams progress).
38
Focusing on the shoppers, it is important to realise that shopping is

not the same as procurement, where the latter concerns companies
purchasing raw materials, components or consumables as part of their
everyday business operations (see Chapter 6 of this subject guide).
Shopping is much more a leisure activity some (but not all) people
enjoy shopping. It is often a social or family activity where part of its
function is meeting friends, who are also shopping. This may be the one
occasion when a family regularly goes out together. Walking around the
shops is a useful source of exercise for those with sedentary occupations.
Furthermore, it can be a source of sensory stimulation (e.g. a modern
boutique or music shop), as well as a source of status and authority, where
consumers expect to be served by shop assistants and, in some cultures,
haggling over prices is normal. Shopping can also be seen as a subtle part
of a persons identity construction as we are all influenced by the products
we purchase and the retailers we frequent. It often gives us particular
pleasure to be seen by the neighbours as we carry home bags from
fashionable (perhaps expensive) shops. Finally, conventional shopping
normally provides an opportunity to examine (or try on) goods, as well as
providing the immediate satisfaction of receiving the goods straight away.
All these aspects of shopping are extremely difficult to replicate online
and represent a formidable barrier for B2C e-business to overcome.
Nevertheless, B2C offers an attractive channel:
for those who are particularly cash rich and time poor
where travelling to the particular shop is very difficult
where the type of shopping is rarely pleasurable (e.g. groceries).
Reasons for consumer adoption

As Chaffey (2009) Chapter 1 explains, B2C companies need to be able
to innovate with new technologies to create a buying experience for
customers that will foster increased buying online (see also Riggins,
1999). In other words, companies need to generate an online value
proposition which doesnt cannibalise their offline channel; instead it
induces new customers to buy their goods and services.
Broadly speaking, value for customers can be created around what Chaffey
(2009) calls the Six Cs:
1. Content detailed content which has informational value that
supports the buying process (either online or offline).
2. Customisation companies need to find ways to tailor and
personalise their wares for each customer. This can be quite targeted
and also forms a part of marketing (see the next chapter of this subject
guide).
3. Community businesses can focus on the community around
products and services, where consumers can discuss the strengths of
the companies and their offerings as well any issues that might arise.
Many companies use blogs, wikis and other forums, including Twitter
(see Chapter 8 of this subject guide), to create a community but also as
a device to gather information on their customers and what they like
(or dont like).
4. Convenience one of the oldest but probably key arguments in
favour of online buying is the ability it gives consumers to choose, buy
and, in many cases, use products at any time the classic 24 7 365
availability of a service.
39
5. Choice online selling has opened up more possibilities for sellers to

differentiate themselves but it also gives more choice to consumers.
Tesco, and indeed other supermarkets, allows consumers to buy food
and drink online but at the same time also offers insurance, mobile
phone contracts, travel, etc.
6. Cost reduction companies often offer lower priced items online,
which is a strong mechanism for encouraging sales. We tend to take it
for granted now that items and services purchased online will be less
expensive than those bought offline.
Alongside creating value, companies must also keep in mind other factors
that influence online buying behaviour. We discuss these in the next section.
Consumer buying behaviour

Various factors either encourage or hinder consumer online buying. They
include:
Ease of use and responsiveness, including personalisation and the
attractiveness of the site. This is usually summarised as the buying
experience.
Trust, security and privacy this issue is particularly important in
e-business as surveys suggest that fears in this area more than
any other deter consumers from buying from websites. Because of
its importance we devote a whole chapter of this subject guide (see
Chapter 10) to security issues.
Product, price and branding.
Fulfilment the efficiency of distribution and the facilities for returning
unwanted goods.
Information quality information about the offerings needs to be
comprehensive, accurate, up-to-date and easily accessible.
Consumer characteristics of the consumer such as personality, culture,
risk aversion, lifestyle and inertia all impact on buying decisions.
It follows that websites need to be designed carefully if they are to achieve
significant sales. Lohse and Spiller (1998) relate the design of B2C
websites to that of conventional shops and this is a useful article to read.
In particular, usability is important if the website is difficult to navigate,
then customers will inevitably go elsewhere.
Website usability and design

Seminal work in the area of website usability was carried out by Jakob
Nielsen, who defines usability as a quality attribute that assesses
how easy user interfaces are to use. The word usability also refers to
methods for improving ease-of-use during the design process (Usability
101 1, Nielsen). The key issues of usability are as follows:
Usability is a design issue an attractive site is likely to gain
customers, while a poor site will damage a firms reputation and sales.
Design for website visitors/customers this implies that the company
knows the characteristics, needs and expectations of their customers.
The buying experience and website atmosphere the site should be easy to
use, without being dull. The use of graphics, videos and animation should
support the buying experience and not be a distraction. The limitations of
computer screens, including mobile phones, need to be considered.
40
www.useit.com/
alertbox/20030825.html
The web is not mass media, nor is it exactly personal contact it falls
somewhere in-between.
Design goals vary according to the context but may include:
Creating an impression consistent with the organisations desired
image, which could be youthful or well-established, exciting or secure,
zany or efficient, etc.
Allowing visitors to experience the site in different ways and at
different levels (e.g. it should cater for both regular customers and
first-time visitors).
Providing visitors with a meaningful, two-way (interactive)
communication (i.e. it should provide relevant information to visitors
but also obtain data about them for marketing purposes).
Sustaining visitor attention and encouraging return visits.
Offering easily accessible information about products and services and
how to use them.
Encouraging trust and loyalty.
To achieve the aim of increased sales, certain design guidelines are often
recommended. We sum them up here again:
ensure simple, fast access to information
provide simple, clear, consistent navigation
avoid jargon and excessive propaganda
acknowledge the need for multiple languages (including navigation) as
not everyone speaks English
avoid unpleasant colour combinations, too small text and irritating
pop-ups.
Design decisions typically imply trade-offs, usually between originality,
simplicity and functionality. For example, functionality (especially
excessive functionality) often implies complexity (the opposite of
simplicity), while originality (implying unfamiliarity) may not be simple or
particularly functional.
Chaffey (2009) Chapter 11 categorises website design under three
different forms: site, page and content design.
Site design and structure

This refers to the overall structure of a site. Chaffey (2009) discusses
site style, organisation and navigation schemes where style refers to the
personality of the site. If it is a formal message for a formal audience,
then the site should reflect the same attitude. Much of this sounds
like common sense, yet the internet is full of websites that are poorly
constructed, with little content and the wrong personality for the audience
and content. Site organisation refers to organising the content in
a clear manner which lends itself to some obvious categorisation for
instance, sorting product ranges alphabetically. Finally, site navigation
explains how users can navigate their way from one page to another (or
back again) in an easy flow. There are basically two approaches to creating
a flow: narrow and deep implies less information on each page but
provides links to other pages, while the broad and shallow approach
has fewer pages but each one contains a lot of content. This is a design
issue and each company needs to assess how best to help customers
navigate their website.
41
Page design
This refers to the layout of each page. Attention must be given to the
title, navigation and content. Chaffey (2009) explains that page elements,
the use of frames, resizing, consistency and printing are issues that the
designer needs to keep in mind when creating the e-business B2C website.
Content design
The key point here is never to include too much information on one page,
use hyperlinks to give the reader a choice about exploring content further
without unnecessarily crowding the page with too much content, and set
out content in small, readable chunks of text that can be scanned easily.
Any new website design should be prototyped and tested with real users,
just to evaluate their reactions. Ives and Piccoli (2003) demonstrate how
a good knowledge of users can inform website design, while Treiblmaier
(2007) discusses the evaluation of websites. Although there are many,
often fairly obvious, design guidelines (see Usability 101, Nielsen), it
must be remembered that artists break the rules. In other words,
exceptional website designers can and do fail to follow what appear to
be obvious guidelines and yet, through their design talents, they still
manage to produce exceptionally attractive and innovative designs (e.g.
www.agencywork.com.my/nokia2600; www.nexteinstein.org; and www.
adultswim.com/music/ghostlyswim/index.html)
Activity
Look up a few different B2C websites (perhaps include a supermarket) and try to find one
particular piece of information on each site. Then assess how many clicks it takes you to
find the answer, and also classify the site as narrow and deep or broad and shallow.
Try a simple question like What is the companys postal address? or something more
complicated like How many choices of a particular product (e.g. breakfast cereals) are
currently available?.
Case studies
The best way to become familiar with B2C is by getting to know the
companies and their websites. As the market is directed at us, the
consumers, this could not be easier. There are no passwords to worry
about and it is recommended that you spend some time just browsing
around B2C websites that interest you. As many of these companies have
quite a long history (in internet time), it is also very worthwhile reading
about how they started, the story of their growth and the particular value
propositions that they offer customers. These stories are well documented
in Chaffey (2009).
A good case to start with is Amazon.com. Here, in Case study 12.1,
Chaffey (2009) emphasises how Amazon makes extensive use of metrics
to drive their whole business. Remember also that Amazon is an excellent
example of long tail economics, the shift from mass markets to niche
markets (Chaffey, 2009, Chapter 8). Because the company does not have
to hold physical stocks of books, it can offer a vast catalogue of titles
(much larger than even the largest traditional bookshop) and previously
unprofitable transactions become profitable using e-business. Whereas
even a large conventional bookstore only offers 130,000 top titles, at
one point, one-third of Amazons book sales came from outside these
top 130,000. Note also how Amazon has branched out from books to
music, electronics, clothing, web services and even (in the USA) luxury
42
foodstuffs. Interestingly, Jeff Bezos, the founder of Amazon, said in an

interview some years ago that the secret of the companys success is not
the business model or the website but efficient inventory management.
Another pioneering B2C company is Dell Computers (Chaffey, 2009,
Case study 8.2), which offers customers a build-to-order service, so
that the computer is built according to the customers specification.
Dell manages this process highly efficiently, representing a triumph of
information over inventory. In an interview, Michael Dell attributed Dells
success to consistent execution (in other words, repeatedly getting it
right) through world-class manufacturing.
A sector that has been transformed by B2C is the travel industry
see Chaffey (2009) for case studies of Lastminute (Case study 2.2) and
easyJet (Case study 8.1). This transformation has been so successful that
it has been calculated that B2C accounts for more than half of the total US
travel market. Customers are increasingly happy to research their travel
plans online and make their own bookings, without any personal contact
with a traditional travel agent.
Another case study well worth reading is that of eBay (Chaffey, 2009,
Case Study 1.3), which is remarkable not just for the facilities it provides
consumers to sell unwanted goods, but also for the way it has extended
over the years from auctioning second-hand goods to selling new goods at
fixed prices. Today tens of thousands of small businesses in Europe rely on
eBay as a sales channel.
Activity
By searching their websites, discover and compare the mission statements for Amazon.
com, Dell Computers, easyJet and eBay. What are the respective value propositions of
these companies?
B2C failures
In addition to high-profile success stories, B2C has also been characterised
by business failures. Chaffey (2009) describes the problems of Boo.com
in Case study 5.3. Another failure was the US company Fingerhut (see
Phan et al., 2005 for a clear narration of the story), which had been a very
successful mail-order catalogue retailer since the 1950s. Part of its success
was due to its sophisticated use of IT, including extensive data mining and
database marketing. Its move into B2C e-business and credit cards in 1998
was welcomed by Fortune magazine, which regarded the company as
one of the ten companies that get it. Shortly afterwards it was acquired
by Federated Stores, a US chain, but then things started to go wrong.
Fingerhuts traditional customers were largely sub prime (low income)
and at the time they were not e-business users. Nor were they particularly
creditworthy, which affected their ability to use credit cards. At the same
time, Fingerhut lost control of its IT systems, such that IT failures began to
hit order fulfilment, peaking during the crucial retail period of Christmas
1999. The company lost trust and credibility, sales dropped and the
business closed down in 2002, although it was revived later.
Another interesting failure was UKeU, a UK e-learning initiative launched
in 2000. Most of the 50m investment was spent developing the software
for the learning platform and insufficient attention was paid to developing
a business strategy. This type of operation has high fixed costs, payable
up-front, and the failure to attract more than 900 students, against a
target of 5,600, saw the project scrapped.
43
B2C problems
Unproven business models
Any business has to have a reliable revenue stream and eventually to make
profits it took companies like Amazon a number of years before they
showed a profit. Investors will not wait forever.
Discount environment
Consumers expect discounts and bargains through B2C and in this
environment, large sales volumes and strict cost control are needed.
Cost-efficiency problems
B2C is not necessarily efficient and cost effective, compared to traditional
retail. Much depends upon the product market. Nowadays consumers
expect attractive websites, backed up by superior support and distribution
networks and these are not cheap. Hence, compared to the dot.com boom,
entry costs (and operating costs) are no longer low.
Theres not always a global market

Different countries have different cultures, preferences and regulations,
such that a product that is a best-seller in the West may be unacceptable
elsewhere. For example, alcohol is prohibited in many Muslim countries
and its transport across state borders is a problem in parts of the USA, as a
firm called wine.com found out to its cost.
Security and privacy overheads

B2C retailers have to be particularly careful to maintain high (and
expensive) levels of website security to prevent customer details (e.g.
credit card details) being accessed illegally.
Channel confusion and cannibalisation

As discussed above, B2C is a new channel and if it is merely cannibalising
customers from existing channels, it is unlikely to be successful.
Key success factors

With so many B2C websites, covering a multiplicity of different markets,
it is impossible to identify specific success factors, as these are highly
context dependent. Product and service markets vary considerably among
industries and regions of the world. However, there are a number of highlevel factors that do seem consistently important:
Innovation
In most cases, B2C is competing against traditional retail operations
and, in order to encourage customers to switch away from the familiar
traditional channels, the new B2C operation must offer something extra
and innovative. This could be the personalisation and reviews offered by
Amazon, the build-to-order of Dell or the convenience and discounts of
easyJet. In addition to these well-known cases, there are myriad smaller
companies, offering innovative solutions in highly niche markets, from
Chinese cosmetics to concert tickets and from violin repairs to virtual pets.
Understanding shoppers
44
It is essential, as we noted above, that B2C retailers build up a good

understanding of the different types of consumer (segmentation) and their
needs, expectations and purchase behaviour. Please see also the following
chapter of this subject guide on e-marketing.
Understanding the product and the industry

As we have argued, the success of B2C is highly context dependent
and it is essential that B2C retailers have a good understanding of the
products or services that they are offering. Some products are very easy
to individuate (e.g. a particular book has a title and an author), others
are much more difficult (e.g. potatoes). Products with well-known (and
well understood) features, such as electric kettles, are easier to sell at a
distance than innovative, highly novel products which the consumer will
really want to examine before buying. The latter is also the case with high
touch items such as clothing.
Consumers are usually happier buying very expensive products (e.g. cars)
through traditional channels with their personal touch, although they
often research the features of such products extensively on the web before
making a purchase. Where a purchase is time critical (e.g. medicine for
someone who is ill) or where the product is widely available on the high
street, it is difficult for B2C to compete.
As we have already remarked, where physical products are concerned,
B2C retailers have to worry about logistics (including inventory control,
distribution and returns) as much as their conventional counterparts.
Similarly, they need to understand the industry structure in terms of
dominant brands, competitors strategies and industry regulations
(especially in, say, the pharmaceutical industry). As we discussed
in Chapter 3 of this guide, e-business often leads to a widespread
restructuring of the industry in terms of disintermediation and
infomediation and B2C retailers need a good appreciation of such
structures and the changes taking place.
Understanding the technology

Consumers expect the website to be available 24 7 365 and any
extended downtime is likely to result in a significant loss of business.
Hence, B2C retailers need to be expert in all aspects of hardware and
software, especially in understanding the limitations and vulnerabilities of
particular components of their technical system.
Activity
The South London Museum of Art, a small local museum, has a website that only provides
basic information, such as opening hours and location. The director feels there must be a
way to use it to increase revenue. How would you approach this problem? What would
you advise her?
Conclusion
B2C e-business is growing and maturing; in industries like travel, this
has happened rapidly. Nevertheless, opportunities for innovation remain,
although many of these have taken on the flavour of web 2.0, social
networking and user-generated content (discussed in Chapter 8 of this
guide). Furthermore, growth can be unpredictable, as can be seen from
Amazons diversification away from books, eBays move into fixed-price
new goods and Googles transformation from a search engine into the
worlds largest advertising agency (see the following chapter of this
guide). This implies that B2C retailers need to be flexible and agile,
especially when the critical success factors are often hidden and may
reside more in logistics and manufacturing than IT (see the cases of
Amazon and Dell referred to above).
45

identify the business models and revenue models of individual B2C
companies, as a prelude to further analysis
analyse the revenue strategy issues that pertain to any given B2C
operation
identify the roles of website visitors to any particular site
analyse why some websites are successful in terms of consumer
adoption and purchases, while others are less successful
distinguish the quality of different websites in terms of their usability
from the perspective of consumers
advise B2C start-up companies concerning the factors that are
important for success in this highly competitive field.
Self-test questions
1. Why do you believe that business-to-consumer (B2C) e-business has
grown steadily in countries such as the UK? Illustrate your argument
with examples.
2. Companies engaged in business-to-consumer (B2C) e-business need
to understand shoppers, technology and their industry. Discuss with
examples.
3. In business-to-consumer (B2C) e-business the critical success factors
may be hidden and the growth path unpredictable. Discuss with
examples.
46

Aims of the chapter
The aims of this chapter are to introduce the basics of marketing before
exploring the contribution that e-business can make to marketing. In doing
so we consider some ongoing issues with e-business marketing that make it
an especially interesting area to study. Key concepts in this chapter include:
customer segmentation
customer relationship management (CRM)
advertising and branding
the contribution of e-business to marketing
new media marketing
interactivity
personalisation and customisation
multi-channel integration
dynamic pricing
behavioural profiling and privacy concerns.
Learning outcomes
discuss the basic concepts of marketing including segmentation, the
customer lifecycle, customer relationship management, and advertising
and branding
analyse a marketing mix using the 4 Ps framework
discuss the balance between CRM technology and strategy
identify the techniques used in new media marketing
recognise the role played by search engines in marketing and advertising
recognise the potential contributions from affiliate marketing and viral
marketing
explain the problems of integrating multiple marketing, sales and
distribution channels
recognise the role of e-business in dynamic pricing
discuss the potential benefits and privacy dangers of consumer profiling.
Essential reading
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapters 8 and 9.
Further reading
Rigby, D.K., F.F. Reichheld and P. Schefter Avoid the four perils of CRM,
Harvard Business Review 80(2) 2002, pp.10109.
Rust, R.T., V.A. Zeithaml and K.N. Lemon Customer-centered brand
management, Harvard Business Review 82(9) 2004, pp.11018.
47

Wang, H., M.K.O. Lee and C. Wang Consumer privacy concerns about internet
marketing, Communications of the ACM 41(3) 1998, pp.6370.
Watson, R.T., G.M. Zinkhan and L.F. Pitt Integrated internet marketing,
Communications of the ACM 43(6) 2000, pp.97102.
Watts, D.J. and J. Peretti Viral marketing for the real world, Harvard Business
Review May 2007, pp.2223.
Up-to-date information on marketing from both the academic and
practitioner perspectives is available at the following websites:
The UK Chartered Institute of Marketing: www.cim.co.uk/home.aspx
Marketing research resources from the Wharton School of the
University of Pennsylvania: http://knowledge.wharton.upenn.edu/
category.cfm?cid=4
A video of a lecture on e-marketing and new business models from the
Tepper School of Business, Carnegie Mellon University: www.tepper.
cmu.edu/alumni/lifelong-learning/speaker-presentations/e-marketingand-new-business-models/index.aspx
Introduction to marketing
The discipline of marketing is a huge area of study, but it is essential that
you grasp the basic concepts in order to appreciate the increasing role that
e-business is playing in an area that is key to competitive advantage in
many industries and product markets.
If you input the term marketing into any search engine, you will see that
it has many definitions. There are commonalities and differences among
all of them. We find the definition provided by the UKs Chartered Institute
of Marketing helpful: Marketing is the management process responsible
for identifying, anticipating and satisfying customer requirements
profitably.
This definition shows us that the customer is central to business objectives,
with the understanding, of course, that profitability is also important.
However, as with all definitions, there are alternatives. Nonetheless,
marketing is a set of customer-oriented strategies and practices.
As with most aspects of business, marketing pre-existed what we now refer
to as e-business. So it is important to explore briefly the fundamentals
of traditional marketing before looking at how e-business changes it.
Here we focus on a few basic concepts and models, including customer
segmentation, the 4 Ps, the customer lifecycle, and customer relationship
management.
Customer segmentation and the 4 Ps: product, price,

place and promotion
A key concept to marketing is customer segmentation. The idea is that
businesses divide customers into categories according to characteristics
that they share (such as where they live, their values and lifestyles, their
brand loyalty), and in turn market products or services based on those
subdivisions. Segmentation is made possible through market research
whereby companies collect data on customers through surveys, focus
groups or by other means. With this data, companies can use the so-called
4 Ps to target their product or service to certain market segments. The 4
Ps aim to address the following questions:
48
Product: How do we design the product or service to satisfy the

customers needs and wants?
Price: How do we price the product or service based on the customers
ability to pay, while also taking into account the profit margins for
wholesalers and retailers?
Placement: How should the product or service make its way to the
customer? That is, where should it be purchased?
Promotion: How do we encourage the customer to purchase the
product or service (e.g., advertising, sales promotions)?
Note that segmentation is about more than just advertising, as it can
also inform the processes of product innovation, pricing and selecting
distribution channels. For example, if it is determined that adventureseeking, young professional men are especially keen on a new sporting
trend, a company might develop a new product for this market segment
and price it based on their purchasing power.
Sometimes marketers refer to the 4 Ps as the marketing mix.
While this is very helpful for understanding the fundamentals of the
marketing process, the 4 Ps have their limitations. In particular, they
have been criticised for not being compatible with longer term customer
relationships. This is where the idea of managing the customer
relationship proves important.
The customer lifecycle

Chaffey (2009) Chapter 9 introduces us to the customer lifecycle. This
model emphasises the importance of initiating and building relationships
with customers over the long term. There are four main stages to the
lifecycle:
Customer selection: This involves deciding on the types of
customers to target (e.g. middle-aged, middle-income women), which
ties in directly with market segmentation. Selection might also involve
dissuading customers who are unlikely to be profitable.
Customer acquisition: This is about forming relationships with new
customers and involves appropriate marketing communications, both
offline and online.
Customer retention: This includes the different strategies (e.g.
loyalty discounts) a business employs to keep customers from
discontinuing the use of a certain product or service or, even worse,
switching to a competitors offering.
Customer extension: This refers to extending the range of products
that customers buy. The objective is to intensify the business relationship
by providing additional offerings. For example, a company that sells soap
to customers might entice them to try their new deodorant.
Customer relationship management

The customer lifecycle model is part of a larger approach to marketing
referred to as customer relationship management (CRM). Despite
appearances, when customers interact with a business, they are actually
dealing with a number of employees who occupy different roles and are
often based in different departments within the company. The point of
CRM, then, is to unify these policies, processes and strategies in order to
achieve better customer service.
49
Information technology plays an important role in attracting new customers,

and retaining existing ones, but CRM is more than just a software solution. It
is an approach to doing business that is extended and sometimes intensified
with the use of information technology. Some prefer to call it a strategy.
Chaffey (2009) Chapter 9 describes the different marketing applications
of CRM as:
automating the sales force
managing customer service efforts
managing sales processes
managing marketing campaigns
analysis.
There are many case studies that show how CRM is often done poorly
by companies, resulting in high costs or elusive benefits. Rigby et al.
(2002) discuss the four perils of CRM. When it works well, CRM allows
companies to gather customer data responsively, identify the most valuable
customers, and increase customer loyalty through customisation. However,
things often go wrong. These perils can be summarised as follows:
Implementing CRM before there is a customer strategy in place
companies often implement CRM without first completing a segmentation
analysis or determining their marketing goals, which is like trying to build
a house without engineering measures or an architectural plan.
Rolling out CRM before changing the organisation to match an
organisation that wants to do CRM well must first be interested in
actually relating to customers.
Assuming that more CRM technology is better CRM does not have to
be technology-intensive. It can also be achieved by other means, such
as motivating employees to care more about customers.
Stalking, not wooing, customers excessive and aggressive marketing
communications to current or potential customers might inadvertently
turn them away from your brand, product or service.
We will return to a discussion of how best to use information technology to
achieve e-business marketing goals in the next section. For now it is important
to grasp that, for CRM to be successful, companies need to consider not just
technological issues, but also organisational, social and strategic ones.
Case study
In Chapter 9 of Chaffey (2009), Case study 9.5 discusses the CRM strategy
of a company called Toptable, which is an online service for booking
restaurants. Originally, Toptable relied on sending undifferentiated, mass
emails to their consumers. However, over time this strategy became less
and less effective. Recognising the limitations of this approach to CRM,
Toptable partnered with a marketing company in order to improve their
communications and customer relations.
Read through the case study and explore the four key areas that Toptable
and its partner focused on. How did they target defectors and lookers?
What problems did Toptable face in successfully delivering email messages
to potential clients, and how did their new partner overcome these
problems? Think critically about these issues, and then consider: in what
ways might their strategy be likened to spam operations?
50
Advertising and branding

Perhaps the most popular aspect of marketing is advertising, which
involves attracting and sustaining customers attention in order to
persuade them to purchase a product or service.
Central to advertising is the use of brands. Chaffey (2009) tells us that
a brand is the sum of characteristics of a product or service perceived by
a user (p.464). Branding, then, is the process of creating and evolving
successful brands. Brands depend on customers psychological affinity
towards certain goods or services, and are much more than names or
symbols. Importantly, the value of a brand is highly individualistic
some people may empathise with a brand while others are repulsed by
it. Brand experience is built up through an individuals interaction
with the brand, either through experience with the product or service or
through advertising and public relations. Brands are typically developed
to promise to fulfil some form of emotional need in the consumer. Thus,
if you are a student in your mid-twenties choosing a holiday, you might
select a brand that promises fun and adventure. Such a brand would not
attract a retiree looking for a private liver transplant.
This relationship between brands and customers is an important one that
marketers often misjudge. Ultimately it is the customer that counts and
the brand itself is secondary. The aim of marketing is to win and retain
customers, not to maintain a brand for its own sake: brands exist to
serve customers, not the other way around. Brands can come and go, but
customers must remain for a business to stay viable. This point led Rust
et al. (2004) to formulate seven directives for customer-centric brand
management:
Decisions about customer relationships must come before brand
decisions.
Brands should be built around customer segments, not vice versa.
Brands should be as narrow as possible but still economically feasible
IT makes customer segmentation easier.
Plan brand extensions based on customer needs, not component
similarities.
Facilitate the switching by customers to other brands within the same
company.
If something catastrophic happens to the brand, drop it and re-brand.
Reconsider how the company measures brand equity the value of a
brand varies dramatically from customer to customer IT may
have a role to play here.
Through the careful design and functionality of websites and the amount
and type of product information provided, e-business can add considerably
to brand awareness and brand experience.
Activity
Choose what you consider to be one cool brand and one uncool brand for clothing.
What are your reasons for choosing them? Are these subjective reasons? What role does
experience play? How does the website support the offline brand experience?
51
The e-business contribution to marketing

Until now we have been exploring the conceptual dimensions of
marketing, without focusing too much on e-business. Indeed, most if
not all of the practices and strategies we discussed above are relevant
in both the offline and online worlds. In this section we look specifically
at what e-business and information technology can offer to marketing.
Chaffey (2009) refers to this topic as e-marketing, which is a term that
nicely captures marketing on various e-business platforms such as the
internet and mobile phone networks.
Chaffey (2009) argues that the single key objective of an e-marketing
plan is online revenue contribution, where this is an assessment
of the direct contribution of the internet or other digital media to sales,
usually expressed as a percentage of overall sales revenue (p.430). Here
the fundamental question is: what effect do a companys online activities
have on overall sales? In other words, what is the objective for moving
the marketing strategy online? Of course, a companys online revenue
contribution objectives will depend on a number of factors, including:
the product or service they offer
the market sector they are in
the digital channel they want to exploit (e.g. the internet, mobile
telephony or interactive television).
For example, a fast-moving consumer goods company that sells ice cream
cannot expect high direct online revenue because it is physically impossible
to enjoy ice cream over the internet or through a mobile phone, but it
can use these platforms to promote its goods by offering discounts or
information on the nutritional value of their product (assuming the ice
cream is of the fat-free variety!). In contrast, the direct online revenue of
digital goods such as music is potentially much higher because the product
can be delivered online. However, the digital nature of such goods also
permits their cheap and unauthorised replication, as the film and music
industries have learned the hard way (see Chapter 11 of this subject guide).
New media marketing

That brings us to a discussion of the main differences between marketing
offline and online. A handy way of thinking about these differences is in
terms of the 6 Is of e-marketing.
Interactivity: A key characteristic of the internet is its interactivity.
Instead of a company simply pushing a message to a customer,
which represents the old media, broadcast way of marketing (think
traditional television), customers can now interact with companies
online by seeking out information themselves. This distinction is also
known as push media versus pull media. Online, the user most
often seeks out the information s/he is interested in. The potential for
new interactions opens up new marketing opportunities, but it also
introduces new problems. For one, marketers have less control over
their messages than in traditional media. Also note that not everything
online is pulled. Email, for example, is an online push medium.
Intelligence: The internet and other new media facilitate new ways
of collecting data on customer preferences and perceptions. No longer
do companies have to rely on traditional surveys for their market
research, as new media offer new ways to understand market segments
52
in much greater detail. For example, software can track a customers

progress around a website (i.e. which products they consider as well as
which ones they purchase) and, at the network level, which websites
they visit. Such behavioural profiling raises ethical questions, to which
we return in the final section of this chapter.
Individualisation: The interactivity of the internet and other new
media also permits greater personalisation and customisation of
marketing communications. For example, Amazon is famous for its
highly customised recommendation system (see Case study 12.1 in
Chaffey, 2009).
Integration: The internet (and other new media) enables the
integration of various marketing communication techniques in at
least two ways. It complements other marketing channels for product
promotion and it facilitates customer service. Note how the UK
supermarket Tesco (see the case study in Chaffey, Chapter 9) integrates
its online offering with its offline operations and customer loyalty
scheme. This case also shows how the company uses CRM techniques
to increase sales. However, as we discuss below, multi-channel
integration is a complex problem.
Industry restructuring: This has to do with the issue of
disintermediation and re-intermediation discussed in Chapter 3 of
this subject guide. Marketers have to consider how to represent the
companys brand and products among the various intermediaries.
Independence of location: New media increase the reach of
companies and their communications, and so companies need to
review how their relationships with various local agents are affected by
the globalisation of marketing efforts.
Personalisation and mass customisation

There is much promise in the new medias capacity to deliver personalised
and customised information and marketing communications to
current and potential customers. While the terms personalisation and
customisation are often used interchangeably, there is a slight difference
in meaning. Personalisation involves the individualisation of
content, while mass customisation focuses on tailoring marketing
content at the group level. A good example of mass customisation is
Amazons recommendation system whereby the merchant recommends
similar products according to what customers in the same marketing
segment have bought. This approach to marketing is referred to as
collaborative filtering and is also known as recommendation
marketing.
Personalisation can use different variables to tailor content, including
customers preferences, time or date, upcoming events or users locations.
For example, many portals allow users to personalise their home pages to
include information such as the local weather, stock prices, the latest news,
the scores of their favourite sports teams, and so on. However, as Chaffey
(2009) notes, there is a negative side to personalisation. For one, it can be
costly as dynamic content requires database integration and specialised
software. Second, users often must log-in to enjoy personalised content.
This can be a problem for different reasons. The most obvious one is that
we all forget passwords and, more significantly, new users are often put off
by having to register (and provide lots of personal information) to access
new services.
53
Search engine optimisation

One very interesting component of internet marketing is what is known
as search engine optimisation. Search engines such as Google and
Yahoo are the gatekeepers to most of the information we seek online.
When we need to find something on the internet we almost always do
so by searching using certain keywords. If the first page or two of results
do not include the information we desire, then we usually try a different
set of keywords. Indeed, it is a truism that no one looks beyond the first
1020 search results any more!
Marketers are aware of this and hence rely on search engine optimisation. It
is a structured e-marketing approach for improving the position of a company
or its products in search engine results listings. Search engines rely on what
are known as algorithms to decide which web pages are relevant to certain
search terms, and the order in which they should be ranked. These algorithms
analyse factors such as the frequency and positioning of certain phrases on a
web page, the quantity and quality of links to the site, the content of certain
HTML tags and meta-tags, and the text that accompanies images. A technical
exploration of how all of this works is beyond the scope of this chapter but,
suffice to say that, knowing how these algorithms make their decisions
can pay off for websites, which is why search engines such as Google keep
the details secret. When search engines do adjust their algorithms and a
company falls from the first couple pages of search results, it can result in
huge losses for those affected, so much so that you can now find companies
that specialise in designing sites so that search engine results are optimised.
Search engine optimisation can be seen as a cat-and-mouse game between
search engines and marketers. The former try to prevent the spamming of
search result listings while the latter do whatever they can to improve their
company or products search results.
Affiliate marketing
Another way in which businesses can increase their revenue online is
through affiliate marketing, which is a model made possible by the
tracking permitted by internet technology. This is how it works: you (the
customer) visit what is referred to as an affiliate site. If the affiliate can
persuade you to click an advertisement which links to the merchants site
and you purchase a product, then the affiliate will be paid a commission
by the merchant. Actually, some merchants will even pay affiliates if the
sale isnt finalised. They sometimes pay for the click-through because
it can generate future leads. As all this activity can be tracked online,
the merchant now has a better idea of how effective its advertising is,
especially compared to the offline world where marketers have wondered
for decades about the effectiveness of advertising.
Online advertising
From the early days of the dot.com boom, advertising has been seen as
an important revenue stream for websites. This was usually in the form of
banner or pop-up adverts, on which many of the more reckless ventures
of the time depended for revenue. However, unless the site has a large
number of visitors (e.g. portals like Yahoo) or enough visitors from a specific
marketing segment or niche (e.g. a site that specialises in mountaineering
information), few advertisers will be interested. Furthermore, as the novelty
wore off, users began to be irritated by the adverts and click-through rates
fell from 2 per cent in the mid-1990s to 0.3 per cent a decade later.
54
However, Googles AdWords service (see the case study in Chapter 3 of

Chaffey, 2009) revolutionised advertising, such that it is frequently referred
to as the worlds most valuable online advertising agency masquerading as
a search engine. Advertisers bid (handsomely) to appear on the (right-hand
side of) screens of information retrieved as the result of a particular keyword
search and then payment is based on pay per click as the consumer clicks
through to the advertisers website. This is much more focused advertising,
and much more likely to lead to a sale, than broadcast advertising on
television. The latter is criticised as sending messages to a large, diverse
number of people, most of whom are not concentrating and have no interest
in the product or the advertiser. In contrast, AdWords provides advertisers
with sales opportunities where the consumer has indicated his likely
intention to buy by clicking twice: once on the keyword search itself and
once on the link from Google to the advertisers site. The success of AdWords
can be seen in the fact that advertising currently makes up at least 97 per
cent of Googles revenue of around $20 billion (2008). Many companies
have switched part of their TV advertising budget to AdWords, causing pain
in the commercial television industry. In 2009, the UK advertising spend on
internet advertising exceeded that on television advertising for the first time.
Although the internet is considered to be the most measurable advertising
medium, click-throughs dont tell the whole story about the impact
of online advertising. We often treat the offline and online worlds
as exclusive, but they are not: online advertising can also stimulate
offline sales. Furthermore, many people use the internet as a source of
information for comparison before buying the product or service offline.
Much of that information is marketing content.
Viral marketing
Another form of e-marketing that is enabled by the internet is called viral
marketing, which relies on pre-existing social networks to increase brand
awareness or sales through self-replicating viral processes. This is basically old
school, word-of-mouth communication enhanced by the network effects of
the internet and related new media. The process is called viral as an analogy
to how viruses spread during epidemics. Recently there have been some very
successful viral marketing campaigns, which often rely on online video clips.
The main idea of viral marketing is that an advertisement or other
marketing content spreads from user to user so that it reproduces
exponentially (see Watts and Peretti, 2007, for a detailed discussion).
The marketing agency does not steer the spread of the message, but
rather relies on users to do the work. Many viral marketing campaigns
are supplemented with other forms of marketing communications such as
traditional public relations and advertising.
As with most aspects of marketing, there is a downside to viral marketing
as well. For one, it has proved difficult to create successful viral concepts.
Some argue that it is merely a fad. There is also a risk that the brand may be
damaged if unsolicited messages run amuck. There have also been cases of
successful viral marketing campaigns that were actually ironic in origin. Take
the example of the Three Wolf Moon T-shirt: the shirt itself is not particularly
stylish and has a reputation for being worn by rural people in the USA
(rednecks), but after a few users jokingly left positive reviews for the shirt on
Amazon that spread virally around the internet, sales increased by 2,300 per
cent over a few weeks in 2009. At one point the shirt was the top-selling item
in the Amazon clothing store. If youre interested in seeing the t-shirt yourself,
follow this link: http://personal.lse.ac.uk/martinak/wolf_tee.jpg
55
However, the company that designs the shirts was not enthusiastic about
the user comments left on Amazon. These sorts of comedy reviews are
becoming increasingly common. This issue is an interesting one because
it shows that marketing is very much a social phenomenon and that firms
cannot control what is said about their brands or products.
Activity
Search online for information on a recent viral marketing campaign. Try to identify how
much the campaign cost the sponsoring company, how the message was spread, what
media were used (e.g. video, funny image, etc.) and what sites were involved. Was
the campaign deemed successful or unsuccessful? Why? Were there any unexpected
problems with the campaign?
At this juncture we would like to bring your attention to Table 9.3 in
Chaffey (2009), which summarises the strengths and weaknesses of
the various new media marketing channels, including search engine
optimisation, affiliate marketing and viral marketing as well as many
others.
Multi-channel integration
With all these different ways of marketing, using both offline and online
channels, and targeting newer and more specific customer segments,
comes what has been called the proliferation challenge. As well as the
various marketing techniques, marketers often use a variety of channels,
including text-messaging and telephone sales/call centres. The vast
amount of customer information that has become available has led to
an increasing number of customer segments, calling forth additional
brands and products. With the advent of web 2.0, in the shape of social
networking sites, blogs, wikis and Twitter (see Chapter 8 of this subject
guide), the complexity of the problem has mushroomed.
Interm ediary
S oc ial m edia
Com pany
Email
T ex t m es s age
T elephone
P os t
P ers on
Figure 5.1 Multi-channel marketing
56
Custom er
The result is a major headache for marketing managers who, faced with
a bewildering choice, must devise a marketing strategy that is effective
but stays within budget and is consistent across channels (see Figure
5.1). For example, increased spending on AdWords implies less spending
on TV advertising, which may make sense for some products (e.g. digital
cameras) but not for others (e.g. washing powder). Consistency includes
product descriptions and prices, except perhaps where channels can be
sufficiently differentiated and incentives or constraints can be applied. For
example, one retailer with excellent distribution and warehousing facilities
but limited showrooms may focus on online price promotions whereas
another, which wants to increase footfall in their stores but suffers from
poor logistics, will choose the opposite strategy.
As discussed in the case study on easyJet in Chaffey (2009) Chapter 8,
while the company sells 98 per cent of its tickets online, it still uses other
channels (e.g. newspapers) for advertising. The case study on Dell in the
same chapter discusses how the company uses various media to market
its computers. Watson et al. (2000) talk further about integrated internet
marketing.
Dynamic pricing
What is the maximum price you are willing to pay for your favourite
shampoo? How valuable is that good to you? These are questions that
companies interested in dynamic pricing ask. Unlike fixed pricing, with
which we are all familiar, dynamic pricing is the dynamic adjustment of
prices depending on the value that customers assign to the good. Advances
in information technology make this approach to marketing much more
feasible than in the past, as companies require access to lots of information
about customer preferences and values as well as demand levels for it to
work.
In a sense, dynamic pricing isnt new. Price discrimination has been
around for decades, if not centuries. Movie theatres, buses, trains, airlines
and even amusement parks and restaurants offer different prices to
children, students and senior citizens. Indeed, airlines have grown very
sophisticated in their price differentiation schemes, segmenting business
travellers from non-business travellers, who are more flexible in their
itineraries and more price-sensitive. Even without e-business, there has
been an element of dynamic pricing in the shape of cheap standby tickets
for the theatre or cinema and end-of-season fashion sales.
The internet has changed the game, however. It facilitates the simple and
rapid transformation of list prices while allowing companies to gather
and analyse customer data quickly. For example, airlines operate highly
sophisticated yield management systems that price tickets for a particular
flight based on the sales so far, such that if the flight is half-empty the
price drops and if it is nearly full the price increases. This access to data
on actual customer behaviour enables companies to micro-manage their
marketing and pricing strategies to the extent that every sales offer can
be customised. Some argue that its not just companies that benefit from
these technologies, but also customers. The emergence of shopping
comparison websites (e.g. www.kelkoo.com) and shopping bots used to
track competitive prices can empower customers to combat the potentially
exploitative practices of dynamic pricing. Indeed, as a relatively recent
pricing innovation, dynamic pricing opens up certain ethical and legal
questions that will surely be debated in the coming years.
57
Activity
Consider a product that is subject to dynamic pricing (e.g. airline seats, fashion clothes)
and outline the costs and benefits of the practice for both the seller and the buyer. Does
dynamic pricing change the behaviour of buyers? Under what circumstances might it not
change their behaviour?
Consumer profiling and privacy concerns

There are few things more irritating to consumers than to be overwhelmed
by irrelevant marketing communications, and these constitute much
of what we term spam email. Furthermore, many of us appreciate the
personalisation offered by websites such as Amazon that remember the
books we have already bought and offer us similar ones the next time we
log on, rather than insisting that we sift through endless lists of irrelevant
titles. As noted above, such personalisation and segmentation is either
based on information that we provide to sellers or as a result of them
tracking our purchases and browsing behaviour. This consumer profiling
allows sellers to focus their marketing efforts and is widely seen as being
very effective in increasing sales. More recently, software (e.g. Phorm)
is appearing that can be mounted on the network computers of internet
service providers (ISPs) that can track the websites that individuals have
visited. This information is potentially valuable as it further enhances
the profiles of individual consumers maintained by sellers and hence is
potentially a valuable revenue source for ISPs.
However, how much personal information are you willing to give to
companies online in order to enjoy personalised goods and services? Is
there a point beyond which you would feel uncomfortable disclosing
certain information? Furthermore, should there be legal limits to how
much information companies can collect on users, especially information
collected without their knowledge? These are important questions that
scholars are currently grappling with see Wang et al. (1998) for a clear,
if slightly outdated, discussion of the issues. As more and more companies
collect information about our online habits and shopping histories, they
are able to construct rich profiles about us. What does this mean for
personal privacy and for our conceptions of ourselves?
Activity
Research online how Amazons recommendation engine works. Based on your findings,
critically analyse the privacy issues involved in the profiling of customers. How much does
Amazon know about its users and how might this information be misused or abused?
Can you imagine a world in which every organisation we do business with has a similar
system in place? What happens to the notion of free choice in a world where our tastes
and desires are continually predicted by companies trying to sell us products?
Conclusion
Marketing is a fundamental part of most businesses and, as markets
become more competitive, firms are becoming more customer-centric. As a
marketing channel, e-business and e-marketing are becoming increasingly
important through techniques such as personalisation, affiliate marketing
and viral marketing. Meanwhile, Google has revolutionised advertising
through its AdWords service. Thus, e-business and new media have
contributed hugely to modern marketing and much e-business activity falls
58
under the heading of marketing. As discussed in Chapter 8 of this subject

guide, the opportunities are becoming more sophisticated through web
2.0 offerings. The only clouds on the horizon are the ability of companies
to integrate the various channels and techniques and also the threats to
personal privacy that e-marketing may represent.

discuss the basic concepts of marketing including segmentation, the
customer lifecycle, customer relationship management, and advertising
and branding
analyse a marketing mix using the 4 Ps framework
discuss the balance between CRM technology and strategy
identify the techniques used in new media marketing
recognise the role played by search engines in marketing and
advertising
recognise the potential contributions from affiliate marketing and viral
marketing
explain the problems of integrating multiple marketing, sales and
distribution channels
recognise the role of e-business in dynamic pricing
discuss the potential benefits and privacy dangers of behavioural
profiling.
Self-test questions
1. What is customer segmentation? How does e-marketing contribute to
segmentation? Justify your answer using examples.
2. Why is customer relationship management important? How is
e-marketing used within customer relationship management? What are
the dangers of customer relationship management?
3. What is viral marketing? What are the benefits and dangers for
companies intending to use viral marketing as part of a conventional
marketing campaign?
59
Notes
60
Chapter 6: Business-to-business (B2B) models and strategies
Chapter 6: Business-to-business (B2B)

models and strategies
Aims of the chapter
The aims of this chapter are to introduce the fundamental aspects of
business-to-business (B2B) e-business systems; to distinguish between
the different forms of B2B; to recognise the strategic implications
of the different forms; and to introduce the underlying concepts of
e-procurement. Key concepts are:
B2B structures
key attributes of e-marketplaces
e-procurement
benefits of B2B systems and e-procurement
e-procurement methods.
Learning outcomes
distinguish between B2C and B2B e-business systems
explain how B2B and B2C systems overlap in certain cases
discuss the strategies behind B2B systems
explain how e-business technology supports B2B systems
explain the basic concepts behind e-procurement
apply B2B models to real world marketplaces.
Essential reading
Riggins, F. J. and S. Mitra An e-valuation framework for developing netenabled business metrics through functionality interaction, Journal
of Organizational Computing and Electronic Commerce 17(2) 2007,
pp.175203.
Further reading
13(1) 1997, pp.10723.
Porter, M.E. and E.V. Millar How information gives you competitive advantage,
Presutti, W.D. Supply management and e-procurement: creating value added
in the supply chain, Industrial Marketing Management 32(3) 2003,
pp.21926.
Turban, E., J. Lee, D. King, T. Peng Liang and D. Turban Electronic commerce:
a managerial perspective. (Upper Saddle River, NJ; London: Pearson
Education, 2009) sixth edition [ISBN 9780137034659 Chapter 5.
61
Forbes.com has useful information on B2B markets in various industry
sectors, which you can find at www.forbes.com/bow/b2b/main.jhtml
Practitioner-oriented articles on procurement can be found on the
following websites:
www.ft.com/multimedia: mostly items related to current business news
www.cips.org: the UKs Chartered Institute of Purchasing and Supply is
the professional organisation that deals with procurement and as such
is a good up-to-date source
www.atkearneypas.com/knowledge/articles.html: a US consultancy
that offers articles and research papers on procurement.
Introduction
Business-to-business (B2B) e-commerce involves the sale of goods and
services between businesses. B2B covers a spectrum of applications that
enable an enterprise or business to form electronic relationships with their
distributors, suppliers and other partners. Examples of B2B e-commerce
include websites such as alibaba.com, mySAP.com and ariba.com
B2B strategies are largely of two types:
Application of IT to pre-existing relationships This is represented
by B2B developments designed to reduce the costs of performing existing
business transactions. In this case, ICTs support existing economic
relationships. They enable a company to reduce the costs of doing business
and hence increase the volume of business possible and its profitability.
Creation of new marketplaces by using IT support systems
Here ICTs are designed to create business transactions which did not exist
before. In this case they create a new economic environment, often called a
marketplace. By exploiting the power of ICTs in distributing, managing and
sharing information, a marketplace can make possible sustainable economic
relationships which could not have been coordinated without the use of ICT.
The crucial point about B2B is that it relies on the internet and other
networking technologies to either sustain or enable economic relationships
between business organisations. Since these technologies increase the
total amount of information, the upshot is that they normally reduce
the search costs associated with the identification of the parties with
which one wishes to conduct the transaction. Therefore, they slash the
transaction costs and lead to a more intensive use of electronic markets
rather than electronic hierarchies (see Chapter 3 of this subject guide). In
other words, B2B may be viewed as the result of the wide adoption of the
internet and other ICT infrastructures which, by reducing the transaction
costs, make electronic transactions more efficient than those conducted in
the physical market (such a claim is valid, yet we know from Picot et al.
(1997) that it is just as possible to use ICTs to reduce transparency and
thus increase transaction costs see Chapter 3 for more details).
You may also conceptualise the implementation of B2B as a process
aimed at changing the organisation of exchange processes. B2B thus
decouples the exchange of products from the business transaction that
defines the contractual agreements which, in turn, define the details of the
transaction. In traditional transactions, suppliers and buyers had to meet
in the same place and at the same time in order to conduct the exchange.
B2B marketplaces operate as virtual marketplaces where suppliers are
62
connected to buyers through communication networks that allow for faster

and more efficient information flows, and products actually move from the
seller to the buyer only after the online transactions are completed.
Online transactions are more efficient and less time consuming than offline
ones because ICTs support many activities needed to make the exchange
possible. ICTs in fact allow more information to be communicated in the
same amount of time, at much lower costs, reducing the time and costs borne
by the businesses involved in the exchange. All the details about products,
information about buyers and sellers, and specifications of price, time of
delivery, etc., can easily be accessed and exchanged, reducing the costs
and time involved in setting up contracts (again see Picot et al., 1997, for
a critique of such statements). Similarly, ICTs allow many potential buyers
and sellers of a given good to be matched in a more efficient and effective
way, facilitating more efficient brokerage between buyers and sellers. There
is more information available about possible buyers and sellers. ICTs make it
easier to extend the boundaries of a traditional market of buyers and sellers.
B2Bs are by definition global; there are no formal boundaries restricting those
markets that sellers or buyers have access to. This makes the use of electronic
marketplaces more convenient and explains the proliferation of B2B.
B2B structures
Looking at the way in which electronic marketplaces are organised
we can identify three main B2B marketplace orientations:
supplier oriented market
buyer oriented market
intermediary oriented market.
The orientation of the marketplace is normally determined by
the organisation (or organisations) that finance the investment in
implementing and running the technological platform which supports the
B2B marketplace (see Chaffey, 2009, Chapter 2).
We have to keep in mind that an investment in setting up electronic links
is normally justified in financial terms by the possibility of modifying the
market structure to a companys advantage (Porter and Millar, 1985). It
is, in fact, very expensive and demanding to implement and maintain a
B2B marketplace and these costs are only justifiable if they are generating
economic advantages for the company. Thus, the different orientations
of B2B marketplaces have to be examined in the light of the financial
objectives of their backers.
In the case of supplier oriented marketplaces, the suppliers of
the goods invest in ICT to create new business opportunities. Such
marketplaces are associated with large powerful suppliers like Dell.
For more on how Dell provides a supplier oriented marketplace, please
see Chaffey (2009) Chapter 5. In this case, the investment is made to
create a marketplace which is structurally very similar to traditional B2C
marketplaces (see Chapter 4 of this subject guide).
Firms invest in ICT to facilitate the purchase of their goods by existing
buyers, and to make it easier for potential buyers to find their products.
In so doing, they try to exploit the potential provided by ICT to reduce
search, contracting and control costs (for their own goods and services by
others) and therefore to create a more efficient market which, by reducing
transaction costs, is generating more revenue for them (examples include
Cisco and Dell).
63
Buyer 1
Buyer 2
Supplier
Buyer 3
Suppliers
products
catalogue
Customers
order
information
Figure 6.1: B2B: supplier oriented marketplace
Firms invest in creating buyer oriented marketplaces to reduce their

procurement costs. Buyers invest in ICT to create a procurement platform
which makes it easier for potential suppliers to provide what the firm
needs.
Supplier 1
Supplier 2
Buyer
Supplier 3
Buyers
products
catalogue (RFQ)
Suppliers
bid
information
Figure 6.2: B2B: buyer oriented marketplace
In this case, ICT is implemented to reduce the dependency of firms on

their suppliers by increasing the potential number of suppliers they can
call upon. By reducing the search, contracting and control costs of the
procurement procedure, firms are able to find more potential suppliers.
An increased number of suppliers leads to a more competitive market.
The different suppliers compete to win the procurement contract. More
competition between suppliers generates better business opportunities
for buyers which justify the costs they face to maintain the electronic
marketplace.
64
Given the nature of these marketplaces, only firms which have large
procurement needs can invest in these B2B platforms. In fact, only large
procurement volumes can justify the costs of running such platforms and
generating such advantages (see, as an example, GE Lightnings Trading
Process Network (TPN) (Presutti, 2003)).
Intermediary oriented marketplaces are where a third party
invests in ICT to create a neutral marketplace where buyers and sellers can
trade.
Buyer 1
Buyer 2
Supplier 1
Supplier 2
Third Party
Supplier 3
Buyer 3
Customers
order
information
Shared
product
catalogues
Suppliers
product
information
Figure 6.3: B2B: intermediary oriented marketplace
The main justification for the existence of these marketplaces is the

neutrality created for both buyers and suppliers (and an income for the
intermediary through the increased dependency of both buyers and
suppliers on its platform). Buyers and sellers do not have to bear the
cost of running the marketplace and maintaining the technology. The
neutrality of these marketplaces makes them unbiased towards both
buyers and sellers, so that neither is exposed to the others strategic
interest. Intermediary oriented marketplaces help to match buyers and
sellers in a virtual environment which provides lower transaction costs for
both parties without creating any bias in favour of one or the other. Typical
intermediary oriented marketplaces are electronic hubs (examples include
Alibaba and Covisint).
Activity
Pick one B2B structure and take the example provided either in this guide or in Chaffey
(2009); better still, find your own from external material and draw a diagram representing
its suppliers, buyers, etc. (depending on which structure you choose). This will require you
to read beyond the subject guide to find out more about Dell, Cisco, Alibaba, etc. The
purpose of this activity is to help you read case studies in detail and then visualise various
B2B structures through diagram construction.
65
Key attributes of e-marketplaces

Some of the main attributes of electronic marketplaces are discussed
briefly below (please see Turban et al., 2009, for more details):
Biased versus neutral
As the name implies, electronic marketplaces can be either biased or
neutral. This means that in the case of:
the biased e-marketplace, the electronic marketplace favours
either the buyer or the seller
the neutral e-marketplace, the electronic marketplace does not
favour the buyer or the seller.
Aggregation versus matching
Electronic marketplaces can also be understood in terms of how they
organise buyers and sellers. We have:
aggregation: bringing together a large number of buyers and sellers
under one roof to reduce transaction costs by creating the possibility of
one-stop shopping
matching: bringing together buyers and sellers to negotiate prices on
a dynamic and real-time basis.
Aggregation is best when:
Matching is best when:
the cost of processing an order is high relative to products are commodities or nearcost of item
commodities
specialised products are involved
there are massive trading volumes
buyers and/or suppliers are highly fragmented

there is unpredictable demand
products can be traded sight

unseen
buyers are not sophisticated enough to

understand dynamic pricing mechanisms
purchasing is done on a spot/

transaction basis (see p.67)
most purchasing is done on the basis of prenegotiated contracts
logistics and fulfilment can be

conducted by third parties
a meta-catalogue can be created.
demand and prices are volatile.
Table 6.1 Aggregation versus matching
Activity
Choose a company, again either from Chaffey (2009) or from other readings and, using
your answers for the first activity in this chapter of the subject guide, think about the
following:
a. What sort of transaction costs are reduced, and for which company?
b. What sort of transaction costs increase, and for which company?
c. What sort of challenges can companies face when they set up this particular
marketplace?
66
E-procurement
As Chaffey (2009) Chapter 7 points out, management literature did not
focus on procurement until fairly recently and its relevance has grown
with the rise in e-procurement. Procurement, very simply, means all
the steps that a company takes in order to purchase goods and services
from its suppliers. E-procurement is defined in Chaffey (2009) as the
electronic integration and management of all procurement activities
including purchase request, authorisation, ordering, delivery and payment
between a purchaser and supplier (p.381).
While Chaffey (2009) tends to use the terms B2B and e-procurement
interchangeably, we prefer greater clarity, such that e-procurement refers
to a buyers view of a B2B market. However, we agree with Chaffey (2009)
that a good way of understanding e-procurement is to question what is
bought and how it is bought.
What is bought? This can be categorised as either production-related
or operational procurement. The former relates to procurement by a
company of supplies for the production of its own products. Operational
procurement is the purchasing of goods and services needed in order to
run the business, such as stationery, furniture and office supplies.
How are goods or services bought? Again, Chaffey (2009)
suggests two methods: systematic sourcing and spot sourcing. Systematic
sourcing implies long-term relationships through contracts with known
and/or regular suppliers. Spot sourcing is when a company needs
something urgently and/or the good or service concerned is generic
(or a commodity) that can be bought from any supplier with few
repercussions. Also, take a look at the Cambridge Consultants case study
on e-procurement in Chaffey (2009) (Case study 7.1).
Procurement participants
Procurement sounds straightforward enough but it is a very complex
process, partly because of the number of participants involved in a
process and their interconnections. Riggins and Mitra (2007) discuss eight
different kinds of partners, starting with traditional manufacturers, direct
sales manufacturers, value-added procurement partners, online hubs,
knowledge experts, online information services and online retailers all
the way to portal communities. The first seems self-explanatory but, as you
go through the list, the rising level of complexity will dawn on you. To get
a better idea of the various participants, you should study the Riggins and
Mitra (2007) paper and its summary by Chaffey (2009).
However, as examples, here we examine two of the partner types briefly to
provide you with a flavour of the roles of different intermediaries. Valueadded procurement partners are intermediaries that connect various
partners and provide some added value through bringing trust, reliability,
security or some other added service, for example a travel agent. Portal
communities are electronic interfaces that bring together many services
and a range of information in a customised fashion. Some of the categories
of partners mentioned are quite similar from their descriptions but there
are subtle differences in their focus or the sort of functionality they offer.
The complexity that comes with e-procurement may well be difficult to
manage, yet on the whole the advantages tend to outweigh the problems.
This helps to explain the growing popularity of e-procurement.
67
Benefits of e-procurement
Chaffey (2009) identifies the following benefits:
Shortening or reduction in purchasing cycle time and cost traditional
intermediaries are no longer needed because they are replaced by
technology. This helps the buyer to cut costs and cycle time as much of
the work can be automated.
Improved control over the budget with greater use of technology
there is more transparency and the buyer can see better where funds
are being used and the areas where an association with another
intermediary would help to cut costs.
Reduction in administrative errors again, technology and the
transparency it brings help to identify problems quicker and often
technology will prompt the user to make sure the action taken is
indeed what is needed.
Enabling an improvement in buyers productivity the buyer, if
technology is used well, can smooth the flow of supplies such that time,
warehouse space and effort are not wasted.
Driving down prices through standardisation of products the products
and the intermediary connections are standardised so that both suppliers
and buyers can choose their partners and are not locked-in. This forces
the cost of buying supplies down, as it improves the choice available to
buyers (with the increased number of interchangeable suppliers).
Better management of information technology is able to retain,
manage, organise and archive information much better than humans
using paper formats.
Greater integration of payment systems again, technology is very
useful as it connects various other electronic systems and allows them
to speak to each other and improve the speed of work through better
integration.
Riggins and Mitra (2007) provide a framework which serves to evaluate
the sort of benefits that can be gained at various dimensions or stages,
and the sort of steps a company can take in order to achieve them. This is
an interesting framework and quite useful because it provides a pictorial
view of where value is created (and what kind efficiency, effectiveness
or strategic) in relation to the dimension of e-procurement (e.g. planning,
development, etc).
Problems and risks of e-procurement

These, which apply equally to the sales side of B2B, include:
Security concerns regarding the channel of communication,
payments and identity technology is very useful but we also know that
if there is a breakdown or if it is hacked into, then the company may
become very vulnerable due to the large amounts of information at risk.
This vulnerability is usually much greater with electronic communication
than with traditional means. Losing control of a companys payment
system is as horrific as an individual losing their credit card.
Organisational risks, such as not making a strong enough case to
promote e-procurement strategies in the company. This is often because
the cost benefits of moving to B2B are not easily distinguishable. This
is an interesting issue because we tend to believe that most companies
would welcome a move towards greater technology use, but this is
68
not always true and sometimes for good reason (e.g. security risks).
Such an investment needs to be justified in terms of real benefits, in
both the short and long term. There can also be problems of resistance
to change.
Technological risks include a lack of integration among B2B and
internal systems that can create pools of information that are not used,
and the duplication of records, waste, etc. In principle, technology
helps to improve the integration of systems but not all systems are
compatible. Incompatible systems can increase the cost of coordination
and, at the same time, increase security risks (through the need for an
added interface or layer of software).
Business risks, such as the loss of preferential terms from a
traditional supplier which, through B2B, makes those same terms
available to competitors. Similarly, buyers may not wish to invest in a
technology whereby their competitors gain disproportionate benefits.
On the other side, suppliers may find their profit margins reduced as
well as having to bear the costs of producing and constantly updating
their electronic catalogues.
Case study examples

Chaffey (2009) provides a number of mini and longer case studies that
you should read carefully to form a better picture of B2B and procurement
in practice in the real world. The early years of the Alibaba1 case
are sketched out in Chaffey (2009). This case is a good example of
entrepreneurial innovation. The Chinese market was not accustomed to
the use of the internet back in 1999, so when a young entrepreneur, Jack
Ma, realised the power that the internet provides, he tried to carve out
a niche market for his new company. However, it was only after 2002
that Alibaba very slowly began to make a profit. It was at this time that
Ma turned his company around to focus on connecting businesses within
China to create an e-commerce ecosystem (please see Jack Mas video
interview with the Financial Times2).
Mas ambition is to create an innovative way of using the internet so that
businesses can come together in his virtual marketplace and do business
in other words, to create a global marketplace. His site provides, among
many other facilities, platform services (Alibaba Cloud Computing) and
secure payment services (Alipay) for companies to transact with each
other. Alibabas early focus (1999) was facilitating Chinese small and
medium enterprises (SMEs) but Ma has broadened the scope and wants
to go global so that he can facilitate business between international
companies. This is a very interesting case and we encourage you to read
more on it by searching through The Economist and other credible sites.
Covisint,3 the other case study we want you to read, is a marketplace, or
as its owners now like to call it, a connectivity solution, created by
three large car manufacturers Ford, GM and DaimlerChrysler for the
motor industry. This B2B platform was not very successful (losing $350
million) so it was abandoned in 2003. It then went on to be acquired by
Compuware (another B2B company) and has now developed into more of
a B2B site for healthcare, public sector and financial services. A number
of reasons are hinted at as the cause of the early failure of Covisint:
for example, Ford was also running a similar system called Everest in
parallel (which also, incidentally, failed); the procurement system was
far too complex; and the motivations of the auto giants were somewhat
questionable.
www.alibaba.com
There are also other

interesting Financial
Times videos available
at: www.youtube.com/
watch?v=j8Qkapdnpik
www.covisint.com
69
This case is described in some depth in Chaffey (2009) and so we wont

repeat the details here. However, Covisint provides its users with some
very interesting and important facilities, and these need your attention.
Different procurement facilities have been customised for different
customers using EDI and web EDI. They include:
Accounts payable this facility provides users with the ability to
archive payment history. In this way it becomes a repository that can be
accessed in order to check past payments, what is due, due dates, and
payment history.
Cooperative raw material acquisition a facility that pools
resources and information on best priced raw materials, thus providing
better deals to buyers. This can offer operational cost benefits as well.
Product catalogue compilation tool this is not only a
distribution channel for products but also collects information on all
a suppliers products to create a catalogue. In effect, it creates and
updates the catalogue of products.
Request for quote application this facility provides users
with the ability to create an online request for quote (RFQ) and thus
facilitates online responses.
Supplier profile as the name suggests, this facility gives customers
a complete and useful profile of information on the supplier. This helps
the customer to make decisions about which supplier to work with,
when and how. Having access to this information in an electronic and
integrated manner ensures that different parts of the systems and
various facilities can work together to give the customer access to
useful and timely information.
These facilities are useful on their own, but when you put them together,
they give each user an integrated way of running their business on a daily
basis. At the same time, these facilities allow users to gain a historical
perspective on what the company has done, achieved, used and been
successful at thus helping to mould the strategy for the future.
Conclusion
This chapter provides a background to B2B and allows you to compare and
contrast it with the ideas and characteristics of B2C. The strategies of B2B
employed by companies are explained, as well as the motivation behind
the choice of each strategy. This chapter employs transaction cost theory
(discussed in Chapter 3 of this guide) in the B2B e-business context and
introduces the notion of e-procurement, focusing on the buyer side of B2B.
These concepts provide a conceptual foundation for the following chapter,
which deals with the practical implementation of supply chain management.

distinguish between B2C and B2B e-business systems
explain how B2B and B2C systems overlap in certain cases
discuss the strategies behind B2B systems
explain how e-business technology supports B2B systems
explain the basic concepts behind e-procurement
apply B2B models to real world marketplaces.
70
Self-test questions
1. B2B buyer, supplier and intermediary oriented marketplaces reflect
different power relationships in electronic markets. Discuss, with
examples, how and why these power relationships are shaped and
maintained.
2. Discuss how and why disintermediation occurs. Discuss, with examples,
whether ICT based disintermediation is always sustainable.
71
Notes
72

Aims of the chapter
The aims of this chapter are to introduce the main concepts of supply
chain management (SCM), to identify the problems that supply chains
face, and to explore how information technology is used to improve their
efficiency, coordination and management. Key concepts in this chapter
include:
information and uncertainty
push and pull supply chain models
restructuring supply chains with e-business technology
value chains and value networks
vendor-managed inventory
virtual organisations
third party logistics
implementation of integration
supply chain management strategies.
Learning outcomes
recognise the various types and components of supply chains and
appreciate their purposes and functions
analyse the role of information and e-business technologies within the
supply chain
discuss the importance of SCM in the context of value chains and value
networks
recognise the various actors within the supply chain and appreciate
their roles
discuss the various levels of integration that are required to facilitate
SCM
analyse the strengths and weaknesses of particular SCM strategies.
Essential reading
Lee, H.L. Aligning supply chain strategies with product uncertainties,
California Management Review 44(3) 2002, pp.10519.
Lee, H.L., V. Padmanabhan and S. Whang The bullwhip effect in supply chains,
Sloan Management Review 38(3) 1997, pp.93102.
Sull, D. and S. Turconi Fast fashion lessons, Business Strategy Review 19(2)
2008, pp.511.
73
Further reading
Angeles, R. RFID technologies: supply chain applications and implementation
issues, Information Systems Management 22(1) 2005, pp.5165.
Croom, S.R. The impact of e-business on supply chain management,
International Journal of Operations and Production Management 25(1) 2005,
pp.5573.
Gunasekaran, A., K.H. Lai and T.C.E. Cheng Responsive supply chain: a
competitive strategy in a networked economy, Omega 36 2008, pp.54964.
Norrman, A. and A. Jansson Ericssons proactive supply chain risk management
approach after a serious sub-supplier accident, International Journal of
Physical Distribution & Logistics Management 34(5) 2004, pp.43456.
Porter, M. and Millar, V. How information gives you competitive advantage,
Any good operations management textbook, for example:

Bozarth, C. and R. Handfield Introduction to operations and supply chain
management. (Harlow: Pearson Education, 2008) second edition [ISBN
9780131354265].
Up-to-date information on SCM from both the academic and practitioner
perspectives is available at the following websites:
The UK Chartered Institute of Logistics and Transport: www.ciltuk.org.uk
The MIT Center for Transport and Logistics: http://ctl.mit.edu
The University of Washington Library: www.lib.washington.edu/
business/guides/sup.html
Supply chain brain: www.supplychainbrain.com/content/index.
php?id=331
Introduction to supply chain management

Virtually every business relies on suppliers to provide it with certain goods
and services before it can deliver its products to customers. These supply
chains can be quite extensive and are made up of diverse companies,
transport fleets, warehouses, and production and distribution facilities. A
supply chain is the flow of information, materials, goods and services
from raw material suppliers through manufacturers and warehouses to
the final consumer. For example, imagine all the different actors required
to manufacture, deliver and assemble the various parts that comprise a
finished car. This is a complex and multifaceted affair. Supply chain
management (SCM) involves the optimisation of these material and
information flows along networks of suppliers and customers, and is
closely related to the areas of logistics and operations management.
Until the mid-1990s, supply chains were largely invisible and SCM was
an area that few senior managers took much interest in. However, the
reduction in global trade barriers, together with increased containerisation
of freight traffic and cheap air travel, resulted in a major shift of
manufacturing from the West to new low-cost production centres in, for
example, China and Eastern Europe. Global supply chains were needed
to shift the goods halfway across the world, and their success can be seen
in the huge growth of world trade and the widespread availability in our
local shops of cheap, high-quality goods that have travelled thousands of
miles.
74
However, wherever the goods flow, information must flow as well. In order
to make these supply chains work efficiently, good SCM is essential and
it is seen now as a key factor in improving organisational effectiveness
and competitiveness. In a special supplement published in 2006, The
Economist referred to supply chains as the physical Internet, which means
that it should be as easy to move goods around the world as it is to access
websites around the world. Furthermore, the ideas behind SCM are now
also being applied to services as particular service processes (e.g. call
centres, the checking of insurance claims, etc.) are being moved offshore
in what is termed business process outsourcing.
In todays highly competitive markets, customers expect a wide range of
cheap goods to be constantly available, which implies that the objectives of
supply chains comprise: speed, reliability, control, flexibility to change, low
cost, quality and the minimisation of inventory. However, these objectives
tend to conflict; for example, flexibility and reliability can be improved by
holding more inventory but this adds to the cost. Speed can be increased
by sending goods by air, but again the cost increases.
Perhaps the most important trade-off is between service and efficiency.
Firms like to give their customers a high level of service (e.g. delivery
arrangements) but this can be expensive. Furthermore, suppliers (for
example, of groceries) may wish to give their best customers (the
large supermarkets) a better service (e.g. delivery on a Sunday) than
their average customers. This adds to the complexity of supply chain
management.
Traditional supply chains include suppliers, manufacturers, distributors,
retailers and consumers. Figure 7.1 depicts this traditional arrangement.
Note that in this figure, information flows from the customer up the supply
chain (i.e. upstream).
Raw material
supplier
Tier 2 supplier
(where materials
are processed)
Tier 1 supplier
(where goods
are manufactured)
Flow of goods
End customer
Warehouse
(where goods
are stored)
Retailer
Flow of information
Figure 7.1: Traditional supply chain structure
Such traditional supply chains face a number of problems:

They can be very slow in terms of response times.
They often result in excessive inventories being held just in case.
They are subject to poor coordination and customer service.
They often cannot support a wide range of products.
They can be unnecessarily costly.
They face problems of uncertainty in forecasting product demand.
They encounter shrinkage (i.e. the loss of products along the supply
chain) and waste.
75
Information and uncertainty

If the demand for products were completely deterministic (i.e. totally
predictable), then SCM would be largely a mathematical optimisation
exercise. However, in most markets demand can vary considerably and so
information concerning sales, enquiries and trends has to be distributed
along the supply chain to reduce the levels of uncertainty. It follows that
most of the key processes in SCM are information intensive. These include:
production planning
inventory management
distribution management
processing customer orders
purchasing and procurement.
One particular phenomenon, known as the bullwhip effect, is
illustrative of some of these problems (see Lee et al., 1997). This
phenomenon, depicted in Figure 7.2, arises when businesses, particularly
retailers, overestimate customer demand for products that are highly
dependent on fashion or weather. A good example is the sale of ice cream
in the UK, where the weather is notoriously unpredictable. When hot
weather is forecast, retailers dramatically increase their orders, which
are transmitted upstream to their suppliers (and raw material producers)
who thus crank up production. The impact of these excessive orders
reverberates up the supply chain like a bullwhip. If the hot weather
doesnt materialise, actual sales fall well below the orders and everyone
in the chain is left with excess stock. The next few orders will then be less
than actual sales (as shown in Figure 7.2) until the stock is used up. The
outcome is that variations are amplified as one moves upstream along the
supply chain.
Quantity
Bullwhip effect
Time
Orders placed
Actual sales
Figure 7.2: Higher variability in orders from dealer to manufacturer than actual
sales
76
Its not just demand that may be uncertain. Supply chain uncertainty
can also vary depending on the type of product and the stability of both
its supply and demand. Certain products have a stable and predictable
demand (e.g. basic groceries), while others face high demand uncertainty
due to the nature of the product (e.g. innovative computer technology
with a small consumer base). Likewise, supply uncertainty can differ
depending on the stability of the supply process and how well established
it is. New and evolving supply processes can involve high uncertainty, as
well as variable weather in the production of crops for food. For further
discussion, see Lee (2002). Figure 7.3 provides examples.
Demand uncertainty
Supply uncertainty
Low
High
Low
Processed food,
basic clothing, oil
Fashion clothing,
smart mobile phones
High
Fresh food, hydro-electric

and wind power
New semiconductors and leading

edge computer technology
Figure 7.3: The uncertainty framework with examples
Activity
Where in the above uncertainty framework would you place the following products?
natural gas
books
refrigerators
solar panels.
Consider other products and where they could be placed in the framework. Are products
likely to move from one cell to another? Why?
Push and pull supply chain models

As we discuss at the end of this chapter, this uncertainty in supply or
demand can impact on a companys SCM strategy. In other words, all
supply chains are not the same. One distinction that we would like to
make at this stage of the discussion is between push and pull approaches
to SCM. Push models involve manufacturers developing products, which
they then try to market. Chaffey (2009) Chapter 6 captures this way of
thinking in the question, This is a great product, now who shall we sell
it to? The push approach is typically motivated by a desire to lower costs
and increase efficiencies during production. Here, the producers seek to
control and dominate the supply chain and, in markets where there is little
competition, they often have their way.
Pull models focus instead on what customers need, incorporating their
requirements into product development and distribution. The supply chain
is geared toward delivering value to customers through reduced costs and
improved service quality. In buyers markets, where customers call the
tune, pull models are becoming much more prevalent. See Chaffey (2009)
Chapter 6 for more information on this distinction between push and pull
models.
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Restructuring supply chains with e-business technology

Technology, especially the internet, has led to the creation of more efficient
and cost-effective supply chains. Keeping in mind that the supply chains
of one firm connect with those of others, creating almost seamless virtual
organisations, the question of control becomes interesting. Chaffey (2009)
understands this virtuality as a continuum with vertical integration at one
extreme and virtual integration at the other, with vertical disintegration
in the middle. Vertical integration is the extent to which supply
chain activities are undertaken and controlled within the organisation
(p.356) and virtual integration occurs where the majority of supply
chain activities are undertaken and controlled outside the organisation by
third parties (p.356). In essence this means that the vertical integration
spectrum of activities is internal; the other extreme is when business
processes are outsourced.
Chaffey (2009) provides a framework to make sense of why companies
choose vertical integration:
The direction of any expansion. Should the company aim to
direct ownership at the upstream or downstream supply chain?
A company can decide to buy into the downstream part of the supply
network (downstream vertical integration). This is sometimes
referred to as an offensive strategic move since it enables the
company to increase its power with respect to customers. The alternative
approach of purchasing services or raw materials would be upstreamdirected vertical integration which is strategically defensive.
The extent of vertical integration. How far should the company
take downstream or upstream vertical integration? Companies in
certain industries have moved from a wide process span to a
narrow process span. This change is the main way in which
e-business can impact upon vertical integration by assisting the change
from a wide to narrow process span.
The balance among the vertically integrated stages. To what
extent does each stage of the supply chain focus on supporting the
immediate supply chain?
Such strategies are made possible via technology. Electronic supply
chain management (e-SCM), using such technologies as EDI and RFID
(see Chapter 2 of this subject guide), can help reduce order-to-delivery
time, reduce costs of manufacturing, manage inventory more effectively,
improve demand forecasting, reduce time to introduce new products,
improve aftermarket/post-sales operations, and lead to faster turnaround
in innovation. However, there are also a few risks involved with e-SCM. If
it is easy to nurture electronic marketplaces, then the relationships built
this way are ephemeral and weak, which enables the customer to move
to another supplier with little trouble. But there is also the possibility of
the reverse happening, where the customer can get tightly locked into a
specific supplier because of high overhead costs.
Value chains and value networks

Michael Porter (Porter and Millar, 1985) famously introduced the notion of
the value chain to describe what organisations can do to add value to
goods or services as they move from creation to delivery to the customer.
These value-adding activities can take place internally, within an
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organisations boundaries, or externally, where activities are performed

by supply chain partners. Both internal and external processes can be
analysed and redesigned to improve the efficiency and effectiveness of the
supply chain, often through the introduction of information technology. A
closely related concept is the value stream, which focuses on increasing
the efficiency of tasks involved in adding value, particularly during the
development and launch of new products. The notion introduces new
opportunities for marketing goods and services (see Chaffey, 2009,
Chapter 6).
As companies rely more and more on external partners for the execution
of their core activities and support processes, the relationships between
partners begin to resemble a network. These value networks are
enabled by information technology that facilitates electronic-based
communication. There are many similarities between value chains and
value networks, but Chaffey (2009) shows us what distinguishes the two
concepts. In particular the value network perspective emphasises:
The electronic interconnectedness between partners, enabling realtime information exchange.
Dynamic relationships between partners. The network is
modifiable and responsive to market demands. Partners can be readily
added and removed from the network as necessary.
Different types of electronic links can exist between partners,
depending on their unique relationship. For example, a business may
wish to build EDI links with their established suppliers but rely only on
email communications with occasional or less-strategic ones.
Vendor-managed inventory
A good example of the changes taking place in relationships between
trading partners is vendor-managed inventory (VMI). This close
collaboration, facilitated by SCM technology, involves the buyer (typically
a retailer) handing over the responsibilities of managing its inventory
(including when to order and how much to order) to the supplier. The
supplier is able to manage this through information sharing between the
two. The key ideas of VMI are:
The supplier manages inventory/orders, not the retailer, and this
produces an integrated and optimised supplier/retailer value network.
There are benefits (for the retailer), which include reduced inventory
and faster replenishment, and improved collaboration in areas such as
joint promotions (special offers).
Potential drawbacks (for the retailer) include loss of autonomy and
increased dependence upon the supplier.
The implementation of VMI is usually driven by large organisations; for
example, Procter and Gamble and Wal-Mart in the FMCG industry. In this
industry, VMI forms part of initiatives known as continuous replenishment
and efficient consumer response, where the underlying facilitator is
the electronic exchange of inventory information and orders using EDI
networks. The retailer provides the supplier with its inventory information,
and the supplier calculates a proposed order (based on past trends and
current marketing promotions) and sends it to the retailer for approval
before supplying the goods.
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Case study
In Chapter 6 of Chaffey (2009), you will find Case study 6.1 on the supply
chain management strategy of Shell Chemicals. Since implementing
a system called SIMON (Shell Inventory Managed Order Network) to
manage their supply chain relationships, the company has moved to an
online portal known as Elemica. SIMON was based on vendor-managed
inventory SCM processes.
Read the passage to understand how SIMON worked in practice. What
types of information did it handle? How is Elemica different from SIMON?
Why did Shell Chemicals switch from SIMON to the Elemica portal?
Virtual organisation
The underlying concepts of value networks and VMI are part of a
wider trend towards what is known as the virtual organisation.
As parts (processes and functions) of an organisations business are
increasingly outsourced to partners, interesting questions arise regarding
the boundaries of the business. Is it more meaningful (or interesting)
to consider an entire supply chain, made up of separate companies
collaborating closely together to provide goods to consumers, as opposed
to the activities of an individual member company within the chain? How
do we conceptualise businesses with reduced physical assets and whose
presence and relationships with partners are almost entirely electronic?
We discuss virtual organisations in detail in Chapter 9 of this subject guide,
as there are many important issues that transcend the realms of SCM,
which is still rooted in the production and distribution of physical goods.
Nevertheless, it is worth starting to think about the concept here and
Chaffey (2009) provides a useful introduction. In particular, his definition
of a virtual organisation is as follows:
an organisation which uses information and communications
technology to allow it to operate without clearly defined physical
boundaries between different functions. It provides customised
services by outsourcing production and other functions to third
parties. (p.354)
The key point is to consider the supply chain as an entity, or virtual

organisation, that is made up of individual companies collaborating
closely with each other to meet a particular objective profit-seeking
in a commercial market. The key issues then become collaboration and
coordination, rather than the competition that is emphasised in traditional
business writing.
Third party logistics

A typical outcome of the diffusion of information and communication
technologies in SCM is the externalisation of logistics activities. Third
party logistics (3PL) is the outsourcing (contracting out) of part
or all of the logistics activities by a company that used to perform such
activities in-house. An even more strategic move in the area of 3PL is now
called 4PL which shifts the focus from operational services to supply chain
coordination, which is more information intensive. Some of the logistics
services that are usually outsourced to a 3PL provider are transportation,
warehousing, order entry, customs clearance, reverse logistics, product
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labelling, fleet management, transportation management and other such

logistics-related activities. All of these activities are eased and indeed
made more strategic and cost effective through the heavy use of up-todate e-SCM technology.
A move towards 3PL can become a strategic advantage for a company, but
there is a need to consider a number of issues before taking such a step.
Below you will find a list of possible advantages and disadvantages of 3PL
provision by an external company. In practice, 3PL is a relationship that
needs to be managed with great care, strategic alignment and clear goals.
Advantages of 3PL
The client company can focus on core competency and outsource all
non-core activities to external experts.
There are cost related advantages through economies of scale.
Labour costs are shared between client and provider.
Offshore suppliers can be managed and trained by 3PL providers.
Capacity utilisation can be optimised.
Outsourcing to external experts can increase the satisfaction of
customers through the ability to pay greater attention to their needs.
It can provide access to international distribution networks.
It is a technique that enables risk sharing with an external expert.
It provides access to state of the art technology.
It allows for inventory reduction.
There is more flexibility to cope with changing demand.
Disadvantages of 3PL
As with all outsourcing, 3PL can lead to a loss of in-house
expertise.
Logistics itself can be a core competency that is better not
outsourced.
Overdependence on external expertise can lead to loss of control.
It can cause a breakdown of responsiveness to customer needs (think
about reverse logistics like returns, repairs, etc. from customers).
There is the potential of an inability to provide customised products
through a breakdown of communication channels between the
client company and its customers.
Contracts, as in all outsourcing arrangements, need to be carefully
specified and are often prone to abuse.
Cost reduction promises are often not met.
There is an inability to form sustainable and trusting relationships
between 3PL providers and clients.
Performance measurement seems to be the only accurate manner
of measuring 3PL success, but this only rates aspects such as delivery
timeliness, order fill rates and inventory turns, and ignores issues such
as trust and long-term relationships, thus making 3PL success difficult
to assess accurately.
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Implementation of integration
So far, we have discussed vertical and virtual integration at a rather
strategic level. However, in practice, it is essential that supply chains
operate seamlessly on an everyday, 24-7 level and this means that the
various components within the supply chain people, processes and
technology must be tightly integrated. In other words, they have to fit
together well, all the way along the supply chain, regardless of whether
the strategy is one of vertical or virtual integration.
At the people level, it is essential that organisations (and their staff) trust
each other and can collaborate together across organisational boundaries
to ensure the success of the overall supply chain. In the past, suppliers
would send salesmen to take orders from customers and sometimes this
selling was particularly aggressive and trust was lacking. However, with
VMI, the ordering process can be almost automated, but supplier-customer
relationships become more important. Typically, large suppliers will now
form account teams to interact with their customers, not to discuss
individual orders, but rather to work together to improve service levels,
logistics, distribution, returns and promotions for the benefit of both
parties. As soon as something starts to go wrong, there should be clear
channels between the trading partners to solve the problem.
Activity
Do you agree with the approach to managing supply chains described above?
Integration between the business processes and the technology is also
very important. An effective supply chain doesnt just mean using state-ofthe-art technology; it requires organisations to pick and choose particular
technologies to provide advantages for specific processes, keeping in mind
the context of the company (in terms of culture, governance structure,
specifics of product/service, etc). A nice example of this is provided by the
case of Zara (see below).
Finally, at the lowest level, the various technologies themselves have to fit
together well, both within individual organisations and among the supply
chain partners. As noted in Chapter 2 above, this technological integration
within companies can be achieved through the purchase of integrated
ERP software packages. In SCM, this integration is often taken a stage
further, such that the ERPs of individual organisations are customised
to link together, or talk to each other, in addition to the integration
achieved through common RFID standards (see Chapter 2 of this subject
guide). The network links between the trading partners are provided by
EDI systems (or their equivalent), which offer standard message formats
and protocols. The linking together of these technologies is not trivial but
much experience has been gained in this area through SCM, and such
integration is now commonplace in many industries.
Activity
Select a large (local or international) company and through researching on the web, try
to discover how its supply chain works. Try to identify the component processes and who
carries them out, and also what strategy the company employs. Explain how the company
uses e-SCM technology.
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SCM strategy
Although we have emphasised the importance of the integration of the
various components of a supply chain, this does not mean that all supply
chains are the same, or that there is one best way in terms of strategy. We
have already distinguished between the strategies of vertical integration,
vertical disintegration and virtual integration, and the discussion of the
different combinations of supply and demand uncertainty in the paper by
Lee (2002) suggests further differentiation of supply chains.
These comprise:
Efficient supply chains otherwise known as lean supply chains,
where both supply and demand uncertainty are low and thus the
member firms can focus on reducing costs and increasing efficiency.
Risk-hedging supply chains where supply uncertainty is the
main problem and hence it is worthwhile for firms to maintain shared
pools of stock that they can call upon when supply is disrupted.
Responsive supply chains where demand uncertainty is the
main problem and hence the supply chain needs to very flexible in
responding to sudden changes in demand. Sales data need to be passed
back up the supply chain very quickly and all member firms need to be
prepared to adjust their production and other activities. The Zara case,
outlined below, is a good example of this.
Agile supply chains where both supply and demand are uncertain
and where the supply chain needs to be both responsive and risk-hedging.
The case of Zara (see Sull and Turconi, 2008) is a particularly good example
of a successful responsive supply chain. Zara has been so successful that in
2008, according to some measures, it became the worlds largest clothes
retailer with first quarter sales of 1.7 billion. Much of this success is
attributed to its particularly nimble supply chain that produces approximately
22,000 new products per annum, taking only 15 days to move from the
idea of a new item to actually supplying it to the stores. These figures are
much better than the industry average and enable Zara stores to constantly
introduce new designs without being left with unwanted stock on hand. This
has been achieved through an SCM strategy based on four principles:
Limited outsourcing or offshoring, such that much of the work
is performed in-house, backed up by centralised new product
development.
Shared situation awareness based on real-time information
from the stores. Store managers use handheld PDAs to record customer
behaviour (e.g. clothes tried on but not purchased; customer enquiries
and comments) and this qualitative data is combined with actual sales
data from the EPOS tills and sent daily to Zara headquarters for analysis.
A proprietary e-SCM system specifically produced for Zaras needs.
This was an expensive solution but Zara does not use industry standard
tools, such as costly ERP or CRM systems, and their total IT spend is
low for the industry.
The organisational culture of Zara aims to reduce hierarchy and
increase face-to-face interaction, not just between the customer and
staff but also between various levels of Zara staff, and this makes their
business strategy unique and challenging for competitors to imitate.
This is not to downplay the role of technology but it does signify the
importance of people within the supply chain.
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From a success story, we now turn to a disaster concerning Ericsson, the

mobile telecommunications supplier (see Norrman and Jansson, 2004).
In this highly competitive business, Ericsson had squeezed out costs from
its supply chain to make it as lean as possible. However, this lean supply
chain depended upon a single supplier for a radio-frequency chip and,
when this suppliers plant in Albuquerque, New Mexico (USA) caught
fire in March 2000, Ericsson lost months of production, at a cost of $200
million, and finally withdrew completely from manufacturing mobile
phones. This is not the only such case, and these disasters demonstrate the
fragility of excessively lean supply chains.
Activity
Based on your reading, can you think of other companies with very lean supply chains
which might potentially face similar or related risks to those encountered by Ericsson?
Conclusion
Supply chains, comprising a combination of companies, people and
technologies, are a very important part of the practice of e-business. They
represent efficient and powerful supply channels and often competition
in a market is between competing supply chains, rather than individual
companies. However, they require high levels of integration, collaboration
and coordination, which places heavy demands on both the technology
and the relationships between organisations. There are various trade-offs,
in terms of strategy, especially between lean supply chains and ones that
are more responsive to uncertainties or changes in supply and demand.

recognise the various types and components of supply chains and
appreciate their purposes and functions
analyse the role of information and e-business technologies within the
supply chain
discuss the importance of SCM in the context of value chains and value
networks
recognise the various actors within the supply chain and appreciate
their roles
discuss the various levels of integration that are required to facilitate SCM
analyse the strengths and weaknesses of particular SCM strategies.
Self-test questions
1. In what ways can computer-based information systems facilitate supply
chain management? What is a vendor managed inventory and why is it
important?
2. Why is supply chain management of growing importance in many
industries? What are the problems with traditional supply chain
management? Discuss how computer-based information systems are
used to address these problems.
3. Discuss, with examples, the supply chain strategies employed by
companies to deal with the uncertainties of supply and demand.
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Chapter 8: Web 2.0 in business and

society
Aims of the chapter
The aims of this chapter are to introduce the concept of a new phase of
the web: web 2.0, to explain how it facilitates increased participation
and collaboration among users, to explore the application of web 2.0
in business organisations and to critically analyse the business case
for the use of web 2.0 by organisations. At the time of writing (2010),
web 2.0 is seen as an exciting new technological development with
considerable social and business implications. Doubtless, as individuals
and organisations mould the technology through repeated use, it will
mature and lose much of its initial excitement. Nevertheless, web 2.0 is
a qualitative step-change in e-business that deserves detailed study. Key
concepts are:
characteristics of web 2.0
collaborative components including blogs, social networking sites,
wikis, content-sharing sites, user tagging and mash-ups
monetisation of web 2.0, including business models
the use of web 2.0 by businesses
the promises and risks for businesses.
Learning outcomes
explain the differences between web 1.0 and web 2.0
describe and use the main components of web 2.0
explain how web 2.0 facilitates collaboration and participation among
users
discuss the potential benefits and risks that web 2.0 offers to business
organisations.
Essential reading
Boyd, D.M. and N.B. Ellison Social network sites: definition, history and
scholarship, Journal of Computer-Mediated Communication 13 2008,
pp.21030.
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 1,
pp.2225.
OReilly, T. What is web 2.0: design patterns and business models for the
next generation of software, Communications and Strategies, First Quarter
2007, pp.1737. Available online: http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1008839
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Further reading
Cormode, G. and B. Krishnamurthy Key differences between web 1.0 and web
2.0, First Monday 13(6) 2008. Available online: http://firstmonday.org/
htbin/cgiwrap/bin/ojs/index.php/fm/article/viewArticle/2125/1972
Smith, H.A. and J.D. McKeen Developments in practice XXXI: social
computing: how should it be managed?, Communications of the Association
for Information Systems 23(1) 2008, pp.40918.
Zimmer, M. The externalities of Search 2.0: the emerging privacy threats when
the drive for the perfect search engine meets web 2.0, First Monday 13(3)
2008. Available online: http://firstmonday.org/htbin/cgiwrap/bin/ojs/
index.php/fm/article/viewArticle/2136/1944
Wikipedia article on Web 2.0: http://en.wikipedia.org/wiki/Web_2.0
Guardian newspaper site dedicated to Web 2.0 topics: www.guardian.
co.uk/technology/web20
ZDNets Enterprise Web 2.0 blog: http://blogs.zdnet.com/Hinchcliffe
Introduction
One of the most exciting recent developments in e-business is the emergence
of what is termed web 2.0. It is seen as the second generation of the web
and, as such, a stepwise enhancement of earlier ways of doing e-business.
Whereas web 1.0 design emphasised transactions and simple access to
information, web 2.0 stresses user interaction and large-scale participation.
Pioneering websites, such as Facebook, YouTube and Twitter, are being
valued in billions of dollars, but have yet to show a profit, leading
pessimists to fear a repeat of the dot.com boom (and eventual bust). Is
web 2.0 the real thing or is it yet another case of technology hype? In
Chapter 2 we briefly explored some of the technologies, such as Javascript
and AJAX, which make developments in web 2.0 possible. In this chapter
we will examine further the emergence of the concept of web 2.0, the
most popular applications and their business prospects, as at 2010.
The term web 2.0 was famously first used at a conference in 2004
by technologist Tim OReilly to describe new developments in web
technology see OReilly (2007) for a good introduction to web 2.0. These
developments have had significant implications for the use of the web
within e-business. Some of these changes include:
Understanding the network as a platform rather than just a bunch of
connections
Instead of being a relatively dumb network linking the computers of users
and companies, web 2.0 can be understood as a general-purpose computer
application, or platform, which resides externally to users machines. This
means that data and applications are stored out there rather than locally.
Harnessing the collective intelligence of users
This platform, which is cheap and easy to use, together with users growing
familiarity with the web, has led to a major shift from passive consumption
to active participation by users. Instead of just retrieving information or
purchasing items from online catalogues, users actively provide content
(such as text and video) and interact socially using the web. One could
argue that the first glimmers of this trend were apparent in web 1.0 sites
such as eBay, Napster, dating sites and multi-user games, but it was web 2.0
that brought about a massive increase in participation.
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Data is what matters

The incredible increase in user participation means that data (or
content) has become increasingly important, as individual users
actively generate and retrieve the data that are central to much of their
social interaction and communication.
Improved software tools
With much of the intelligence and processing held centrally, users
are freed from the tyrannies of the software release cycle, where they
had to spend much time and effort updating their wares. The new
lightweight programming models similarly make fewer demands on
users machines but still provide a rich user experience. Furthermore,
they do this above the level of a single device, such that the same (or
very similar) application runs on laptops, personal digital assistants
(PDAs) and mobile phones.
These developments have been driven by a variety of people, with varying
motivations:
web evangelists who wanted to see the web escape the grasp of the
rather staid and conservative large corporations
entrepreneurs attracted by the potential for profit
developers eager to make their mark with the new technologies
users who were keen to explore attractive (more or less) free
applications and services
conventional firms keen to explore new markets and new collaboration
mechanisms.
If you wish to explore the differences between web 2.0 and web 1.0,
please refer to Cormode and Krishnamurthy (2008).
Collaborative components of web 2.0

The key hallmark of web 2.0 is collaboration and participation,
which is facilitated by various applications or collaborative components.
These include blogs, social networking sites, wikis, widgets and sites that
permit content-sharing, among others.
Blogs
Short for web logs, blogs are personal pages containing diaries and
opinions on topical issues. Blogs are often focused on a single topic, and
can be interlinked with comments and other threads. Blog hosting sites are
abundant and publishing is simple and free.
The predecessors of blogs are the internet forums and bulletin boards that
originated in the 1990s. There are about 100 million active blogs, and
around 200 million dead ones. It is estimated that 120,000 new blogs are
created daily, a large number of which are spam blogs; that is, blogs with
fake content or articles that are used to trick search engines and attract
users who generate ad revenue by mistakenly visiting these sites.
And it is not just individuals who are using blogs. There are corporate blogs
as well, in which businesses attempt to have conversations with customers,
making it more than just a marketing or public relations effort. These blogs
are seen as a way to connect directly with dedicated or interested customers.
An important dimension of blogs is that they offer a fascinating alternative
to mass media. No longer is the public dependent upon conventional news
media that may be highly consolidated and owned by large corporations
87
or governments. Blogs give individuals and small groups the opportunity

to publish their own news items, free from heavy-handed editorial control.
This provides an opportunity for whistle-blowing (e.g. reporting instances
of corruption or misconduct encountered first-hand) and, as such,
represents a rare opportunity for free speech. However, this can be taken
too far and can degenerate into defamation and propaganda.
Nevertheless, blogs are often the first media to break news, when
bloggers report on events that are just starting (e.g. earthquakes, riots)
where the blogger is on the scene long before professional journalists
arrive. Some blogs, such as the Huffington Post (www.huffingtonpost.
com), have built up a huge international following, based on their style of
reporting and opinions, and are accepted as a reliable and valuable part of
the news media landscape.
Social networking sites
Currently led by Facebook with 350 million members (as at 2010),
these sites have become phenomenally popular among users of all ages.
They allow users to share profiles among friends and colleagues, enable
messaging and provide a platform for embedding music and videos,
among a growing number of other features. Early social networking sites
(e.g. SixDegrees.com and Friendster) struggled to attract loyal users
and determine appropriate business models. Indeed, the early history of
social networking sites was fairly dismal. These problems have not gone
away entirely, but success stories such as MySpace and Facebook are
encouraging both entrepreneurs and investors. Indeed, Facebook is now
the second most popular website on the internet (after Google). If it were
a nation, Facebook would be the worlds third most populous country,
after China and India. Boyd and Ellison (2008) provide a good discussion
of social networking sites, together with a comprehensive review of the
literature in the area.
In addition to the conventional social networking sites that mostly aim to
facilitate the normal social life of individuals, there are more specialised
variations. These include virtual worlds, such as Second Life, where
individuals and companies can act out an alternative reality. Somewhat
more prosaic are sites such as LinkedIn that leverage career development
and recruitment. Smith and McKeen (2008) explore the notion of social
computing at greater length.
A recent variant of social networking is micro-blogging, best exemplified
by sites such as Twitter. These sites function similarly to blogs but limit
the number of characters that people are allowed to use to communicate
their messages. The point is to broadcast messages concisely and to large
numbers of followers. There is a lot of promise for marketing and offering
special deals through such sites (see below).
At the time of writing Twitter was described by the Guardian newspaper
as the hottest internet startup on the planet. Introduced in late 2006, by
2009 it boasted 35 million users and yet employed only 52 staff. It allows
individuals to follow their favourite celebrities (e.g. Stephen Fry, Oprah
Winfrey) and, like blogs, it is also useful for breaking news, and featured
strongly in the 2008 US election and the 2009 riots in Tehran. Companies
that were experimenting with marketing applications in 2009 included
retailers French Connection and ASOS, while the UK central government
was providing 26 Twitter feeds and 1.1 million people were following the
feed from 10 Downing Street.
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One of the most interesting and enticing current problems for social
networking sites is how to monetise them (i.e. how to make a profit
from the huge numbers of people taking advantage of their free services).
There are a number of difficult questions related to the profitability of
social networking technologies that managers of these sites are currently
facing:
How can they make money without alienating users through excessive
advertising?
Is there a way to balance users privacy with the tendency to use their
personal information for targeted advertising? The failure of Facebooks
Beacon recommendation marketing system speaks to this issue of
balance.
Is advertising the only way to turn a profit?
What sort of investments should be made to upgrade sites to keep them
attractive to users? For example, MySpace lost users and, consequently,
advertising revenues after it failed to upgrade its site properly.
Activity
Go online and investigate the reasons for the failure of Facebooks Beacon
recommendation marketing system. Then connect this case to the Activity on Amazons
recommendation engine, from the end of Chapter 5 of this subject guide. What privacy
concerns do they have in common?
Various business models have been put forward to try to solve the
monetisation problem. These include:
clever, more focused marketing and advertising, including affiliate
marketing (see Chapter 5 of this subject guide)
taking a commission on sales of goods and services
charging developers to load applications onto sites
selling software as a service
offering premium services and using the proceeds from these to
subsidise free users (e.g. the Googlemail strategy)
selling users data to other companies interested in profiling and selling
to them these sites hold massive amounts of user data which could
be quite valuable (e.g. Facebook manages more than 25 terabytes of
user data every day, which is equivalent to 1,000 times the volume
of post delivered daily by the US Postal Service). Of course, there are
huge privacy questions surrounding the resale of these data.
However, there are other issues in social networking. If these
sites become the new public square, what does this mean for individuals
(and, to a lesser extent, firms)? What sort of an impression should we, as
individuals, give online? To our friends, we may wish to appear devil-maycare party people, but to future employers we may wish to appear more
serious (Zimmer (2008) explores the privacy issues further). It is too
early to comment on the highs and lows of creating and maintaining
online social relationships. To date, it appears that social networking sites
tend to support conventional offline friendships. In addition to privacy
issues, mentioned above, there are the issues of fakesters (people who
maintain totally inaccurate profiles) and online bullying. While fairly
harmless for most adults, these can be problematic for younger, more
vulnerable users.
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Activity
We take for granted that the webs most popular sites are successful businesses, but this
is not always the case. Take YouTube as an example. It has huge operating costs (it takes
a lot of money to stream video on demand to millions of users. Advertising is an option,
of course, but advertisers are wary about including their ads alongside user-generated
content (for various reasons). Go online and research YouTubes business model. Try to
find out whether it is profitable and how it makes its money. What changes has YouTubes
business model undergone over time to make it a more sustainable business?
Wikis
Wikis are websites that facilitate the simple creation and editing of
any number of connected web pages. Their most popular use is for
collaborative and community websites. They constitute the notion of
crowdsourcing whereby users can contribute and share their knowledge
of a topic or issue. Wikipedia, the online open source encyclopedia, is the
most well known wiki but there are many more, often highly specialised,
wikis. Their success relies on design principles including openness,
incremental development, convergence of ideas and the interlinking of
topics, as well as the overriding need for quality control of input through
careful editing to ensure that the credibility of a site is maintained.
Content-sharing sites
Content-sharing sites allow web users to share content such as photos
and videos. In addition, users can tag content, provide feedback on the
quality of information, and rate it as well. Sites such as Flickr and YouTube
are prime examples of these types of sites. YouTube in particular is very
popular, attracting large numbers of visitors, but it has yet to find a viable
business model, even though it was acquired by Google for $1.65 billion in
2006. It requires careful control of user contributions to avoid content that
is pornographic, defamatory, harassing or illegal in terms of copyright.
Related to the legal content-sharing sites are the mostly illegal peerto-peer networks or file-sharing sites. These highly decentralised
networks comprise nodes that share processing and storage and are mostly
associated with sharing music and video files (e.g. KaZaa, Pirate Bay,
Gnutella). They are constantly prosecuted for copyright violation by music
and film companies.
User tagging, rating and reviewing
While web 2.0 embodies user participation and collaboration, this is not
limited to the contribution of complete articles, music files or videos. Just as
important are the reviews and feedback that users give on products, services
and opinions. These provide useful indications to firms (such as Amazon
and various restaurant and travel sites) and consumers. They are the views
of ordinary people and merit a place beside the opinions of expert critics.
In addition to giving ratings, users can also categorise (tag) items
regarding their content and share these tags through sites such as del.icio.
us, producing folksonomies (or social classifications). Again, this is the
voice of ordinary people classifying products, articles, events or services in
a way that may be very different to that of an expert.
Mashups
Mashups combine data from more than one source to produce something
new, typically a new information service. They are facilitated by standard
application programming interfaces (APIs), common to web 2.0. Examples
often involve maps, typically extracted from Google Maps, on which data is
90
then superimposed. An example is chicagocrime.org, which shows how crime

is distributed across the city of Chicago. The iGuide travel site takes data
from seven sources to provide an interactive travel guide, including maps and
photos as well as extensive information on flights, hotels and places to visit.
Open source development
This is the collaborative development of content (especially software)
with a view to making it freely available. This movement began before
the introduction of web 2.0 but is certainly facilitated by the collaborative
tools and motivations of web 2.0. We examine this phenomenon in detail
in Chapter 9 of this subject guide.
Figure 8.1: An impression of web 2.0
(Created by Ross Dawson; www.futureexploration.net)
Figure 8.1 (reproduced with permission from www.futureexploration.net) is

a depiction of web 2.0 in terms of its inputs (mostly from users), mechanisms
and the outcomes that emerge, as well as the building blocks in the outer
circle: standards, participation, decentralisation, identity, user control,
modularity and openness.
Activity
Which of the collaborative components of web 2.0 do you personally use? Why? Why
dont you use the other components? Has web 2.0 changed your behaviour or your
everyday life in any way? Think about these issues and discuss them with your friends.
Business interest in web 2.0

While you and your friends may be avid users of web 2.0, especially
social networking sites, and regard them as entertaining leisure tools,
commercial companies are also very interested in web 2.0 developments
and not for leisure pursuits. They regard social networking sites,
with their large numbers of influential, well-educated users, as excellent
potential marketing and public relations channels. Hence, they are
keen to get their products and messages out there. Similarly, such sites
91
offer good potential for informal networking with current and future
trading partners. These sites are also potentially valuable for internal
team building, in terms of building up a modern and cohesive esprit de
corps, which is particularly relevant for teams that are spread throughout
the world and lack physical contact. These issues are discussed further
in Chapter 9 of this subject guide. Finally, social networking sites offer
companies potential opportunities for recruitment (e.g. the LinkedIn site,
mentioned above).
Wikis offer companies a convenient mechanism for sharing knowledge
with their trading partners (both customers and suppliers) and hence offer
the prospect of enhancing these relationships in an efficient and cheap
fashion. While complex negotiations and urgent problems will probably
always be the preserve of conventional meetings or dinners, wikis offer a
handy medium for everyday collaboration. They are particularly valuable
where, for example, a customer is beta-testing some new software and the
supplier and customer need to work closely together to iron out any bugs.
Blogs also offer a new communication channel for external public
relations and internal morale-boosting and cultural shaping. For example,
a staid old company that wishes to update its image, or change its sleepy
organisational culture to an energetic can-do culture, may well switch
its press releases and internal newsletters to a blog format. If they are
attractively produced and written in a lively fashion, they could represent
a (relatively cheap) first step towards changing the company. Employees
outside the public relations function may be paid specifically to produce
favourable blogs.
Similarly, user-generated content and open source development
are of great interest to companies that are searching for cheap and
innovative content or further development.
Activity
Consider a local company or organisation with which you are familiar and which does
not use web 2.0 technologies. Draw up a list of ways in which it could use particular web
2.0 technologies to achieve its goals. Which parts of the business (marketing, PR, finance,
etc.) would best utilise these technologies? How? What might be the value proposition
(i.e. the benefits, costs and risks)?
Enterprise 2.0?
At the time of writing, large companies such as General Electric, Procter
& Gamble, Shell and Airbus are said to be integrating social networking
into their corporate strategies in a trend described as Enterprise 2.0.
Organisations are using these technologies to encourage internal and
external communication and collaboration, to increase productivity, spur
innovation and enhance value.
However, this is not entirely straightforward as some companies face
huge cultural obstacles. It is often difficult for business leaders to accept
the openness and free-flow of information that these technologies make
possible. However, some argue that, sooner or later, organisations will be
forced to accept at least some of the technologies and think strategically
about how they can restructure work, knowledge sharing and expertise.
Using these technologies in an organisation normally requires certain
adaptations. Companies seek the immediacy and ease-of-use that web 2.0
technologies provide, while redesigning them to offer functionality such as
audit capabilities and access and version controls.
92
However, web 2.0 technologies also embody serious risks, which

companies need to consider before deciding to adopt them. These risks
include:
leakage of sensitive or confidential company data on a social
networking site or blog
fines that accompany data losses or breaches of confidentiality
reduction in employee productivity if the technologies are used for
pleasure rather than work purposes.
Activity
In the past few years many business have turned to social media to enhance their
marketing practices, including the use of Twitter for engaging with current and potential
customers. See if you can find your favourite brands on Twitter. Do they have a presence
on the site? If so, how do they engage with customers? How active are they? Is the
communication with customers of a personal nature? If you cannot find your favourite
brand on the site, can you think of reasons why an enterprise might avoid this channel?
What are the benefits and risks of marketing on an open web 2.0 platform such as
Twitter?

explain the differences between web 1.0 and web 2.0
describe and use the main components of web 2.0
explain how web 2.0 facilitates collaboration and participation among
users
discuss the potential benefits and risks that web 2.0 offers to business
organisations.
Self-test questions
1. In what ways are web 2.0 technologies different to those of the first
generation? Discuss, with examples.
2. Social networking sites are purely for leisure purposes and companies
should ban their use during working hours. Discuss the validity of this
statement.
3. Why is it difficult for popular content sharing sites to be profitable?
Discuss the relevance of potential business models.
93
Notes
94

Aims of the chapter
The aims of this chapter are to provide a summary of the way in
which organisations are changing their structures and using e-business
technology and techniques to address the chronic problems that
have plagued this area for decades. New technologies facilitate the
reorganisation of work and offer new opportunities in terms of where,
when and how work is carried out. These new forms of organisation
straddle internal organisational structures as well as relationships between
firms. Key concepts in this area are:
traditional organisational forms and their problems
virtual organisations
virtual teams and offshoring
teleworking and mobile working
open source production model
problems with new organisational forms.
Learning outcomes
describe traditional organisational forms, such as bureaucratic
hierarchies, and the main characteristics of organisations
explain the problems of structuring organisations, especially as a result
of changing work practices
discuss the role technology plays in changing work practices
recognise different new organisational forms
discuss the contribution of e-business technology to changing
organisational structures
describe how e-business technology can be used to restructure
organisations
describe virtual organisations and virtual teams, as well as their
benefits and drawbacks
analyse a new organisational form in terms of its shared principles of
membership
explain the benefits and drawbacks of offshoring activities and the role
of technology
describe teleworking and mobile working, and explain the challenges
for the management of these approaches
discuss open source production and recognise the contexts in which it
is appropriate
distinguish between various forms of organising such as mobile work,
virtual forums and open source development
explain the problems and benefits of the various forms of organising.
95
Essential reading
Bughin, J., M. Chui and B. Johnson The next step in open innovation, The
McKinsey Quarterly June 2008, pp.19.
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] pp.35455.
Kasper-Fuehrer, E.C. and N.M. Ashkanasy The interorganizational virtual
organization, International Studies of Management and Organization 33(4)
2004, pp.3464.
Ljungberg, J. Open source movements as a model for organizing, European
Journal of Information Systems 9 2000, pp.20816.
Further reading
Bryan, L.L. and C.I. Joyce Better strategy through organizational design,
McKinsey Quarterly 2 2007, pp.2129.
Cooper, W.W. and M.L. Muench Virtual organisations: practice and literature,
Journal of Organizational Computing & Electronic Commerce 10(3) 2000,
pp.189208.
Economist The new organization, The Economist, 19 January 2006.
Hinds, P.J. and D.E. Bailey Out of sight, out of sync: understanding conflict in
distributed teams, Organization Science 14(6) 2003, pp.61532.
Holland, C.P. and A.G. Lockett Mixed mode network structures: the strategic
use of electronic communications by organisations, Organization Science 8
1997, pp.47588.
Larsen, K.R.T. and C.R. McInerney Preparing to work in the virtual
organization, Information & Management 39 2002, pp.44556.
Miles, R.E. and C.C. Snow Causes of failure in network organisations,
California Management Review Summer 1992, pp.5372.
Perens, B. The open source definition in DiBona, C., S. Ockman and M. Stone
(eds) Open sources: voices from the open source revolution. (Cambridge, MA:
OReilly, 1999) [ISBN 1565925823].
Raymond, E.S. The cathedral and the bazaar. (Cambridge, MA: OReilly, 2001)
[ISBN 9780596001087].
Rockart, J.F. and J.E. Short The networked organisation and the management
of interdependence in Scott Morton, M. (ed.) The Corporation of the 1990s.
(New York: Oxford University Press, 1991) [ISBN 9780195063585] Chapter
7, pp.189219.
MIT Open Source Repository: http://opensource.mit.edu/online_
papers.php
Resource for workshop papers on open source: http://opensource.ucc.ie
Professor Eric von Hippels website where you can access his papers
and online books: http://web.mit.edu/evhippel/www/index.html
Introduction to new forms of organisation

Organisational forms (or structures) have been a chronic problem for
companies since the birth of organisations, hundreds of years ago. Any
company needs some type of structure to organise its workforce and
management, but which structure is the most efficient and the most
effective? This is a complex problem, especially for large organisations with
huge numbers of staff and multiple functions that span the globe. Similarly,
relationships with key external trading partners are not straightforward, as
simple market-based relationships have limitations, while joint ventures and
other forms of partnership are difficult to organise.
96
As we discussed in Chapter 3 of this guide, new technology and e-business

are having an impact in this area, offering new opportunities to change
where, when and how work is carried out. Furthermore, for the last 20
years, organisations have been encouraged to focus on their areas of core
competence and outsource (to trading partners) many of their previous
activities. In highly competitive and uncertain environments, organisations
are under pressure to simultaneously cut costs but also retain sufficient
flexibility (or agility) to cope with sudden change. What does this mean
for organisational forms?
Research conducted by McKinsey (Bryan and Joyce, 2007) suggests
that the nature and content of work itself is changing, with a significant
move away from both transformational jobs, such as those in extractive
industries (e.g. mining and agriculture) and manufacturing, and
transactional jobs, like low-level clerical jobs that are easily automatable.
More and more people aspire to tacit jobs, including management,
consulting and knowledge work, typically involving complex interactions
that require a high degree of judgement. Facilitated by the growth of
IT, there has been a huge increase in both the volume and value of
interactions such that tacit jobs have been growing three times as fast
as general employment and now comprise 40 per cent of the US labour
market and 70 per cent of US jobs created since 1998.
In a similar vein, The Economist (2006) finds that organisations
themselves have undergone a sea change as the organisation man of
traditional bureaucracies has given way to todays networked person.
The old command and control mentality of organisations has been
replaced by an emphasis on interaction. This can be seen in the way
that the long-familiar vertical hierarchies have been swept away and
their members regrouped into amorphous teams. Yesterdays salary
man who sat behind a desk for eight or more hours a day has been
replaced by mobile connected knowledge workers who rely on IT,
including laptops, mobile phones, Blackberries and video-conferencing,
to keep in touch with the organisation. There has also been a growth in
professional service firms, such as consultants, lawyers and accountants.
In their constant search for innovation, large companies are increasingly
pursuing joint ventures with small businesses, individual entrepreneurs
and universities or engaging in open source development. All of these
developments create a huge demand for information, communication and
connectivity.
What is the function of an organisational form?

Organisations need a structure in order to:
create a framework within which the activities and processes of
an organisation can be planned, organised, directed and
controlled
provide a basis for the division of work and responsibility
provide formal reporting relationships, levels of authority and spans of
control.
In addition, the organisational form serves as a social structure as
friendships (and feuds) develop within and between work groups. This
is particularly important for individuals in countries where the extended
family structure has largely broken down and where people spend much
of their time working, such that their workspace becomes their social
arena.
97
Traditional organisational forms and their problems

For much of the twentieth century, the favoured form for large organisations
was the bureaucratic hierarchy, which comprised a complex, multilevel structure where jobs were tightly compartmentalised. They were often
based on job functions, such that one arm would be for, say, marketing,
another for finance and so on. Such structures, typified by the public sector,
were well ordered, in that every manager and employee knew precisely
their responsibilities and duties, and to some extent this suits a placid
environment. For large multinational companies, these structures would
be replicated in different regions of the world, with an extra layer of the
same structure at the headquarters. However, they were also very rigid
and slow to operate with high overhead costs, as even minor decisions had
to be passed a few levels up the hierarchy and collaboration between the
various branches of the structure was inefficient and costly. For example,
in Figure 9.1, advertising is managed in a separate unit to sales and the
rest of marketing and this arrangement reduces interaction between the
units, at the cost of both marketing and sales neglecting advertising in
their strategies and activities. Such structures are not suited to a dynamic
environment as they cannot cope with change. A variant of this form is the
strategic business unit, where the hierarchy is broken up into relatively
separate (hierarchical) structures, often based on the product line.
Marketing
and Sales
Division
Marketing
Group
Sales
Group
Advertising
Group
Figure 9.1: A traditional bureaucratic hierarchy
Small businesses typically start with a highly centralised organisation, such

that the founder makes all the decisions (including the colour of the office
wallpaper). This is efficient and there are few coordination problems, but,
as the company grows, the founder becomes overwhelmed and some form
of bureaucracy emerges to spread the management responsibilities.
The problems of coordination between the different functions in a
functional hierarchy became unbearable in many organisations. Functional
groups develop little empires and political squabbling for resources often
overwhelms attempts at coordination. For example, how can the marketing
department market products if they are barely on speaking terms with
the production department? One solution, popularised in the 1960s
and 1970s, was the matrix organisation, where everyone reported
to (at least) two managers. For example, if you worked in advertising
for a washing powder for a large multi-product, fast moving consumer
goods (FMCG 1) corporation, you might report to an advertising manager
on aspects of company advertising policy and standards, as well as to a
product manager for, say, washing powder, on individual promotions as
98
http://en.wikipedia.
org/wiki/Fast_moving_
consumer_goods
part of the washing powder team see Figure 9.2. This aimed to capture
the best of both worlds, such that functions, like advertising, could be
well managed across the firm but also sufficient attention could be given
to individual product lines. However, it is not ideal, especially when the
two managers have different priorities and these result in conflicting
instructions and confusion. An additional complication for multinational
corporations is that the regional dimension has to be added to the
functional and the product dimensions, resulting in a complex threedimensional structure.
Marketing
Function
Sales
Function
Advertising
Function
Washing
powder
Baked
beans
Cakes
Figure 9.2: A matrix organisation
For some industries, like consulting and software development, project

teams are often used, such that the project manager has overall control.
However, their difficulty is that projects tend to vary in terms of the skills
required and hence teams need to be reformed after each project and
stability suffers. If your skill is not needed for the next project, you have to
sit on the bench until you can join another team.
It seems as though each organisational form has its own particular
problems, leading to inefficiency, poor coordination and waste.
Activity
Produce a rough drawing of the organisational structure for your college or for the
organisation for which you work. Is it a traditional organisational form? If so, which one?
What characteristics can you list (borrowing from the material explained above) that
guide your classification?
New organisational forms

Researchers and practitioners faced with the problems of organisational
structure saw the potential of IT, and later e-business, to improve
coordination and provide opportunities for new organisational forms.
Various, slightly different, new organisational forms (NOFS) are
described in the literature, including networks, platforms, shamrocks and
adhocracies (Miles and Snow, 1992; Rockart and Short, 1991). Such forms
are usually based on a smaller, flatter network structure, rather than a
hierarchy. NOFS are often ambiguous, in that some people may not be fulltime members, and they are typically fluid, in that people join and leave
as requirements change. NOFS are typified by dynamic cross-functional
teams of experts set up to solve a particular problem; for example, the
launch of a new product line.
99
NOFS also stretch outside the focal organisation to encompass external

relationships. These include the appointment of external consultants to an
internal team, such that there is a blurring of organisational boundaries
as individuals work for a number of separate organisations. There is also
a move to the middle (Holland and Lockett, 1997) where organisations
construct structures that are between markets and hierarchies; for
example, profit centres involve one part of a company selling services to
another part. Various partnering strategies, such as outsourcing, alliances,
franchising and joint ventures have become popular, where the technology
can be used to improve coordination. Within companies, strategies such as
the offshoring of production or research and development involve shifting
the activity to another part of the world, often based on cheaper labour
costs, and relying on IT to provide coordination.
Virtual organisations
One particular NOF is the virtual organisation, which is a highly dynamic
network organisation where the requirements are split from the satisfiers
and all are linked through an IT switch (see Cooper and Muench, 2000).
For example, one person detects a need for, say, a new type of software and
s/he puts together a virtual organisation of people in different locations
who can work together to develop the new software. Such an organisation
lacks the traditional organisational attributes in that there is no common
workplace, no security of employment and no self-sufficient production line.
The members, usually decentralised, market-based e-lancers (electronic
freelancers), come together for that particular project, remain as long as they
are providing a useful function and then leave at the end of the project.
The entire project is performed regardless of physical location. The manner
in which ICTs are used to create and coordinate a virtual organisation has
been explained by Kasper-Fuehrer and Ashkanasy (2004). The relevance
of this idea is to understand better ICT as an enabler of such new forms of
organising. Virtual organisations are discussed briefly by Chaffey (2009)
Chapter 6; for a more detailed treatment, see Larsen and McInerney (2002).
Shared principles of membership

In the absence, or reduction, of traditional workplace attributes, such as a
common workplace, NOFS require certain shared principles of membership.
According to Rockart and Short (1991), there is a need for shared:
goals and priorities
decision-making
trust, responsibility and accountability
technology and culture
work and expertise/core competence
rewards.
This is neither easy to achieve nor to sustain, especially when people are
simultaneously members of a number of different NOFS.
Virtual teams and offshoring

The rise of globalisation has offered companies attractive opportunities
for shifting work overseas, where labour costs are much lower. The classic
example is software development in India. In many cases, this has been
achieved through outsourcing the activity to a separate company but many
organisations prefer to keep the activity in-house, albeit on the other side
100
of the world. The latter firms have set up facilities in places like India
and taken the activity concerned off-shore. However, it is important to
integrate the off-shored activity into the rest of the company, leading to the
notion of virtual teams and virtual dispersed working, with some members
of a team being in, say, London and others in, say, Bangalore.
In the context of off-shoring, the problems of virtual teams refer mostly to:
Differing cultures which may involve differing working styles and
approaches to learning, authority and deadlines. For example, it
appears that Asians have more respect for authority than Europeans do,
which can mean that Asians are less likely to question the decisions of
managers, for better or worse.
Collaboration and coordination while it is relatively straightforward
to share explicit knowledge (through documents), assuming there
is a common language, the sharing of tacit knowledge (which is not
written down) is much more difficult at a distance.
Building trust between members of a team thousands of miles apart.
The issues noted above are exacerbated by the lack of shared physical
presence and socialisation. Minor misunderstandings or cultural
niceties can often easily be sorted out on the spot in a conventional
workplace, but they can build up to major proportions when the only
communication is asynchronous across time and space.
Excessive dependence upon the technological infrastructure (e.g.
the network), in terms of reliability and compatibility. Also, if the
documents being exchanged are particularly large, then bandwidth can
be problematic. These problems are more likely to be encountered in
developing countries than in the west.
The conflict in virtual teams that often results from these problems is
discussed further by Hinds and Bailey (2003).
Teleworking and mobile working

Teleworking, or telecommuting, involves working at home, either full time
or part time, and is an idea that has been around for many years, with
early pilot projects dating back to 1976. Variants include telecottages,
where organisations share a local suburban office space, and remote offices,
where firms set up small local branches close to where their employees
live. The principle is to use networked IT to send work and information to
employees, rather than bringing them in to the office every day.
Teleworking has many evident advantages:
less time and energy wasted in commuting into city centres
cost savings by avoiding having to provide each employee with office space
increased individual productivity and autonomy
less office politics
allows parents of young children or carers of the elderly to continue
working.
For these reasons, teleworking (and mobile working, discussed below)
have become popular in many countries, such that increasing numbers of
staff work at home, at least part time. Many companies have introduced
hot-desking, where individual offices have been scrapped and staff
reserve office space in advance if they intend to come into the office. In
some cases, individual offices have been replaced with additional meeting
rooms or coffee bars.
101
However, there are various drawbacks to teleworking:

motivational depending upon the personality or circumstances of the
individual employee, there is a danger of them working too little (due
to distractions at home) or working too much (becoming a workaholic)
the traditional cultural divide between work and home is lost, such that
teleworkers may feel guilty or disoriented by working at home
the lack of organisational visibility may dent career prospects
without the direct support of the work group, people can become
alienated from the organisation and experience feelings of
depersonalisation
depending on the nature of the work (and the staff), managers may
worry about maintaining control over their staff, without direct
personal contact
practical issues, for example not everyone has suitable accommodation
(in terms of space and the correct office furniture) and insurance can
be problematic.
Mobile working
The widespread introduction of e-business technology, in the shape of
laptops, wireless networks, PDAs, Blackberries, teleconferencing and
3G mobile phones, has dramatically increased the number of potential
workplaces, from just the office and the home to the possibility of
working anywhere. Many workers, especially consultants and salespeople,
have become nomads, working in client sites, hotels and airports and
rarely needing to go back to their official offices.
Most of the benefits and drawbacks are similar to teleworking but in
addition we find:
the advantages of being able to work more closely with clients and
trading partners
the ability to work any time, anywhere offers a form of flexible freedom
however, work becomes more dependent upon telecommunications,
leading to problems when the network is down, as well as the
difficulties of real-time communication between different time zones
working any time, anywhere can become working all the time,
everywhere, leading to excessive stress, alienation and motivational
problems as the social life of employees disappears.
Open source production

Open source development (see Chaffey, 2009, Chapter 3) has introduced
another form of organisation. In this chapter we are more interested in the
structure, governance style, and coordination and control habits of open
source than the ethical or legal concerns. However, a simple definition of
open source is useful open source software is software which brings
with it a number of freedoms. The creator of the software must make the
source code visible and available so that other interested developers (and
others) can use, read and modify the code (Perens, 1999). The obligation
on the other developers is that if they make any changes to the code
base then they too must provide the source code and the other freedoms
of visibility to anyone interested in their changed software. The basic
102
principle behind open source is that the more people that can see, read
and modify the code the better the software will be, which in turn will
benefit all users (for more details see Raymond, 2001). There is a need
then to encourage many people to contribute to the code base so that the
software grows and becomes more useful to more users.
The tricky element of open source production is how to manage a
group of people that rarely meet face-to-face, so that they all work on
the same software in a productive and gainful manner over time (see
Ljungberg, 2000). Most, if not all, of the communication in open source
production is carried out via some form of technology, such as discussion
forums, email, IRC, etc. The question then becomes: is this really an
organisation? If you revisit the ideas discussed above when making
sense of virtual organisations and mobile work, you will notice that open
source development communities have much in common. Open source
communities:
communicate via technology
come together with the mutual goal of creating some software
(technology is the motivating and inspiring factor)
have a flatter, decentralised structure
have varying hierarchy layers and leadership models ranging from
highly democratic to dictatorships
seek to control community members via technology such as version
control software; but there is also a strong social element to control
which is applied through flaming 1 of developers, ridicule and tough
peer review of bug fixes
are dynamic and changing where the developers enter and leave the
community freely (within the scope of their talent and expertise)
are independent of the physical location of developers anyone with
skills and bug fixes can contribute (at least in principle)
exhibit a culture and work ethic built on reputation and trust
relationships.
These characteristics provide the workforce with an ability to evolve, be
agile and flexible, and can lead to a highly scalable production process
that is difficult for traditional organisations to match. However, open
source production also has to deal with many issues:
Flaming is a hostile
and insulting interaction
between internet
users. Flaming usually
occurs in the social
context of a discussion
board, Internet Relay
Chat (IRC), by email
or on video-sharing
websites see http://
en.wikipedia.org/wiki/
Flaming_(Internet)
Building trust between developers is a long-term phenomenon and is

tricky in comparison to a traditional organisation where employees sign
contracts and fear being fired if they do anything seriously wrong.
Keeping the community together through only technology is not
straightforward and can create feelings of alienation in developers who
are not part of the core team. The peripheral developers have to work
long and hard to be noticed and fit into the community.
Promotion is not straightforward in open source production. It is based
on merit, trust and long-term expertise building, which must all be
done through technical communication. It is the role of technology in
open source production and developer promotion that differentiates it
(to a large extent) from traditional organisations.
Communities are so dynamic that the induction process of open source
production needs to match this approach yet it takes a long time for
new developers (newbies) to become a part of the community and
learn its rules and norms.
103
The most crucial concern of any open source community is to gain

a critical mass of developers because, without a workforce that is
happy to work on the software, there is no organisation or product. In
traditional organisations employees are paid a salary and benefits and
have a contract that provides job security but open source developers
do not have any of these. Open source developers work for the love of
technology, a desire to fix a problem that has bothered them personally
or, more recently, as a way to learn new skills (which makes developers
more attractive to hire by large traditional organisations).
Open source development has evolved over time. The fact that it is a
dynamic model has helped it to change as problems emerged. Such change
has been spurred by increased interest from commercial companies in
open source software because there is a promise of cutting costs with
low licence costs and the potential for ideas from a large population of
developers the ability to harness innovation is strong!
We now have traditional companies working with open source
communities, thus creating another form of organisation where it
becomes more difficult to recognise where the company ends and the
community starts. Company employees (salaried) are instructed to help
the community develop software and in many cases the open source
community members are also given full-time positions in the company.
Collaboration is becoming key for communities and companies in order to
harness greater innovation (for the companies) and for job security and
longevity of the open source project for the open source community.
Companies borrow more than just the software of open source communities.
An interesting phenomenon is how the open source production model is
being emulated by companies to enhance internal circulation of ideas and
innovation. Companies like Nokia practise what is known as inner sourcing,
which is inspired by the notion of sharing (from open source production)
but which is only internal to the company. We speak now of not just code
production but the provision of services and goods other than simply software.
This makes open source more widely relevant as the ideas of sharing,
governance patterns, control and communication are being translated to
areas other than software production. Procter and Gamble (P&G) structured
their Connect and Develop method to improve Research and Development
(R&D) using ideas of open source, and there are many other examples. Take
a look at the Connect and Develop2 site for P&G. It is a very interesting mix of
showcasing P&G talent but at the same time asking for support and ideas from
consumers and users; indeed, anyone and everyone. If you click on Browse
P&G Needs you will find a list of products and areas in which this company
is looking for external innovations. Watch the videos on this site where
different people connected to P&G speak about open innovation and their
way of asking for external help. If your innovation is interesting to them then
they will license, produce and market it for you. There are other examples
of collective production, and pooling of ideas. Undoubtedly you have used
Wikipedia at some point in your life. Collective production is inherent in the
example of Wikipedia (for more examples see Bughin et al., 2008).
Case study
Read Mini Case Study 3.4 on Twitter in Chaffey (2009) Chapter 3 and
complement this with your own exploration of the Twitter site. More
specifically, find the About Us section and read this through. Try to find
out how Twitter is supporting and being supported by open source. The
Status section is of particular interest as it facilitates user feedback and
104
https://secure3.verticali.
net/pg-connectionportal/ctx/noauth/
PortalHome.do
quick bug fixing on the part of Twitter. Twitter was created in 2006 by
Jack Dorsey (@jack), Biz Stone (@biz) and Evan Williams (@ev). For its
initial history and a very interesting article please read the LA Times 3 piece
by David Sarno.
The first part of the article by Sarno explains how Twitter was created,
the original idea and the first design. Read this as background, but the
second 4 half of the article will bring you to the intriguing questions of
how Twitter is being enjoyed by individuals as a way to interact and by
companies to advertise, collect marketing information, gather feedback
from users and behave as a platform to bring all sorts of people together,
be it for communication (mostly one-way, but reciprocal communication
is possible through features such as reply and direct message) or simply
gathering information.
http://latimesblogs.
latimes.com/
technology/2009/02/
twitter-creator.html
http://latimesblogs.
latimes.com/
technology/2009/02/
jack-dorsey-on.html
Read Dorseys reply to Sarno when he is asked what he thinks Twitter

is is it a service, medium or piece of software? What do you think, and
why? Go back to Table 2.5 in Chaffey (2009) Chapter 2 and see where
Twitter fits into the various forms of intermediaries. Also, who governs
Twitter, and how? Is it similar to Wikipedia in its style of being controlled
and maintained, or do the users have more control than the editorial
committee (of Wikipedia)? Like open source software development, is
Twitter leading to the emergence of new businesses around it, which
complement Twitter? Is this what you understand by the term ecosystem
used by Sarno?
Think about how the network idea created by the presence of the internet,
and used very productively by open source developers to collaborate, is
now being implemented by you and me to ask questions, make complaints
(to companies, etc.), self-promote, create a community of like-minded
people or goals through followers and lists, and further personal goals
such as setting up a company, gathering data, etc.
For anyone interested in gaining a better understanding of social
networking and Twitter, take a look at the study carried out by Kwak, Lee,
Park and Moon (2010).5
http://an.kaist.ac.kr/
traces/WWW2010.html
Activity
Read the essential readings on traditional organisations and open source, and then list
all the potential issues that you can think of when two such diverse forms of organisation
are encouraged to merge together. Think along the lines of control, communication,
structure of both forms, and incentive and sanctions methods.
Problems with NOFS

Although IT and e-business technology offer improved coordination and
collaboration, many problems remain:
technological inflexibility and dependence
inter-organisational relationships especially when problems occur,
large companies may resort to bullying their smaller partners
organisational NOFS offer a certain ambiguity (compared to the
traditional bureaucracy), which can be very useful in providing
flexibility, but it can also lead to confusion and conflict. Similarly,
conventional reward systems and career structures may be sacrificed,
leading to frustration and dissatisfaction
individual/psychological issues of lost job security, stress, alienation
and depersonalisation are common
105
unclear lines of authority with changes in accountability, evaluation

and planning responsibilities
implications for managers NOFS are more difficult to manage than
conventional structures. Managers typically suffer from increased role
complexity, with the dangers of trying to impose too much or too little
control; there is a need for managers to develop new coordinating
skills, rather than supervisory ones.
Conclusion
E-business offers a significant opportunity for change in both social and
organisational structures, in particular regarding how and where work
is done and organised. As such, the technology and associated practices
offer tools to address the chronic problem of organisational structure with
potentially huge benefits in terms of effectiveness and efficiency. However,
despite the promise of healthier organisations, there is also a danger
that poorly considered implementation of the technology could lead to
fragmented organisations, made up of stressed and alienated individuals.
As is often the case with information technology, the technology is
relatively neutral and the impact depends overwhelmingly on the
significant human and organisational enablers and constraints.

describe traditional organisational forms, such as bureaucratic
hierarchies, and the main characteristics of organisations
explain the problems of structuring organisations, especially as a result
of changing work practices
discuss the role technology plays in changing work practices
recognise new individual organisational forms
discuss the contribution of e-business technology to changing
organisational structures
describe how e-business technology can be used to restructure
organisations
describe virtual organisations and virtual teams, as well as their
benefits and drawbacks
analyse a new organisational form in terms of its shared principles of
membership
explain the benefits and drawbacks of off-shoring activities and the role
of technology
describe teleworking and mobile working and appreciate the challenges
for the management of these approaches
discuss open source production and recognise the contexts in which it
is appropriate
distinguish between various forms of organising such as mobile work,
virtual forums and open source development
explain the problems and benefits of the various forms of organising.
106
Self-test questions
1. Why are organisations increasingly considering new forms of
organisation (e.g. network organisations, teleworking)? What are the
problems in implementing them?
2. What are the characteristics of most new organisational forms (e.g.
virtual organisations, off-shoring)? Describe a new organisational form
that you are familiar with, highlighting its opportunities and risks.
3. What features and characteristics of virtual communities do you think
create an environment where open source production can flourish?
Justify your answer.
107
Notes
108
Chapter 10: Security issues in the digital

environment
Aims of the chapter
The aims of this chapter are to introduce the main concepts of e-business
security and, in particular, to explore the distinction between the technical
and socio-organisational aspects of security, as well as examining the
different goals of e-business security. We shall also discuss the role that
information security policies play in securing an organisations digital
environment and consider the various means of authentication. Key
concepts in this chapter include:
goals of e-business security
technological dimensions of security
threats and attacks
human and organisational dimensions of security
managing e-business security
information security policies
user authentication.
Learning outcomes
identify and explain the major security threats
explain security protocols and practices
distinguish between technical and human and organisational security
threats
discuss the strategic nature of security polices
distinguish between the various authentication technologies and
discuss their strengths and weaknesses.
Essential reading
Prentice Hall, 2009) fourth edition [ISBN 9780273719601] Chapter 11,
pp.65275.
Further reading
Adams, A. and A. Sasse Users are not the enemy, Communications of the ACM
42(12) 1999, pp.4046.
West, R. The psychology of security, Communications of the ACM 51(4) 2008,
pp.3440.
Security expert Bruce Schneiers blog: www.schneier.com/blog
The New School of Information Security blog: http://
newschoolsecurity.com
109
Information Security Business Advice from the UK Department of

Business, Skills and Innovation: www.berr.gov.uk/whatwedo/sectors/
infosec/infosecadvice/page10059.html
The Registers section on technology security: www.theregister.co.uk/
security
Princeton Universitys Center for Information Technology Policys
Freedom to Tinker blog: www.freedom-to-tinker.com
Introduction
E-business security deals with the matter of planning and managing
security within and around computer systems in e-business contexts.
It is therefore both a technical and a managerial matter. In fact, to
truly understand potential security threats to their businesses, security
managers must understand both the technological glitches and threats
that might occur, as well as the social and organisational weaknesses that
arise. To date, researchers and practitioners have mainly concentrated
on the technical aspects of security (such as encryption, firewalls, viruses
and data protection), paying less attention to the human component.
This is despite all the evidence that shows that the greatest threats to
organisations information systems come from within the organisations
themselves; that is, as a result of poor policies and practices. We must thus
consider people as a key factor in managing e-business security, in addition
to the technological factors see also West (2008).
E-business security is therefore both a technical and a social issue. This
chapter discusses these two dimensions and presents the main instruments
and techniques used to manage the complex security environments around
and within information systems that make e-business possible. As the
problems of e-business security are very similar to those of most largescale information systems, we use the terms e-business and information
systems security synonymously in this chapter.
Five goals of information systems security

As with other information systems, the security of e-business deals with
five main goals:
integrity: guaranteeing that data are not modified without authorisation
confidentiality: ensuring that only authorised individuals have
access to the information resources being exchanged
availability: guaranteeing that information is available when it is
needed
non-repudiation: guaranteeing that someone cannot deny his or her
participation in a transaction (e.g. when a seller falsely denies receiving
payment for an eBay transaction)
authenticity: ensuring that data and transactions are genuine.
To achieve these goals, technological and organisational procedures need
to be put into place so that failures are minimised.
Technological dimensions
From a technological viewpoint, many distinctions can be made when
addressing the problem of security. The first and most simple distinction
is between the technical layers that are taken into account when the
security strategy is designed. There are different ways of layering
110
information security, but for our purposes we can understand information

systems security on three levels: the computer security layer, the
network security layer and the internet security layer. Their main
characteristics are:
Computer security layer Securing the computer involves ensuring
that machines are installed with up-to-date anti-virus software. It can
also involve the regular backing-up of data in the case of data loss or
computer failure.
Network security layer Company intranets should be secured using
appropriate network architectures, including the use of firewalls.
Internet security layer Encrypting data as it is sent along the public
internet is a fundamental aspect of information security. This also
includes the use of digital signatures, which are a method of
proving that a message is from a particular sender and also that is has
not been tampered with in transit.
Threats and attacks

Every organisations e-business systems face a number of different threats
and potential attacks.
Denial of service attacks Malicious users flood a system with
so many requests (i.e. data packets) that it overloads and fails. These
attacks are common, and when a companys site is attacked it can
result in reputational harm, along with monetary loss. A famous
example of a denial of service attack is the one directed at Georgian
government websites in the lead-up to the countrys short-lived war
with Russia in 2008. Despite suspicions that the Russian government
was behind the attacks, which knocked out the National Bank of
Georgias website among others, the identity of the attacker was never
conclusively determined.
Web page hijacking Fake copies of trusted websites are created
and used to redirect web users to malicious websites. This technique is
commonly used by spammers.
Phishing Trying to fraudulently acquire information such as
usernames, passwords and credit card details from users by pretending
to be a trustworthy partner (such as a bank, online payment broker,
helpdesk, etc.).
Botnets Involves hijacking large numbers of computers connected to
the internet, for the purposes of creating a zombie network that can be
used to send spam or propagate viruses.
Malware Stands for malicious software, which is designed to install
itself on a computer without the users permission. Malware includes
adware (unwanted software that generates advertisements on the
computer screen), spyware (which secretly collects information about
the user and sends it to other computers), hijackers (which take control
of different parts of the web browser, such as the default home page
and search bar) and unwanted toolbars in the browser. See http://
arstechnica.com/security/news/2004/11/malware.ars for an extended
discussion of malware.
Viruses Computer programs that can install themselves on a
computer and propagate through a network. Viruses typically have
harmful intent, doing damage as they spread by corrupting or deleting
files.
111
Worms Similar to viruses, but they can spread without human

intervention. These often do damage by consuming network
bandwidth.
Trojan horse A type of malware that pretends to perform a desirable
function but in fact grants system access to unauthorised users.
Rootkits Programs that enable backdoor access to a computer,
usually without the users knowledge.
Another way of looking at threats is in terms of the likelihood that they
will actually harm an organisations e-business. That is, not all threats
occur as frequently as others. Chaffey (2009) Chapter 11 presents the
most common security breaches in large business organisations. He shows
us that infections by viruses or malicious software are a lot less likely
than staff misuse of technology, which is another type of security risk.
This reaffirms the argument that social factors are just as important to
e-business security as technical issues.
Activity
In using email, youve almost certainly encountered the type of spam email that tries to
phish personal details from recipients. These emails are increasingly common and can be
very sophisticated in terms of how they appear to come from official bodies such as banks
or other organisations. When you receive such emails, how can you tell they are fraudulent?
What clues are there in the email that make you wary about its trustworthiness? Has there
ever been a moment when you simply werent sure whether an email was legitimate or not?
Did the email ask for information you felt uneasy revealing? What did you do? Based on
these considerations, reflect critically on trust in e-business environments. Why and how do
we trust the information that we encounter in these systems?
Human and organisational dimensions

One of the major concerns regarding technological models of information
security is the weak emphasis placed on human, organisational and social
factors. For example, while a good encryption system might be in place
for employees to secure sensitive data, they might simply ignore it or
choose not to use it because it is too cumbersome. As such, these models
neglect the socio-technical dimensions of e-business security. E-business
systems are, indeed, designed, developed and used by humans. Humans
design the systems, operate them and execute their tasks using computers.
The problem of security of corporate information systems therefore
needs a much more holistic approach to the planning and management
of information systems security. It requires consideration of the social
context within which the technology is implemented and used for further
reading, see Adams and Sasse (1999).
All the threats listed above can be severely reduced if users are aware of the
risks that they pose and have been properly trained to identify them and act
accordingly. However, many companies choose not to provide such training,
occasionally because they do not see the immediate benefit. Likewise,
e-business companies often fail to implement secure transaction systems
because they are a costly investment. Such short-sightedness can prove very
expensive, in terms of both monetary costs and reputational costs.
Managing e-business security

Security is thus a central managerial challenge for every company that
engages in e-business. Besides actual and potential financial losses,
information systems security abuses or breaches can have other very
112
dangerous consequences for businesses, such as negative publicity,

competitive disadvantage and even reduced organisational viability.
A company struggling with information systems crippled by security
problems is not a healthy business and will be seen as an unattractive
partner.
As e-business makes companies more open to network- and internet-based
relationships, it increases the potential threats to internal information
systems coming from outside the organisation. When associated with the
increased accessibility to computers across the globe, increased computer
user sophistication, and the availability of advanced software tools, it
becomes clear that there is an increased risk of information systems
security abuses accompanying the increased diffusion of information
and communication technologies globally. Hence, management needs to
pay more attention to information systems security issues. However, this
can be challenging to achieve in practice because very often information
security is not considered to be a high priority by management.
This means that information security policies and strategies need to
be seen by managers as being vital to organisations. Such policies and
strategies form the basis of protection against the risks associated with
security breaches.
Activity
In late 2007, Her Majestys Revenue and Customs (HMRC), the UK tax agency, admitted
to losing two CDs in the post, containing sensitive information on 25 million people.
It was a very high profile data breach which seriously hurt the reputation of the UK
government. Go online and research what happened during this incident. What could
management have done to prevent the loss from happening? How did the agency
respond to the data loss?
Then see if there have been any comparable data losses in your country, either by
government or a business organisation. What type of breach was it? How did it happen?
Was it preventable?
Information security policies

An information security policy can be defined as the general guiding
statements of the goals to be achieved to guarantee the integrity,
confidentiality, availability, non-repudiation and authenticity of data
within corporate information systems. This definition is broadly in line
with the international standard on information security management
(International Standards Organisation (ISO) 27002, 2005), which states
that an information security policy document should provide management
direction and support for information security.
This document typically includes a general description of managements
commitment to the implementation, maintenance and improvement of its
information security management system. It is backed up by a specification
of the general technological and organisational means and procedures
put in place to achieve these objectives. The critical role of information
security policies in preventing, detecting and responding to security
breaches has become increasingly apparent, leading to concensus that such
policies must be a central focus of any information systems security plan.
There is a growing consensus within both the academic and practitioner
communities that a strong information security policy is the best basis for
the dissemination and enforcement of the information security strategy
within the organisational context.
113
A strong information systems security policy is therefore at the core

of every information security management strategy. Following the
documentation provided by the ISO, a list of specific issues to be addressed
by every information security policy includes:
114
1.
Personal usage of information systems: The information

security policy should clearly articulate all employees rights and
responsibilities in their use of the organisations information systems.
These users are fundamental to any policy and so they must fully
understand how their actions might affect the organisation.
2.
Disclosure of information: Information systems increasingly give

employees direct access to significant amounts of information much
of which may be confidential. The security policy must therefore
highlight any restrictions with regard to the disclosure or use of such
information.
3.
Physical security of infrastructure and information

resources: It has been noted that equipment should be physically
protected from security threats and environmental hazards. It
is therefore important that the policy explicitly articulates how
infrastructure and information resources are to be protected. Many
organisations produce what are known as disaster recovery plans in
order to ensure the security and availability of systems during natural
or human-inflicted disasters.
4.
Violations and breaches of security: The policy document must

indicate the steps that are to be taken to recover from a breach or
violation and the requirements for recording such security incidents.
These steps might also form part of an overall disaster recovery plan.
5.
Prevention of viruses and worms: The rapid proliferation of

viruses, worms and trojans presents an increasingly potent threat to
the security of corporate information resources. The organisations
policy must be clear regarding the application of virus-checking
software, the use of attachments and the sharing of information.
6.
User access management: It is considered good practice to

control users access to information based on sound business and
security requirements. The information security policy should
therefore provide a clear statement regarding the business
requirements needed to control access to systems.
7.
Mobile computing: The use of computers, laptops and mobile

technologies away from the traditional working environment must
be clearly regulated, as they are more difficult to protect using
conventional security controls. The policy must consider practices
that should be adopted to ensure that business information is not
compromised.
8.
Internet access: It is important that the policy explicitly addresses

the issue of internet access and restrictions on browsing and other
online activities. As we noted in Chapter 8, the increased use of web
2.0 technologies by employees increases the risks to information
security.
9.
Software development and maintenance: As many security

problems can be directly attributed to errors and oversights in
the development of information systems, the policy must present
guidelines for ensuring that effective security controls and procedures
are built into the software of all new systems.
10. Encryption: Encryption is a fundamental aspect as electronic

commerce has increased the amount and value of information that
is being communicated across public and potentially insecure
networks. The organisations requirements for encrypting such
information must therefore be clearly addressed in the information
security policy.
11. Contingency and continuity planning: It is essential that all
organisations have a contingency plan in place to cope with and
recover from a significant security breach. The information security
policy must specify how such contingency plans are to be written,
tested, maintained, revised and, ultimately, implemented.
The implementation of the information security policy is itself a very
challenging process. The information systems security policy is in fact a
statement which needs to become embedded in the daily organisational
practice of the business. Very often, a policy is clear, linear and wellframed, but the organisation still suffers from security breaches. This is
the outcome of more general problems related to the implementation of
managerial plans in organisations. Good planning is one thing, but until
employees pay attention to policies and incorporate them into their day-today routines, breaches will continue to occur.
Activity
If youve held a job or internship, at some point you should have encountered the
companys information security policy. Your university should also have its own
information security policy. Are you aware of such a policy? If so, how is the policy
communicated? Is its documentation easily accessible and does it make sense to you?
How are the policies enforced, if at all? If you were never provided with the company
or universitys information security policy, then why not? Who in the organisation is
responsible for communicating it to you?
User authentication
Another major issue for organisations, especially in online environments,
is how to control access to certain systems that might contain confidential,
privileged or business-sensitive information. This is the authentication
problem alluded to in the section on the goals of information systems
security.
Various technologies exist for authentication. A good way of classifying
them is in terms of their relation to the user:
1. authentication with something you possess
2. authentication with something you know
3. authentication with something you are or something you do.
The best example of the first type of user-authentication (possessionbased) is the use of tokens or ID cards by employees. Employees who need
to access a private company network are often required to enter a code
from a secure token that generates random codes at regular intervals.
Likewise, employees trying to access rooms in company buildings
where sensitive information is stored on servers are regularly required
to authenticate themselves using an access card. The main problem
with these technologies is that they are easily lost and can be used by
unauthorised agents. Anyone who gains possession of the token or ID card
has the right to access the system or facility, which creates a weakness in
the authentication process.
115
A different logic applies when it comes to passwords, personal

identification numbers (PINs) and cryptographic keys. These are things
that a person knows, rather than something they physically possess
(until they write them down, of course, which they usually are not
supposed to do!). We are all familiar with the problems with passwords.
They are easily shared and easily forgotten, which introduces risks to the
security of the information system. Passwords and PINs work well in many
business contexts, such as checking electronic mail, but if security is a
top concern, then a more reliable system must be devised. Such a system
needs to overcome the weaknesses of passwords and PINs. It must address
the practices or mistakes that users make which compromise systems. One
way to do this is to combine two or more means of authentication, such
as a user token plus a PIN. This is called two-factor authentication.
These authentication mechanisms are more secure, but they do not
eliminate all the risks that users introduce.
A very secure solution is provided by authentication technologies
which rely on users unique bodily characteristics. These are known
as biometrics. Biometrics can be either physiological (that is,
measurements of the body) or behavioural (that is, measurements of a
humans actions). Physiological measurements include facial recognition,
fingerprinting, handprint recognition, vein pattering, iris patterning and
even DNA profiling. Behavioural biometrics include measuring signatures,
keystroke dynamics (that is, the uniqueness of someones typing), gait
(how someone walks) and speech or voice. Biometrics is a new technology
and its e-business application is not yet commonly used. It is, however,
expected that in the near future these solutions will become more
common. Costs and technical problems still affect the diffusion of these
solutions.
Conclusion
This chapter discusses the major aspects associated with security in
e-business. The chapter presents and discusses the major security threats.
Perhaps the main theme that underlies the whole chapter is the distinction
between technological and human and organisational aspects of e-business
security.

identify and explain the major security threats
explain security protocols and practices
distinguish between technical and human and organisational security
threats
discuss the strategic nature of security polices
distinguish between the various authentication technologies and
discuss their strengths and weaknesses.
116
Self-test questions
1. Discuss the role of technology in enforcing information systems
security. Explain why more investment in IT does not always lead to
more secure information systems.
2. Discuss how and why biometrics can solve many security related IT
problems. Explain, with examples, whether there are any shortfalls in
biometric security based systems.
117
Notes
118
Chapter 11: Conclusion and implications

for e-business strategies
Aims of the chapter
The principal aims of this chapter are to summarise the subject guide as
a whole and to discuss briefly the implications of e-business technology
and practice for firms business strategies. In other words, we have argued
that e-business is important for commercial companies, in both theory
and practice. In many instances, it represents a major change in the way
they carry out their business and thus becomes a strategic challenge.
This chapter discusses how firms should go about harnessing e-business
for their own benefit. It also considers briefly the nature of strategy and
presents a number of case studies of actual e-business strategies.
Learning outcomes
integrate the previous nine chapters into an all-round understanding of
e-business
explain how the various components of e-business fit together in the
context of a commercial company
discuss the nature of strategy
explain how companies use a strategy to adopt e-business
explain how the underlying economics of e-business is transformed into
a strategy
discuss examples of e-business strategies.
Essential reading
Chu, C. and S. Smithson E-business and organizational change: a
structurational approach, Information Systems Journal 17(4) 2007,
pp.36989.
Clegg, C.W., C. Chu, et al. Sociotechnical study of e-business: grappling with
an octopus, Journal of Electronic Commerce in Organizations 3(1) 2005,
pp.5371.
Further reading
Ciborra, C.U. Teams, markets and systems: business innovation and information
technology. (Cambridge: Cambridge University Press, 1996) [ISBN
9780521574655] Chapters 1 and 6.
Giddens, A. The constitution of society. (London: Polity, 1986) [ISBN
9780745600079].
Green, M. Napster opens Pandoras box: examining how file-sharing services
threaten the enforcement of copyright on the internet, Ohio State Law
Journal 63(2) 2002, p.799.
119

Jarvenpaa, S. and B. Ives Information systems and business strategy: an
overview in Galliers, R.D. and D.E. Leidner (eds) Strategic information
management. (Oxford: Butterworth Heinemann, 2009) fourth edition
[ISBN 9780415996471].
Lee, H.G. and T.H. Clark Strategies in response to the potential of electronic
commerce in Galliers, R.D. and D.E. Leidner (eds) Strategic information
management. (Oxford: Butterworth Heinemann, 2009) fourth edition
[ISBN 9780415996471].
Porter, M.E. Strategy and the internet, Harvard Business Review 79(3) 2001,
pp.6278.
Porter, M.E. and E.V. Millar How information gives you competitive advantage,
Various management journals regularly feature articles on strategy and,
because of the importance and pervasiveness of e-business, many of these
articles deal with e-business strategy. We suggest that you check recent
issues of:
Harvard Business Review

The Economist
McKinsey Quarterly.
Summary of the subject guide

This subject guide has covered a very large amount of territory, from
the developments in technology through the underlying economics of
exchange to the management challenges of the twenty-first century. In
studying this course, you need to build up a detailed knowledge of each
component, as we have laid them out in each chapter, and also understand
how these components fit together in business practice.
This section summarises the preceding chapters from the perspective of
integrating them together in the context of firms business strategies. It is
certainly not a substitute for the detailed study of each chapter and this
is only one possible summary. Other summaries could be produced that
focus more on theory, societal change, human behaviour or numerous
other perspectives. Nevertheless, we have chosen to summarise and
integrate on the basis of strategy as this seems relevant to most students.
While working through this chapter, you are encouraged to turn back to
individual chapters to ensure that you follow, and internalise, the logic of
the argument made here.
The initial chapter sets out the rules of the game by summarising the
learning outcomes of the course and showing you how to approach
the material covered by the subject guide, the recommended textbook
(Chaffey, 2009), the other essential and further reading and the activities
contained within the guide. It gives a brief argument for the importance
of e-business, based on the short history of the phenomenon, and
emphasises the speed and dynamism of the continuing development
of the field. Unlike much information technology that has become
commoditised and institutionalised, e-business technology and practice is
still changing radically as the technology and its users, entrepreneurs and
consumers, companies and governments, interact together within various
societies. E-business is a multi-faceted phenomenon comprising strong
technological, business, management and social dimensions.
120
Chapter 2, E-business technology and infrastructure, describes

the hardware and software infrastructure that underpins e-business.
Such technology is necessary, but certainly not sufficient, for e-business
success. This chapter emphasises the network and connectivity aspects of
the technology as it is cheap, reliable and seamless communication that
facilitates e-business.
The third chapter, Economic theories of e-business, discusses a rather
different infrastructure that is as important as the technological one. It is
the economic aspects, in particular those pertaining to transactions, that
drive e-business. As we make clear in this chapter, it is the reduction in the
various transaction costs (in particular those related to the provision of
information) provided by the use of the technology that makes e-business so
competitive, compared to traditional ways of doing business. Transactions
that wouldnt have been worthwhile in the past suddenly become profitable.
New products and services, new delivery mechanisms and new business
models stem largely from the opportunities provided by the major reduction,
or shake-up, of these costs. In addition to reducing costs, e-business has
brought about changes in the structure of various markets, in particular the
disintermediation of middle-men or their replacement by infomediation.
The impact of e-business technology, together with the underlying economic
forces, is shown in Chapter 4, Business-to-consumer (B2C) systems
and strategies. We are all consumers and hence this is a familiar context
for examining the growth of e-business. By examining the strategies and
well-known products and services offered by high profile websites, this
chapter demonstrates how e-business has revolutionised many consumer
markets, such as travel and books. It shows the importance of understanding
shoppers and ensuring that websites are both innovative and easy to use.
The chapter also demonstrates that success is not inevitable by cataloguing
the problems and various failures associated with B2C e-business. It also
argues for the need to understand the product, the industry (or market) and
the technology. This shows the context dependent nature of e-business; in
other words, e-business is not appropriate for all retail transactions.
Chapter 5, Marketing for e-business, looks behind consumer
transactions and examines the ways in which e-business is used for
marketing. It demonstrates how e-business can bring the vendor and the
consumer closer together in a customer relationship. Marketing is an
activity that is especially information-driven, both in terms of the vendor
collecting information about the customer and delivering information to
the customer in order to provoke fresh sales. Customer segmentation,
personalisation and customisation are examined as key marketing concepts
where e-business has demonstrated major benefits, at least to the vendor.
Online advertising and branding, affiliate marketing and viral marketing
are also discussed, leading to the problem of how to integrate marketing
over a number of different channels. Although ostensibly a business issue,
we show the dangers to personal privacy caused by the use of intrusive
e-business marketing techniques a serious social issue.
The following chapter, Business-to-business (B2B) models and
strategies, switches the context away from consumer markets to
wholesale markets where businesses trade with each other. This chapter
shows how e-business technology, supported by the underlying economics
of B2B relationships, can be used to change the structure and orientation
of these markets in order to gain competitive advantage. The chapter also
examines procurement, showing how e-business can be used by companies
to improve the way that they purchase goods and services, resulting in cost
savings that can increase their competitiveness.
121
Chapter 7, Supply chain management, takes a wider view of B2B by

considering the whole supply chain (or value chain). Here again, tightly
integrated e-business technology and practices can dramatically improve
communication and coordination and hence drive down costs and improve
quality of service right the way through to the consumer. Again, we show
that different markets vary in their characteristics and hence one size of
supply chain does not suit all. We also highlight the risks of excessively
lean supply chains.
Chapter 8, Web 2.0 in business and society, describes the
development and application of this very contemporary e-business
technology that, many would argue, is a step change in both the
technology and the circumstances in which it is used. The context shifts
beyond markets to wider social behaviour, including social networking,
democracy in the media, and the storage and distribution of knowledge.
Nevertheless, as we make clear in the chapter, economic and business
interests are gaining a higher profile in this domain.
The next chapter, New forms of organisation, leads on from the
notion of changing social relationships in the previous chapter and shows
how e-business technology can be used to restructure organisations
and change how, where and when we work. Just as e-business can
revolutionise (some) markets, it can also transform (some) organisations.
As we discuss in the chapter, these new forms of organisation can lead to
lower costs for companies and improved coordination both within and
among organisations. They can also improve the working conditions of
employees. However, if their implementation is not managed properly,
they can also result in chaos and increased alienation and stress.
Like the whole of the subject guide, Chapter 10, Security issues in the
digital environment, exhibits a mixture of technological, management
and social issues, as these are the sources of security risks, but they also
represent particular solutions to the threats. As e-business becomes
increasingly important to the wealth and everyday happiness of individuals,
organisations and nations, security risks become more dangerous and
their potential for damage more widespread. We argue that technological
solutions are but one tool and, more importantly, the risks have to be
managed, especially those stemming from human and organisational issues.
Through summarising the previous chapters, this section demonstrates
three very powerful themes that characterise e-business. First, e-business
provides companies with tremendous opportunities, in terms of new
businesses, reduced costs and improved coordination, but also there are
considerable risks; for example, the cannibalisation of existing business,
the failure of new business models and the alienation of staff.
Secondly, this section demonstrates the multi-faceted nature of e-business
with its complex mixture of technological, management, business, social,
human and organisational issues. Companies may get some of these right but,
if they just get one aspect wrong, the e-business project is likely to fail.
Finally, this summary shows clearly the pervasiveness of e-business as it
touches all aspects of a companys business, from marketing to procurement,
from sales to logistics, and from human resource management to
infrastructure. Clegg et al. (2005) refer to this as grappling with an octopus
which has its tentacles in all a companys operations. E-business stretches
along the supply chain from raw materials, through sub-assemblies and final
assembly to the end consumer and it involves the interplay between people,
processes, organisations, culture, business models and technology.
122
E-business then is clearly very important for organisations but also very
complex and difficult to deal with. What should organisations do? Clearly
they need a strategy to deal with this phenomenon. Weve already talked
in some chapters, for example Chapter 7, about individual strategies for
that particular area but, given the nature of e-business, organisations need
to develop an overall e-business strategy.
E-business strategy
Chaffey (2009) devotes a whole chapter (Chapter 5) to e-business strategy
and you should read it carefully. The first point to note is the nature of a
strategy. Chaffey defines it as the definition of the future direction and
actions of a company defined as approaches to achieve specific objectives
(p.259). It is a companys sense of purpose or direction and it should not
be confused with a plan. A strategy is at a much higher level than a plan
and normally a strategy will lead to a number of plans; the strategy sets the
direction for more detailed step-by-step plans. Note that a strategy must
contain specific objectives but needs to incorporate considerable flexibility in
order to cope with a fast-changing environment. A strategy is needed in order
to seize opportunities, avoid organisational drift, to ensure a single direction
for the company and to reduce uncertainty, conflict and duplication.
We are happy to subscribe to Chaffeys definition of e-business strategy as:
definition of the approach by which applications of internal and external
electronic communications can support and influence corporate strategy.
Because of the importance and pervasiveness of e-business, the e-business
strategy needs to be an integral part of the corporate strategy. It follows that
the e-business strategy document is often not a long document as it does
not contain detailed plans or timelines. It is the overall direction (the what)
whereas the plans set out detailed implementation (the how) of the strategy.
When considering an e-business strategy, it is important to highlight the
underlying economics of e-business as it is these fundamental aspects that
must be leveraged for the company to benefit. It is surprisingly easy to
forget these key forces when trying to develop an e-business strategy for a
traditional marketplace. As we argue in Chapter 4, e-business is all about
innovation (in products, services, processes or business models) and being
able to translate the underlying, fairly abstract, economics into a feasible
strategy that will receive the support of managers, staff, customers, trading
partners and investors.
Earlier articles that discuss the difficulties of designing strategies that
somehow combine business, innovation and information systems include
Ciborra (1996), Jarvenpaa and Ives (2009) and Lee and Clark (2009),
while Porter (2001) and Porter and Millar (1985) tend to be more
optimistic. However, it is important to note that the latter texts were
written before e-business became the everyday tool that it is today.
The formulation of an e-business strategy

Chaffey (2009) presents a strategy process model, which is similar to
others in the literature. It breaks down the process of strategy formulation
into four stages:
1. analysis
2. objectives
3. definition
4. implementation.
123
Strategic analysis is a systematic evaluation of the current situation,

both internally within the company, and externally within the market it
is a picture of where we are now. The internal analysis includes a
review of the existing e-business resources (including hardware, software
and networks) and a portfolio analysis of where in the company e-business
is, or will be, strategically important. It also incorporates a SWOT
(strengths, weaknesses, opportunities and threats) analysis, as well as a
review of the human and financial resources available, including skills and
organisational structure.
The external analysis focuses on competitors and is based on Porter
(2001) and analyses the impact of e-business on:
the bargaining power of buyers
the bargaining power of suppliers
the threat of substitute products and services
barriers to entry
rivalry among existing competitors.
This includes the threats of new digital products and new business models,
as well as the changing (either increasing or decreasing) role and power of
intermediaries.
Having analysed the current situation (the as-is), companies should then
move on to setting objectives where they want the company to be in
the future. This includes defining the vision and mission of the company, and
Chaffey (2009) includes examples of vision and mission statements from
various well-known firms. Setting realistic objectives involves an appreciation
of how e-business can create business value in this particular company and it
is here in particular where an understanding of the underlying economics of
e-business comes into play. Chaffey (2009) refers particularly to:
Adding value through improved products or services or from using
information to improve customer relationships.
Reducing costs through efficiency savings (e.g. reduced inventory
within the supply chain).
Managing risks improved information can reduce uncertainty.
Creating a new reality through the innovation of new business
models, services or processes.
The objectives (e.g. increased market share) should be quantified (e.g.
market share increases from 5 per cent to 10 per cent) through the use
of key performance indicators, which should be closely monitored
throughout the implementation of the e-business strategy.
The third of Chaffeys stages, e-business strategy definition, involves
selecting the options (in terms of approaches) that are most likely to
achieve the objectives. These include:
Determining the e-business channel priorities (i.e. upstream or
downstream and avoiding cannibalisation from existing channels).
Market and product development deciding which market segments to
focus on and which new products to develop.
Positioning and differentiation deciding how to differentiate from
competitors (e.g. on price, quality or service).
Selecting an appropriate business, service and revenue model.
Marketplace restructuring this refers to the position of middlemen
and may involve disintermediation or infomediation.
124
Supply chain management the integration and structure of the supply

chain.
Internal knowledge management the provision of knowledge and
information to staff within the company.
Resources and capabilities whether these are already available
internally or whether they need to be acquired, perhaps through
partnerships or joint ventures with other companies.
Finally, the strategy needs to be implemented, which requires drawing
up detailed plans in all of the above areas, implementing the plans and
carefully monitoring their progress. This is particularly difficult in a dynamic
environment like e-business, where there may be radical changes in:
customer tastes and behaviour
technology developments
capabilities of trading partners
availability of resources, especially skills and investment capital
legal frameworks (e.g. copyright laws)
competitors actions
product and service developments especially from new entrants to the
market.
From the above discussion, you should appreciate the difficulties
in formulating an e-business strategy and, furthermore, you should
understand why such strategies, no matter how well considered, often fail
in practice and/or produce a totally unexpected result. You should now
refer back to Chapter 4, where we discuss the case studies of various B2C
companies which had to change their initial strategies but did so very
successfully (e.g. eBay).
The following cases are excellent examples of strategic change, driven
by e-business. The first one examines the transformation of the music
industry, where the entire industry structure has been changed beyond
recognition through the application of e-business technology and practice.
The second example refers to the e-business strategy of a large car
manufacturer, which failed in its original implementation.
Case study 1: The transformation of music retailing

through B2C innovation
As we discussed in Chapter 4, in some retail sectors e-business has been
largely a case of loading a traditional paper catalogue online, but in others
it has totally revolutionised retailing. A prominent case concerns the music
sector, where a combination of the underlying economics of the sale and
distribution of what is fundamentally a digital product, together with
innovation and understanding the shoppers, the product, the industry and
the technology, has transformed the sector. At the time of writing (2010),
that transformation is still being worked through.
Traditionally most artists belonged to a record company that sold their CDs
(and previously cassettes and vinyl) to customers through conventional
retailers. The artists were given a varying portion of the profit and the
companies prospered from the formers efforts, while also taking charge
of marketing, selling merchandise and promoting the artists. However, the
introduction of the Napster file-sharing site in mid-1999 began to change
everything. Napster, created by US student Shawn Fanning, allowed
users to share music files without payment. It was an immediate success,
125
attracting more than 26 million users, who felt exploited by the record
companies. Some artists, who felt equally exploited, approved of Napster
while others sided with the companies. However, after just two years it
was shut down by a court ruling, following pressure from the companies,
claiming copyright infringement. Nevertheless, in this short time span
Napster changed how both customers and artists (including composers)
viewed the purchase and consumption of music (Green, 2002). It led
the way to numerous peer-to-peer file distribution programs like KaZaA,
Gnutella and BitTorrent, which were also pursued by the companies.
Napster re-emerged as a legal music distribution site and its situation circa
2008 is described in Chaffey (2009) Chapter 8.
However, a year after Napster first closed, Apple introduced its iPod,
followed a further year later by iTunes and the iTunes store. Sales of
conventional CDs were now in freefall. According to The Guardian (3
September 2009) global revenue from CD and DVD sales in 2004 was
close to $32bn but this fell drastically to $22bn in 2008 and is expected to
continue tumbling. With an iPod we are all able to hold, and use, digital
music and video files. Users are thus empowered in a manner that they
were not previously. Digital goods are more amenable to being mixed and
matched, shared, changed and distributed than other older formats. This
can be seen in the amount of music and user activity involving web 2.0
platforms, such as niche blogs and social networking sites like MySpace
(see Chapter 8 of this subject guide), as well as commercial sites such as
Spotify in Europe.
Meanwhile, the record companies are currently consolidating and scrambling
to find new business models that match the new reality. However, the
issue of copyright and the need to reward artists has not gone away. In
2009 there was a dispute in the UK between YouTube owner Google and
the PRS (the Performing Right Society which represents the copyright
owners) that, although resolved, shows that controlling content online is
not straightforward. But there is a bigger idea here. Studies have found that
piracy and online music releases can lead to an increase in legal sales. This
can be explained by borrowing ideas from marketing (see Chapter 5) where
piracy can be used by companies as a marketing tool. Microsoft used a
similar strategy in China, and other developing countries, where the company
initially turned a blind eye to the rampant pirated copies of its software
and then threatened to sue if legal versions were not purchased. Users had
become used to Microsoft products, and to wean themselves off such software
would hurt businesses too much so they were forced to pay.
The music industry example offers insight into how users, customers
and, very importantly, musicians and artists have been empowered by
technology. Technology has disintermediated (see Chapter 3 of this guide)
the process of music distribution, threatening the position of record
companies. New technologies have led to the emergence of new business
models that provide a means for artists to profit from their labour. One
example of such a technology is the iTunes store. The software is freely
available, even though Apple invested heavily in developing this innovative
product. Apple understands shoppers and spotted the opportunity to use
free software to lock them into what has become an indispensable channel
for sales and sharing. Each week iTunes releases a free song for download,
thus whetting the appetite of customers. Customers who download the
free song are presented with a range of other songs in which they might be
interested, in the style of profiling used by Amazon.
126
iPods are a durable good which are rarely replaced by customers. Keeping this
in mind (the product), and the needs of the industry, Apple innovated with
technology, in this case iTunes, to re-intermediate not just music distribution
but also films, software, applications, etc. Apple makes money from drawing
customers back into using its software to buy such products. A portion of the
profit goes to the creator of the work and the rest is taken by Apple.
The technology used by Apple iTunes is proprietary software that
cannot be changed, which implies that its competitors, like Nokia, depend
on Apple for software applications to make iTunes compatible with Nokia
handsets (which is what Apple used to do but then refused to continue).
Nokia finds it difficult to compete with the iPhone and iTunes lock-in and so
has attempted to supply its customers with the necessary software to make
Nokia products compatible with iTunes use.
The music example shows how business models adapt to changes in
technology. Technology can be used to tie customers into particular products
or services and, as in the case of digital products, Napster and peer-to-peer
networks, can lead to innovations in product, business model and use.
Activity
Apple is a company with a growing number of customers. The customer base is growing
but Apple also releases newer versions of its products on a more regular basis than most
other companies, which may indicate that the customer base is happy to buy new versions
of old products.
What sort of customers does Apple attract? Are they interested in new functionality,
keeping up with fashion or do they consider Apple products to be luxury goods and so
a status symbol ? Think about why you have an iPad, iPhone, iTouch, Nano, iMac,
MacBook Pro?
Now that you understand who makes up the largest part of your customer base, if you
were Steve Jobs, or a key Apple employee, what sort of strategy would you propose
Apple takes for the next two to three years? Choose one product, or answer
keeping in mind a bundle of Apple products and services (iTunes). Pay special attention
to your competitors, resources needed, threats, and of course the strengths of your
products and brand name. (Hint: you could use Porters five forces model.)
Do you see Apple collaborating with another large company (e.g. Google, which owns
YouTube) as a marketing device for selling songs, software, videos, as another avenue
to sell its products, or a way to kill competition? Explain where and how Apple would
add value with such a collaboration, reduce costs, manage risks or create a new
business model.
There are no right answers to most of these questions but, by thinking about the issues
and sketching out the arguments, you will learn a lot about e-business strategy.
Case study 2: AutoCorp

This case, which is written up in Chu and Smithson (2007), concerns the
e-business strategy of a large US car manufacturer as it tried to navigate
the dot.com boom and bust. Despite the new CEOs clear vision to use
e-business to transform the corporation from a manufacturing company
to a customer-focused company, the article shows clearly the difficulties
in formulating and implementing an e-business strategy in a turbulent
environment.
127
You should read the article carefully, especially the narrative of the case,
but without worrying too much about the theoretical aspects. The article
uses tools from structuration theory (Giddens, 1984), which is a social
theory concerned with the way societies change. In particular, the article
uses Giddens notion of structure to talk about organisational structures in
terms of relationships between individuals across three dimensions:
Domination power relationships based on the control of resources.
Legitimation the importance of social norms of behaviour.
Signification the power of language and symbols in communication.
The underlying narrative of the case is quite straightforward. At the height
of the dot.com boom, managers, staff and shareholders of large traditional
corporations felt uncertain and confused by the apparent revolution of
e-business and the knowledge economy. AutoCorps new CEO, an avid
proponent of e-business, offered a tantalising vision of the future, whereby
e-business would transform AutoCorp from being a rather stuffy old
manufacturer into a highly customer-focused company.
He set about this by introducing a new high-profile division, named EBD
in the article, with a lot of resources (and hence power), into the large and
ungainly multinational structure of AutoCorp. This caused considerable
political problems, of legitimation and signification, with the rest of the
company. The European brands did not like being pushed around by the
American headquarters and the traditional IT division felt threatened by
this new upstart. The CEO transgressed longstanding norms of behaviour by
recruiting senior managers for EBD from outside the company, by investing
in joint ventures with start-up companies and by encouraging EBD to adopt
an entrepreneurial attitude to the rest of the company. Symbolically he
closed down one of the historic manufacturing plants and installed EBD in
fashionable new offices.
Reflecting the apparent urgency of e-business, the CEO authorised a big
bang strategy whereby EBD would grow very quickly and take on projects
throughout the company. In the medium term, he expected this venture to
be so successful that EBD could be spun off as a separate company, boosting
the value of AutoCorps shares. Unfortunately, but perhaps not surprisingly,
this strategy didnt work as EBD staff, who had little experience with the
new technology and practices, had to develop procedures and methods from
scratch while selling e-business to the rest of the company. Their salesmanship
and evident lack of expertise caused serious problems and antagonised many
of their internal customers. This led to friction and a drop in morale within
EBD. Around the same time, the joint ventures also began to unravel.
However, it was a major engineering failure, and nothing to do with
e-business, that finally led to EBDs closure. This failure, which cost
AutoCorp many millions of dollars in recalls, together with a sharp decline
in profits, built on the general discontent within the company and the CEO
was fired. By then, the dot.com boom had turned to bust and numerous
investors had lost fortunes in speculative hi-tech ventures. Against this
backdrop, the replacement CEOs call for a back to basics strategy of
focusing on quality control and engineering was heartily welcomed by most
of the company and EBD was closed down. Since then, the company has
developed numerous e-business systems successfully but it did so in a much
more carefully controlled manner.
128
Activity
Read the Chu and Smithson (2007) paper carefully, think about the issues and answer
the following questions:
What were the alternatives to the internal big bang strategy? What sort of
incremental strategy could have been followed? Was the joint venture approach a
bad idea altogether or did the CEO choose the wrong partners?
Should EBD have been set up initially as a separate division? Or, should it have been
allowed to develop within a parent division? If so, which one? IT? Marketing?
Was the CEO merely unlucky? Or, just foolhardy?
There are no right answers to most of these questions but, by thinking about the issues
and sketching out the arguments, you will learn a lot about e-business strategy.
Generic e-business sell-side strategies

Chaffey (2009) Chapter 5, Activity 5.3 lists six generic strategies, originally
coined by IDC Research. They are:
Attack e-tailing aggressive competition, usually based on low prices.
Defend e-tailing competing on aspects other than price.
End-to-end integration optimising the supply chain through using
e-business to reduce costs, increase quality and reliability and cut
delivery times.
Market creation using B2B exchanges within the supply chain to
continuously improve the value chain.
Customer as designer allowing customers to personalise the product
or service through using the technology.
Open source value creation using open source production to solve
internal shortcomings or problems.
Activity
For each of the above six generic sell-side strategies, identify a good example of a
company that has successfully adopted that strategy. You will find some examples in the
cases described by Chaffey (2009) especially Chapter 5. If you find this too simple, then
repeat the exercise but, this time, identify examples of each strategy that have failed.
Conclusion
In this chapter, we summarised briefly the preceding chapters of the
subject guide and argued that e-business:
presents companies with both opportunities and risks
is a complex mixture of technological and non-technological issues that
interact together to create uncertainty for companies
is highly pervasive, affecting entire organisations and their value
chains.
On this basis, we argued that companies need an e-business strategy and
we discussed the nature of such a strategy and the processes that most
companies follow to formulate the strategy. We then argued that strategic
issues can best be appreciated by referring to case studies.
129

integrate the previous nine chapters into an all-round understanding of
e-business
explain how the various components of e-business fit together in the
context of a commercial company
discuss the nature of strategy
explain how companies use a strategy to adopt e-business
explain how the underlying economics of e-business is transformed into
a strategy
discuss examples of e-business strategies.
Self-test questions
1. Why do companies formulate e-business strategies? Briefly outline how
companies usually go about formulating these strategies. What are the
main problems involved in e-business strategy formulation?
2. E-business is a contemporary example of organisational change.
Discuss this statement with reference to a case study with which you
are familiar.
3. What is an e-business strategy? Which aspects of a companys business
should it cover? Who should be involved in its preparation? Justify
your answer.
130
Appendix: Sample examination paper
Appendix: Sample examination paper

Important note: This Sample examination paper reflects the
examination and assessment arrangements for this course in the academic
year 20092010. The format and structure of the examination may have
changed since the publication of this subject guide. You can find the most
recent examination papers on the VLE where all changes to the format of
the examination are posted.
Time allowed: three hours
Candidates should answer THREE of the following SIX questions. All
questions carry equal marks.
1. Why is supply chain management of growing importance in many
industries? What are the problems with traditional supply chain
management? Discuss how computer-based information systems are
used to address these problems.
2. Companies engaged in business-to-consumer (B2C) e-business need
to understand shoppers, technology and their industry. Discuss with
examples.
3. What are the characteristics of most new organisational forms? Why
are organisations adopting these forms? What are the implications
for managers? What is the role of information systems in new
organisational forms? Give examples.
4. You have been asked, as a consultant, to begin work on an e-business
strategy for a new pure-play, online, business-to-consumer retailer.
What areas would you examine regarding this strategy? For each area,
briefly discuss an issue that you feel is likely to be important in this
context.
5. It has often been argued that information and communications
technology (ICT) is disintermediating electronic marketplaces.
Infomediaries are however increasing in electronic markets. Discuss
with examples.
6. Transaction costs can be described as frictions in the market. How can
ICT reduce these frictions? Discuss the theoretical model of transaction
costs and explain how and why ICT can reduce or increase transaction
costs.
END OF PAPER
131
Notes
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Management and innovation

University of London International Programmes

167 Management and innovation of e-business

A reminder of your learning outcomes.......................................................................... 33

167 Management and innovation of e-business

Introduction to new forms of organisation ................................................................... 96

167 Management and innovation of e-business

Aims and objectives

introduce the notion of new organisational forms, such as virtual

How to use this subject guide

167 Management and innovation of e-business

Structure of the guide

Chapter 3: Economic theories of e-business

of markets for products and services exchanged through e-business. The

Chapter 4: Business-to-consumer (B2C) systems and strategies

Chapter 5: Marketing for e-business

Chapter 6 Business-to-business (B2B) models and strategies

Chapter 7: Supply chain management

Chapter 8: Web 2.0 in business and society

167 Management and innovation of e-business

Chapter 9: New forms of organisation

Chapter 10: Security issues in the digital environment

Chapter 11: Conclusion and implications for e-business strategies

e-business environment legal, ethical and security issues; lessons from

It is always preferable that you have access to the latest editions of

167 Management and innovation of e-business

Online study resources

The VLE provides a range of resources for EMFSS courses:

Making use of the Online Library

167 Management and innovation of e-business

Most broadsheet or business newspapers, such as the Financial Times or

The Economist (www.economist.com): although this is not a computer

Using the essential textbook

www.datamation.com the website of Datamation magazine

167 Management and innovation of e-business

Chapter 2: E-business technology and infrastructure

Chapter 2: E-business technology and

167 Management and innovation of e-business

Introduction to e-business technology

Networks and the internet

Chapter 2: E-business technology and infrastructure

Intranets are private networks that operate within organisations. These

167 Management and innovation of e-business

Chapter 2: E-business technology and infrastructure

critics continue to debate these distinctions. The popular site Wikipedia,

167 Management and innovation of e-business

Figure 2.1: Client/server versus peer-to-peer architectures

Figure 2.2: Cloud computing

Chapter 2: E-business technology and infrastructure

In a way, cloud computing resembles previous network architectures.

Mobile computing and m-commerce

167 Management and innovation of e-business

Technologies for supply chain management

Chapter 2: E-business technology and infrastructure

Rubee is a similar technology to RFID, with some important differences.

Security technologies for e-business

167 Management and innovation of e-business

Another business application that uses encryption is the digital

A reminder of your learning outcomes

Chapter 2: E-business technology and infrastructure

167 Management and innovation of e-business

Chapter 3: Economic theories of e-business

Chapter 3: Economic theories of