Electronic commerce: a market opportunity for support equipment and services - Industry Corner - Column

Business Economics, Oct, 1998 by Andrew C. Gross, Edward D. Hester

Two key slogans, "Doing Business on the Net" and "Conducting Electronic Commerce," have become popular in the late 1990s, yet both concepts can trace their roots back three decades. However, they differ: the Internet had its origin with the U.S. government, while electronic commerce (EC) began in the private sector, specifically in the banking community. Their underlying purposes also differed: in the former, the emphasis was on exchange of information; in the latter, on buying, selling, and making payments for such transactions. Today, the scope of both the Internet and electronic commerce has expanded greatly; at the same time, the two concepts (now, in fact, key activities) are beginning to converge. They are joined by a third player, the World Wide Web, with its own slogan, "Surfing the Web."

Forerunners of the Internet include the ARPAnet of the 1960s and the NSFnet of the 1980s. These electronic linkages, for the military and later on for research agencies and universities, constituted semipublic, restricted networks. The situation changed drastically by the early 1990s, with personal computers proliferating, computing decentralized, and business enterprises allowed to join in. The Internet became a true public and global network of networks, cooperatively run, with a common protocol. Soon thereafter, its graphic counterpart, the World Wide Web appeared, along with browsers, search engines, and web sites for both businesses and individuals. Education, entertainment, and enterprise players now all seek "to play in this sun" by "going on line." Many issues, such as access, pricing, privacy, security, copyright and censorship, remain controversial but are also being resolved.

The roots of EC can be traced back also over three decades. In the mid-1960s, automated teller machines (ATM) emerged to assist bank consumers in performing routine functions, such as deposits and withdrawals. About the same time, point-of-scale (POS) terminals and related scanning systems appeared; these allowed the capture and analysis of transactions in retail establishments, large or small. Scales of such equipment now reached the mature stage of the product life cycle in the United States but are by no means declining.

Subsequent developments during the 1970s and 1980s involved electronic data interchange (EDI), online credit authorization, direct-debit purchasing, automated clearing and fund transfer schemes. Associated goods and services facilitating such transactions included multipurpose terminals, sophisticated software, and services ranging from maintenance to training. Current and future sales of such items should still be in the growth stage, with advance terminals and software leading the way.

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By convergence of the Internet, the Web and EC, transactions would take place not just over dedicated corporate tielines (in the EDI mode) but on line, in a public meganetwork. This permits far more shoppers to enter the electronic store, far more suppliers to display their wares. Forecasts for the volume of electronic shopping by 2000 range from $5 billion to $10 billion by households and from $65 billion to $160 billion by businesses. To facilitate such shopping, establishments must purchase both equipment and services; the dollar value of such items is shown in Table 1.

FROM EDI TO EC

EDI involves computer-to-computer exchange of business data over dedicated tielines, i.e., a private network. Originally, the key rationale was to handle purchase orders, invoices, and payments. But EDI can also handle inquiries and adjustments of all kinds; it can be used for notifying partners about price changes, promotion campaigns, and inventory.

While EDI seems simple in concept, it is complex and costly to put in full operation. In effect, formal standards and sophisticated systems must exist between the parties for accurate and speedy exchange of data. This works well when a large firm, such as Ford or General Motors, deals with dozens of major suppliers. Another attractive application for EDI is when collaboration occurs between a large manufacturer, such as Procter & Gamble, and a large retailer, such as Wal-Mart. In this case, Wal-Mart gathers data from outlets for analyzing trends and then tells P&G what product mix to ship to what warehouses, all in a "just-in-time" mode. Both parties benefit in terms of inventory levels, material management, logistics efficiency, and customer satisfaction.

According to both the Gardener Group and Forrester Research, only 100,000 of the 2 million U.S. companies (with ten or more employees) deployed EDI in 1996. Traditionally, EDI worked well among firms with strong relationships in manufacturing, consumer goods retailing, trucking, and health care. Do the remaining 1.9 million small and medium-size firms represent a major opportunity for vendors in the coming years? Most observers think that these firms will prefer a more open mode of operation, true EC rather than EDI.

Electronic commerce represents a new way of thinking about electronic data interchange. In EDI, a business relationship already exists among firms; the data exchange occurs between computers and transaction volume is high. In contrast, EC, which is Internet/Web based, encourages formation of new relationships, recruiting customers nearby and around the globe. Admittedly, transaction volume will be more moderate, shipments more irregular. Yet vendors can respond instantly to buyers' inquiries and orders, so response and action can be quick. The Net/Web-based EC is proving to be cheaper and more flexible than EDI, with just minor sacrifices in security and reliability.