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2000 VOLUME 3 ISSUE 1

Are You Ready for E-Commerce?

Make Customers the Focus of Your Online Venture
BY TOM PENDERGHAST, DBA

Basic issues for firms to consider when developing an e-commerce plan.

It took radio 30 years, from 1922 to 1952, to reach 50 million users. Television
required 13 years to do the same thing. Cable television became available in 1974
and achieved this goal in 10 years. It took the Internet approximately five years to
reach an estimated 100 million users (Source: Harris Interactive) and revolutionize
the ways in which firms market and provide customer service.

This growth is particularly impressive since the Internet challenges firms to do

business in new ways. How do firms chart a profitable course in cyberspace? The
key is to focus on the customer who, it turns out, may bear little resemblance to
customers of the past.

Who Buys Online?

Online customers are youngish and educated. In 1998, the Georgia Institute of
Technology conducted a survey that identified the average age of Internet users as
35 and stated that 81% of them have had some college training. Eighty-eight
percent of those who use the Internet log on daily and 63% can connect from
home. The survey indicated that 76% of Internet users have purchased goods or
services online.

Online customers may be out of state or overseas. E-commerce can greatly expand
the scope of a firm in both customer base and product offerings. A virtual
organization can serve customers who live and work in distant geographic locations

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so regional sales outlets can assume a global presence. A note of caution here…US
firms report that a relatively high percentage of foreign transactions are fraudulent.

Online customers may know little about firms with which they do business. Online
customers visit a website rather than a showroom and, in many cases, know little
about the host company. They are more focused on the merchandise than on the
marketer. Using the Internet for product research, online customers are
increasingly knowledgeable about products and services.

Online customers are mobile. Travel and tourism are among the fastest growing
areas of e-commerce. Firms that offer online access to airlines and other travel
services earn commissions on arrangements booked through their sites. Foster
Research predicts that, by the year 2000, 25% of retail e-commerce will be related
to tourism.

Online customers are mushrooming. Online sales are the most dynamic
phenomenon in the recent history of retail sales. Less than a decade old, e-
commerce will become a $20 billion business in the year 2000, up from $518
million in 1996. Its rate of growth has been a phenomenal 15-25% per month. It is
estimated that, by the end of 1999, 39% of all US retailers will be selling online.

Use the Internet Strategically

Many firms with strong shares of traditional markets are losing ground as these
markets move online. Some of these firms have not yet explored the potential of
the Internet while others have jumped into e-commerce without a clearly defined
strategy. Because of the rapid pace of innovation in computer technology, and
equally rapid changes in online markets, firms engaged in e-commerce must place
more emphasis on planning for the future – even the distant future – than
traditional retailers. Profitability may be years away. Amazon.com, for example, is
projected to exceed $1 billion in annual sales by 2001 but the firm has yet to show
a profit.

An e-commerce strategy can build on an existing firm’s traditional strengths or lead

to completely new ways of doing business. Here are some basic questions for a
firm to ask when considering an e-commerce venture:

1. What value will the Internet provide the business?

2. Will the benefits outweigh the costs?
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 3. How can we measure success?
4. How will business processes have to be changed to use this technology for
electronic business?
5. How much process integration is required?
6. What technical skills and employee training will be required to use Internet
technology?
7. Do we have the appropriate information technology infrastructure and
bandwidth for using the Internet or Intranets?
8. How can we integrate Internet applications with existing applications and
data?
9. How can we make sure our network systems are secure?
10. How secure is the electronic payment system?
11. Are we doing enough to protect the privacy of customers we reach
electronically?

A strategic plan typically sets forth the market that a firm will serve and the ways in
which it will provide that service. It also identifies a firm’s strengths and
weaknesses, and considers the availability of resources. An effective strategic
planning process will provide direction for a firm and still enable employees the
flexibility to respond quickly to changes in customer needs or competitive
conditions.

Every Internet firm must be a world-class competitor because of the global nature
of the online marketplace. And it is not enough simply to have an attractive
website. Pricing must be competitive and order processing, inventory control, and
shipping must be efficient. In many cases, these functions are far more costly than
website design and maintenance. Computer Weekly notes that many commercial
Internet sites are simply shells without an adequate back office infrastructure to fill
orders and service customers.

Focus on Four Basic Needs of Online Customers

One significant part of a strategic plan is the way in which a firm will develop
relationships with new customers. One way to initiate the customer service aspect
of an e-commerce strategic plan is to consider four basic needs of virtual
customers: information, security, support, and privacy.

E-Customers Need Information. Information access is the driving force of e-

commerce. The Internet is particularly effective in providing customers with the
information needed to compare products or services, to research a manufacturer,
and to select a provider. The challenge is to deliver this information conveniently.
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Site design and functionality are the online equivalent of an attractive showroom
and professional sales staff.

Take, for example, the Amazon.com web site. It is rich in customer information and
presents a convenient format for locating descriptions of books, music, and other
products. It helps customers make selections by providing customer comments,
customer ratings, and links to other products chosen by those who purchased a
particular book or CD. Customers can preview music samples by downloading 30-
second WAV (audio) files. The newer MP3 audio format will soon enable even faster
downloading of such samples.

There are a variety of technological challenges in delivering information to

customers online. Frames and other aspects of web site design can be confusing.
Slow computers and aging browsers can discourage prospective customers, and
there is the question of how to attract customers to the site. These are problems
for which new solutions are continually being developed. Some firms use
traditional advertising media to reinforce the information delivered online while
others advertise solely to publicize their web sites.

One clear key to success in online sales is prominent positioning on Internet search
engines such as Yahoo!, Excite, Lycos, and AltaVista. These services are the
gatekeepers of the electronic marketplace. A consultant may be useful in helping to
position a firm prominently in search listings. Search services organize their listings
based on factors such as hit count and the way in which keywords are used in the
site’s title, contents, and coding. But often listings are counterintuitive. Popular
sites, such as Walmart.com and Amazon.com, do not always appear high in the
subject listings for their market segments.

E-mail is another way of initiating online communication with prospects. The Los
Angeles Times and the Harvard Business Review are examples of companies that
send periodic e-mail to prospects. They strategically place bits of news and
information in the message along with a commercial offer. Both of these
companies also know that it’s good business to give prospects the option of
excusing themselves from future e-mailings if they so desire. E-mail is very cost-
effective. It costs about $9 to send an e-mail message to 1200 prospects while the
cost of sending a direct mailing or fax to the same audience is some $1600.

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E-Customers Need Security. How secure are Internet transactions? Widespread
security concerns linger among consumers despite published improvements in the
online processing of credit card information. One recent survey found that 65% of
U.S. consumers believe it is unsafe to take part in e-commerce. Another survey
found that just 5% of Internet users would risk sending credit card information
over open lines.

E-businesses utilize a variety of security methods and often provide general

descriptions of these measures on their web sites to assure customers that
personal information is protected. Progressive companies guarantee that
customers will not be liable for any fraudulent activity resulting from online
purchases. Their sites often contain general descriptions of encrypting systems or
other safeguards in place to protect credit card information.

Secure Sockets Layer, or SSL, is one technology used to encrypt financial data
before it travels across the Internet. Customers may also be given the option of
submitting their credit card information by phone or paying by check. Another
current means of protecting online information is public key infrastructure, PKI,
technology. This cryptographic system is analogous to a bank night safe for which
many keys may be issued to enable deposits, but only the bank possesses a private
key to access these deposits. For Internet transactions, freely available public keys
lock messages that can be unlocked only by the recipient’s private key. A third
means of Internet security is Secure Electronic Transaction, or SET, protocol. This
system encrypts payment transaction data and verifies that both parties in an e-
transaction are genuine.

Security concerns, however, persist despite these precautions. For example, The
Wall St. Journal recently reported that newer, faster computers can be used to open
files encoded with common forms of encryption. But the security issue is a
significant competitive advantage for sophisticated firms that assure consumers of
security and have procedures in place to minimize their own losses from fraudulent
transactions.

E-Customers Need Support. The Internet provides new ways of developing closer
relationships with customers. Such techniques replicate face to face interactions in
important ways. E-mail and messaging are forms of communication that can be
used to better understand customer needs. The opportunity for customers to
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provide feedback to a firm over the Internet can establish two-way relationships
and help build customer trust. Return policies are also important.

Many firms offer full refunds on goods returned in original condition. With such
assurance of satisfaction, customers will make online transactions more readily.
Still, the extent to which customer loyalty exists on the Internet is yet to be seen.

E-Customers Need Privacy. Finally, customers need assurance that online firms will
not disclose personal information to other parties. If the Internet is to remain a
largely self-policing entity, firms must refrain from selling or exchanging customer
names and demographic data. Customers will quickly abandon firms when such
abuses are discovered.

Making E-Commerce a Reality

Firms wanting to venture into e-commerce face significant investments of time and
resources. One of the first steps is to develop a web site. This will require personnel
with the technical expertise to program the site, others who make the site
appealing to prospective customers, and still others to manage the orders and
information that the site generates.

A firm’s existing personnel will need varying amounts of training in the effective
utilization of e-commerce. Employees may resist what they consider to be
significant changes in the company’s strategy and culture. Some employees will
need to know how to send, receive, and locate information on the Internet. They
must also be able to advise and reassure customers who are inexperienced in
online transactions. New methods of marketing and competitive analysis will have
to be developed and implemented.

One managerial issue to consider is the extent to which you want to rely on e-
commerce software to handle transactions. This can range from a simple database
to a full-blown package that can handle all the aspects of catalog purchases. The
cost of e-commerce software can exceed six-figures depending on the complexity
of transactions to be processed and the volume of traffic expected. The following
chart describes some of the e-commerce software currently available.

Sampling of Electronic Commerce Servers

Product Description Vendor

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 Icat Electronic Provides on-line catalog shopping and order placement Icat
Suite for sophisticated web sites; available for small business
storefronts.

Net Lower priced START version has a store creation wizard IBM
Commerce for catalog pricing , shipping, taxing, and secure
payment processing with business-to-consumer and
business-to-business capability; high-end PRO version
for more advanced Web site with intelligent catalogue
capability and tools to integrate the Web site with
existing legacy systems.

Netscape Supports high-end business-to-consumer site with Netscape

MerchantXpert catalog search tools, order management, tax, payment
and logistics modules and tools to integrate the site with
legacy systems.

Open market Commerce services include on-line customer Open

Transport authentication, order and payment processing, tax Market
calculations and customer service with multiple
language capabilities.

Oracle Business-to-consumer commerce application that Oracle

Internet integrates with other Oracle applications for orders,
Commerce inventory, customer service, call centers and payment
Service authorizations via third-party payment technology
capabilities

E-commerce offers significant opportunities and challenges to firms in traditional

markets as well as in newly emerging ones. The genie is out of the bottle and can
no longer be ignored. Managers have an obligation to explore new ways of serving
customers, suppliers, and other stakeholders. Time is of the essence. As Harry
Newton stated in a recent issue of Computer Telephony, “If your company is not
getting ready for the explosion of web business, you’re road kill. Period.”

AUTHOR OF THE ARTICLE

Tom Penderghast, DBA

Tom Penderghast, DBA

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Graziadio Business School | Copyright © 2000 Pepperdine University

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