The Future Of The Processor

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Historically, a broad range of
technologies have been used to exchange business information electronically between
organizations; these include EDI, barcodes, electronic forms, inter-enterprise messaging,
and electronic funds transfer (EFT). This information can be transmitted by various
electronic means-direct program-to-program, email, or even via fax. A subset of these
technologies is used for ecommerce, that is, to carry out actual transactions. The web has
captured the attention of merchants, consumers and vendors alike and has caused the scope
of ecommerce to expand to incorporate internet commerce. With the expanding purview of
ecommerce has come confusion due to rapid innovation cycles, resulting in constant changes
in terminology.

Discussions of ecommerce and many market size estimates include not only traditional EDI
but also public email and other forms of internet-based electronic business activities.
This approach results in a large market that in some cases may include the entire spectrum
of computer-based external communications.

This chapter focuses more narrowly on technology, applications and standards for
business-to-business and consumer-to-business ecommerce transactions. Ecommerce is the use
of electronic information technologies to conduct business transactions among buyers,
sellers and other trading partners. Ecommerce combines business and electronic
infrastructures, allowing traditional business transactions to be conducted
electronically. Ecommerce also enables the online buying and selling of goods and services
via the communications capabilities of private and public computer networks, including the
internet.

Ecommerce is defined in this chapter as possessing all the following attributes:

* Direct electronic interaction between two computer applications
(application-to-application) or between a person using a computer (typically a web
browser) and another application (typically a web server)

* The interaction involves the completion of a specific transaction or part of a
transaction.

* The transaction crosses enterprise boundaries, either between two business
(business-to-business) or between a business and a consumer (business-to-consumer)

This chapter limits its discussion to ecommerce as defined above. It does not discuss
other way that the internet and web are being used in business today, such as for
promotion, advertising or content distribution, which fall within the larger realm of
electronic business. Also excluded are other areas such as email or collaborative
information sharing over the internet that do not involve actual transactions.

Types of ecommerce
The two main forms of ecommerce covered in this chapter are EDI and internet-based
ecommerce. Internet commerce largely consists of web-based ecommerce. Today, EDI features
and technologies differ from those offered by internet commerce, but these differences
will become less pronounced as internet commerce matures and as traditional EDI utilizes
new internet-based technology. For example, some EDI services now use the internet, rather
than a traditional dedicated network, as a transport mechanism. Meanwhile, ISPs
increasingly will offer higher-quality services, which today are the province of EDI, to
those concerned about reliability and security.

Electronic Data Interchange
Historically, the main form of ecommerce has been EDI. EDI is a form of program-to-program
communication that lets business applications in different organizations exchange
information automatically to process a business transaction. EDI transactions involve
predefined relationships between trading partners, suppliers and customers and typically
are carried over specialized networks known as value-added networks (VANs). These
relationships and the use of private EDI networks allows EDI service providers to offer a
degree of security, performance and reliability that is more difficult to accomplish with
the ad-hoc relationships and internet-based communications that characterize web-based
ecommerce.

EDI typically has the following characteristics:

* Direct application-to-application exchange of information; for example, an auto parts
supplier’s computer system may generate invoices automatically and submit them to the auto
manufacturer’s accounts receivable system when parts are shipped.

* Well-defined, tightly specified message formats and industry standards.

* Store-and-forward messaging to transport messages through an intermediary over a VAN.

* Batch-oriented (or ‘asynchronous’) rather than interactive operation; that is, one
computer application is sending messages that are queued up for delivery to another
computer system over a store-and-forward network.

* Business-to-business (not business-to-consumer) interactions

* Interactions based on pre-existing contractual relations between the two parties so that
EDI is used to carry out transactions that effectuate an existing business relationship,
rather than create a new business relationship.

* Used primarily within a given industry (or an industry and its trading partners) and
characteristically concentrated in specific industries such as manufacturing, health care,
and consumer goods retailing.

* Often established at the behest of a single company that requires its trading partners
to adopt EDI as a condition of doing business.


Many established EDI software vendors and VANs are incorporating the internet as another
enabling technology and communications vehicle for their corporate customers to implement
their EDI strategies. New technologies and capabilities developed for the internet are
influencing EDI information transport technology and applications. These capabilities
sometimes are referred to as EDI Lite or EDI over the internet. The fact that EDI is
evolving from store-and-forward to event-driven and interactive implementation techniques
also reflects a shift in the ecommerce business model.

Internet commerce
Internet commerce involves managing and conducting a business transaction using the
internet. Web commerce, a subset of internet commerce, goes beyond using the internet as a
transport mechanism and presupposes that participants have web access. Typically, the web
browser is used as a software client for interactive access to a web server implementing
ecommerce. Currently, web-based ecommerce is the most widely used form of internet
commerce.

Components of the transaction may include catalog display, ordering, order fulfillment,
payment processing and back-end integration. Internet commerce embraces all stages in the
trading cycle, from information exchange and relationship building, negotiation and
contract agreements to transactions and fulfillment logistics.

Moving to web-based ecommerce
The rapid growth in business and consumer use of the internet and the web-beginning with
the introduction of the first graphical web browser, Mosaic, in 1992-and the subsequent
elimination of the National Science Foundation’s (NSF’s) acceptable-use policy (which
prohibited commercial use of the internet backbone) created the potential for new forms of
ecommerce. These options now are attracting more attention than EDI, are growing much
faster and eventually will be much larger, both in terms of participants and in the value
and volume of transactions.

As interest in the web exploded during the mid-1990s and as the number of consumers with
access to the internet at work or at home grew, companies that originally had established
web sites primarily for marketing purposes to promote their corporate or brand identity or
to provide information about their products, soon became interested in using those sites
for sales purposes as well (that is to take orders). In other cases, the web was used in
support of transactions that already had occurred or were ongoing, for example, in
tracking of shipments being handled by the major package delivery services.

The compelling advantage of the web as an infrastructure for ecommerce is that it provides
a universal software client, the web browser and a ubiquitous infrastructure, the global
TCP/IP network known as the internet, that can serve as a readymade platform for
ecommerce. This situation vastly reduced the costs of setting up as an EC merchant because
it eliminates the need for each vendor to develop, distribute, and support a software
client and maintain a dedicated network and dialing access facilities.

Although business-to-consumer web-based ecommerce has garnered more attention recently,
business-to-business ecommerce will continue to account for the bulk of transaction dollar
volume in the next few years, in part due to existing infrastructure and to compelling
financial benefits. Barriers to business-to-consumer ecommerce have included concerns
about security and poor performance often experienced by consumers from internet
congestion, slow modems, the use of large graphic files and other factors. At the same
time, business-to-business ecommerce has been accelerated because businesses already have
the necessary technology infrastructure. The growth of corporate extranets (intranets that
have been extended to include business partners and key customers) has fueled the growth
in internet-based business-to-business ecommerce.

The two forms of web-based ecommerce, business-to-business and business-to-consumer, share
many common characteristics and technologies. However, they also differ in important ways,
in characteristics and technologies as well as in the business drivers for adopting
ecommerce.

Common technology characteristics of both business-to-business and business-to-consumer
web-based ecommerce include the following:

* Use of the web server as a platform and the web browser as a client.

* Interaction that is often human using computer program (web browser) to program (web
server), not direct program-to-program (as in the case of EDI).

* Message formats that are not tightly defined or highly standardized (as in the case of
EDI). Instead, each web site has its own structure, content, procedures and so on. The
only way to interact with that site is to navigate through it with a browser and populate
forms by typing into them.

* Technology issues involved in linking a company’s web site and ecommerce server to its
back-end systems for functions such as generating the content of an online catalog from a
product database or passing orders taken over the web to an order entry and fulfillment
system.

* The need for authentication and encrypting because the transactions are carried out over
non-secure networks.

There are also important technology differences between the business-to-business and
business-to-consumer ecommerce models. For example, the need to process payments via
credit card securely has been a major driver for the development of the broad range of
security technologies and payment systems discussed in this chapter. However, this need is
felt most acutely on business-to-consumer sites because ecommerce merchants expect payment
at the time an order is placed and consumers want to be able to pay online to avoid the
delay and inconvenience associated with having to mail a check to the merchant. On
business-to-business ecommerce sites, this issue is not as pressing because the merchant
typically is willing to invoice the buyer and collect payment later and because business
customers are used to ordering via a purchase order rather than paying immediately via
credit card. For business-to-business transactions, additional safeguards are built into
the existing processes to protect the companies against possible fraud.

Both business-to-business and business-to-consumer web-based ecommerce also share certain
non-technology characteristic, which highlight additional distinctions between web-based
ecommerce and EDI.

Non-technology characteristics of web-based ecommerce included these:

* Not necessarily based on a preexisting business or contractual relationship between the
buyer and seller-the buyer can decide to do business with the seller for the first time
just by (or as a result of) visiting the web site.

* Not confined to participants within a given industry group and not characteristically
associated with any particular industry (today, the highest concentration is probably
found in the sale of computer-related products)

* Not imposed by a ‘hub’ company on its trading partners.

Ecommerce business model
Both traditional EDI and newer forms of business-to-business and business-to-consumer
ecommerce are growing due to the variety of benefits they offer. The typical drivers for
the adoption of EDI are to do business more efficiently or more cost effectively. This
outcome sometimes can be a result of simply reducing the cost of processing the
transactions themselves, for example, by eliminating the need to receive invoices in paper
form and then manually re-key them into an accounts payable system. It also can allow the
underlying business process to function more efficiently and cost-effectively, for
example, by eliminating the need to hold excess inventory because EDI is used to arrange
delivery of needed parts or merchandise on a ‘just-in-time’ (JIT) basis.

Some examples of the use of EDI to improve business processes include the following:

* Quick Response (QR): Uses EDI, Universal Product Code (UPC) and barcoding for
carton marking. Retailers can improve their profitability by increasing the number of
stock turns during a season and eliminating end-of-season markdowns. EDI enables market
data gathered by point-of-sale (POS) terminals to be delivered from retailers to suppliers
more quickly. Retail industry studies estimate that a fully implemented QR system returns
about 5% of gross sales to the bottom line.

* Model Stock Replacement: An approach used by large retailers and key suppliers. A
retailer identifies the desired level of inventory, known as ‘model stock’, for each
location and provides POS data to suppliers on a daily basis. The suppliers then restock
the shelves as needed. The retailer monitors the suppliers’ activities while allowing the
original model stock level to be adjusted by suppliers as the volume of sales changes over
time.

* Materials Management: Widely adopted in manufacturing, particularly in the
automotive industry. Materials management uses EDI, materials requirements planning and
JIT manufacturing to reduce the level of parts inventory kept onsite to virtually zero.

* Efficient Customer Response (ECR): Similar to QR and Model Stock Replacement but
found in the grocery industry. Sales data is transferred electronically between supplier,
distributor and retail store. The goal is to match product flow to consumption in a
seamless, timely and accurate manner.

* Evaluated Receipt Settlement: Eliminates the invoice from the purchase order
cycle. The customer authorizes payment to the supplier upon confirmation of the arrival of
goods making the issuance of an invoice unnecessary.

* Electronic Funds Transfer (EFT): The transfer of a value payment electronically
from buyer to seller via a financial institution. An EDI/EFT transaction is made through a
bank, either by wire transfers or automated clearing-house (ACH) transfers.

In the case of web-based ecommerce, the benefits are more varied and may differ
significantly between the business-to-business and business-to-consumer models. In the
business-to-consumer ecommerce market, the anticipated benefits to the vendor vary
according to the business model for becoming involved with ecommerce initially.

In some cases, merchants have taken a familiar business model, such as catalog shopping,
and transported it to the web as a new medium, using their web site instead of a paper
catalog to provide product information and using online ordering to replace calling an
operator to place an order. Today, these web sites may not generate many incremental
orders (orders that would not be placed if the company was not on the web.) Rather
merchants are investing in ecommerce to extend their presence to the web so they will not
become (visible by their absence), to give consumers and additional mechanism through
which to do business with them; and to gain experience with web-based ecommerce so that
when (or if) it becomes a larger part of their sales, they are ready to take advantage of
it.

Gaining experience with web-based ecommerce is particularly important so that a company
can avoid being outflanked by competitors who take advantage of the web more quickly and
use it to gain market share. In the future, as usage of the web becomes more widespread
and possibly begins to replace (rather than supplement) existing channels, other business
drivers may become important as well. For example, expenses of direct mail merchants (such
as printing and postage) could be reduced dramatically if web-based ecommerce replaces
traditional catalog sales.

In other cases, entirely new business models are developed around web-based commerce.
These include the online retailer, the aggregator and the direct seller.

The online retailer
The online retailer is a company set up specifically to sell via the web, such as the
internet bookseller Amazon.com. Under this model, all the web-based orders are incremental
because these companies would not exist without the web. They need to take advantage of
some characteristics of the web-such as the ability to have a catalog that is unlimited in
size or the ability to provide additional information about the product not available
elsewhere (for example, other customer’s comments about a particular book). They also may
need to provide another benefit over non-web shopping, such as discounts over retail
stores (made possible by their lower cost of doing business), to attract customers away
from non-web shopping and away from their web-based competitors.

The aggregator
Another new business model is the aggregator or the electronic mall. Here, the web site
provides the consumer with a selection of products from multiple vendors but typically
limits the selection to a particular type of product, such as computer accessories. The
aggregator may be able to offer a broader selection of products than would normally be
found elsewhere. For example, an online wine retailer might sell wine from smaller
wineries that do not have their own web sites or that have a limited presence in retail
stores. In other cases, the merchant may be taking advantage of the web’s ability to
provide more detailed information about products, such as comparative product
specifications, than is possible in a traditional retail establishment. Some vendors also
provide a forum for their customers to discuss their products, essentially creating a
virtual community.

The direct seller
Ecommerce also has been seen as resulting in disintermediation, where the ultimate
supplier eliminates distribution channels and sells directly to the ultimate customer to
reduce distribution costs. For example, the airline industry has used ecommerce to reduce
the role of travel agents and sell tickets directly to passengers instead. This example
also contains elements of the online detailed schedule and fare information in a way that
might be hard to do in a telephone conversation and the airline gains a way to reduce
costs by replacing telephone reservation agents with direct customer access to its
reservation system.

On the other hand, disintermediation is not a one-way process. Although ecommerce may
eliminate the need for intermediaries that do not offer value-added services, the value of
many distributors or resellers will increase if they leverage their personal relationships
with customers and offer services not available elsewhere. Even successful internet
companies acknowledge the need for third parties to reach the substantial marketplaces
between very large enterprises and individual consumers accessing products directly from
the web.

In the case of business-to-business ecommerce, many of these business models and their
related benefits also apply. A well-known vendor may set up a web site to expedite the
order-taking process, resulting in increased convenience and access to more detailed
information for its customers. In this case, the benefit is less likely to be incremental
orders; however, the savings due to a reduced cost of order processing and the handling of
related inquiries can be enormous. In other cases, an existing product distributor may act
as an ecommerce aggregator, combining product information from multiple manufacturers with
order-taking capability.

Some Essentials
Significant investments in business process redesign, IT infrastructure enhancement and
marketing reorientation are required to deliver customized, personalized,
information-based products and services. IT organizations also are challenged with
implementing new applications that must handle increasing volumes of data. In addition,
accommodating a growing number of consumer-to-business ecommerce transactions may require
an upgraded network and systems infrastructure.

Ecommerce facilitates new types of business processes for reaching customers as well as
new types of products and selling environments-interactive shopping malls, electronic
books and catalogs. Use of ecommerce technologies can result in improved efficiencies in
finding and servicing customers, in communicating with trading partners and in developing
new products and markets.

Customers are learning about products through information on the web, buying products
using electronic cash and secure payment systems and having information and services
delivered in ways not previously possible. Consequently, how customers commit their
loyalty to a brand, manufacturer, retailer or service provider is changing. Given these
shifts in purchasing patterns, companies need to adapt to a world where the traditional
concepts of products, brand differentiation, quality, content and distribution may no
longer apply.

Small companies are gaining the benefits previously realized only by large corporate and
government organizations that depended on fast, economical, computer-to-computer
communications to conduct business transactions. Today, small companies faced with the
need to compete globally in a cost-effective manner have the opportunity to do so. IT
vendors are developing and marketing products for these new business models and numerous
opportunities exist for them in a variety of ecommerce tools and technologies, including
ecommerce web site design, commerce servers, security, payment systems, databases,
high-speed networks, and integrations of new ecommerce systems with existing applications.
The ecommerce tools market is also attracting banks, credit card companies, internet
startups, ad agencies, EDI vendors and system integrators, web site infrastructure
products are being created by software vendors, systems integrators and messaging vendors.
Infrastructure providers also include database vendors, imaging software publishers, VANs
governments, telecommunications companies and LAN vendors. Industry changes will continue
to result in a flood of new offering over the next few years.

Excerpted with permission
from Technology Forecast 1998
Price Waterhouse Associates.

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