Discussion: E-Commerce and M-Commerce (300 words)

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CHAPTER

7 Electronic and Mobile Commerce

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Know?Did Yo u

• Although the business-to-consumer market grabs more of the news headlines, the B2B market is considerably larger and is growing more rapidly. B2B sales within the United States were estimated to be over $780 billion in 2015, twice the size of B2C commerce.

• Target reported that cyberthieves compromised the credit card data and personal information including

phone numbers, email and home addresses, credit and debit card numbers, PINS, expiration dates, and mag- netic stripe data of as many as 110 million of its custo- mers. Within two days after the Target data breach was announced, a class action lawsuit was filed claiming that Target was negligent in its failure to implement and maintain reasonable security procedures and practices.

Principles Learning Objectives

• Electronic and mobile commerce are evolving, providing new ways of conducting business that present both potential benefits and problems.

• Describe the current status of various forms of e-commerce, including B2B, B2C, C2C, and e-government.

• Outline a multistage purchasing model that describes how e-commerce works.

• Define m-commerce and identify some of its unique challenges.

• E-commerce and m-commerce can be used in many innovative ways to improve the operations of an organization.

• Identify several e-commerce and m-commerce applications.

• Identify several advantages associated with the use of e-commerce and m-commerce.

• E-commerce and m-commerce offer many advantages yet raise many challenges.

• Identify the many benefits and challenges asso- ciated with the continued growth of e-commerce and m-commerce.

• Organizations must define and execute an effec- tive strategy to be successful in e-commerce and m-commerce.

• Outline the key components of a successful e-commerce and m-commerce strategy.

• E-commerce and m-commerce require the careful planning and integration of a number of technol- ogy infrastructure components.

• Identify the key components of technology infra- structure that must be in place for e-commerce and m-commerce to work.

• Discuss the key features of the electronic pay- ment systems needed to support e-commerce and m-commerce.

Why Learn about Electronic and Mobile Commerce? Electronic and mobile commerce have transformed many areas of our lives and careers. One fundamental change has been the manner in which companies interact with their suppliers, customers, government agencies, and other business partners. As a result, most organizations today have set up business on the Internet or are considering doing so. To be successful, all members of the organization need to plan and participate in that effort. As a sales or marketing manager, you will be expected to help define your firm’s e-commerce business model. As a customer service employee, you can expect to participate in the development and operation of your firm’s Web site. As a human resource or public relations manager, you will likely be asked to provide Web site content for use by potential employees and shareholders. As an analyst in finance, you will need to know how to measure the business impact of your firm’s Web operations and how to compare that to competitors’ efforts. Clearly, as an employee in today’s organization, you must understand what the potential role of e-commerce is, how to capitalize on its many opportunities, and how to avoid its pitfalls. The emergence of m-commerce adds an exciting new dimension to these opportunities and challenges. Many customers, potential employees, and shareholders will be accessing your firm’s Web site via smartphones, tablets, and laptops. This chapter begins by providing a brief overview of the dynamic world of e-commerce.

As you read this chapter, consider the following:

• What are the advantages of e-commerce and m-commerce?

• How do innovations in technology and infrastructure affect regions across the globe?

An Introduction to Electronic Commerce

Electronic commerce (e-commerce) is the conducting of business activities (e.g., distribution, buying, selling, marketing, and servicing of products or ser- vices) electronically over computer networks. It includes any business transac- tion executed electronically between companies (business-to-business), companies and consumers (business-to-consumer), consumers and other con- sumers (consumer-to-consumer), public sector and business (government- to-business), public sector to citizens (government-to-citizen), and public sector to public sector (government-to-government). Business activities that are strong candidates for conversion to e-commerce are ones that are paper based, time consuming, and inconvenient for customers.

Business-to-Business E-Commerce Business-to-business (B2B) e-commerce is a subset of e-commerce in which all the participants are organizations. B2B e-commerce is a useful tool for connecting business partners in a virtual supply chain to cut resupply times and reduce costs. Although the business-to-consumer market grabs more of the news headlines, the B2B market is considerably larger and is growing more rapidly. B2B sales within the United States were estimated to be over $780 billion in 2015, twice the size of B2C commerce.1

A recent survey by Forrester Research and Internet Retailer showed that 30 percent of B2B buyers now make more than half of their purchases online, and that percentage will likely increase to 56 percent by 2017, with much of that growth coming from purchases that are researched or completed through mobile devices.2 Popular B2C Web sites have helped raise expectations as to how an e-commerce site must operate, and many B2B companies are responding to those heightened expectations by investing heavily in their B2B platforms. Spending on e-commerce technologies by large U.S. manufac- turers, wholesalers, and distributors is expected to top $2 billion in 2019.3

business-to-business (B2B) e-commerce: A subset of e-commerce in which all the participants are organizations.

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Moving more customers online is key to B2B commerce success, so in addition to investing in new technologies, B2B companies are focusing on new ways of engaging their customer across multiple channels—both online and offline. Providing customers with a consistent experience regardless of channel was a top priority for 68 percent of B2B organizations who took part in another recent survey commissioned by Accenture Interactive and SAP. The top e-commerce priorities for many B2B buyers include transparent pricing, easily accessible product details, purchase tracking, and personalized recommendations.4

Many organizations use both buy-side e-commerce to purchase goods and services from their suppliers and sell-side e-commerce to sell products to their customers. Buy-side e-commerce activities include identifying and comparing competitive suppliers and products, negotiating and establishing prices and terms, ordering and tracking shipments, and steering organizational buyers to preferred suppliers and products. Sell-side e-commerce activities include enabling the purchase of products online, providing information for custo- mers to evaluate the organization’s goods and services, encouraging sales and generating leads from potential customers, providing a portal of information of interest to the customer, and enabling interactions among a community of consumers. Thus, buy-side and sell-side e-commerce activities support the organization’s value chain and help the organization provide lower prices, better service, higher quality, or uniqueness of product and service.

Grainger is a B2B distributor of products for facilities maintenance, repair, and operations (a category called MRO) with more than 1.5 million different items offered online. See Figure 7.1. In 2015, the company’s online sales exceeded $4 billion or more than 40 percent of the company’s total sales.5 A key part of Grainger’s e-commerce success is its suite of mobile apps, which make it possible for customers to access products online and quickly find and order pro- ducts via a smartphone or other mobile device. Currently, 15 percent of the com- pany’s e-commerce traffic comes to its Web site through mobile devices.6

Business-to-Consumer E-Commerce Business-to-consumer (B2C) e-commerce is a form of e-commerce in which customers deal directly with an organization and avoid intermediaries. Early B2C pioneers competed with the traditional “brick-and-mortar” retailers in an industry, selling their products directly to consumers. For example, in 1995,

FIGURE 7.1 Grainger e-commerce Grainger offers more than 1.5 million items online. Source: grainger.com

business-to-consumer (B2C) e-commerce: A form of e-commerce in which customers deal directly with an organization and avoid intermediaries.

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upstart Amazon.com challenged well-established booksellers Waldenbooks and Barnes & Noble. Amazon did not become profitable until 2003; the firm has grown from selling only books on a U.S.-based Web site to selling a wide variety of products through international Web sites in Canada, China, France, Germany, Japan, and the United Kingdom. A recent Forrester Research Inc. and Internet Retailer survey found that the average B2C order value was $158.7 As with B2B sales, B2C revenues are increasingly being driven by customers using mobile devices. In Q3 of 2015, smartphones accounted for 14 percent of all B2C revenue—a 98 percent jump from the previous year.8

By using B2C e-commerce to sell directly to consumers, producers or providers of consumer products can eliminate the middlemen, or intermediar- ies, between them and the consumer. In many cases, this squeezes costs and inefficiencies out of the supply chain and can lead to higher profits for busi- nesses and lower prices for consumers. The elimination of intermediate orga- nizations between the producer and the consumer is called disintermediation.

More than just a tool for placing orders, the Internet enables shoppers to compare prices, features, and value, and to check other customers’ opinions. Consumers can, for example, easily and quickly compare information about automobiles, cruises, loans, insurance, and home prices to find better values. Internet shoppers can unleash shopping bots or access sites such as eBay Shopping.com, Google Shopping, Shopzilla, PriceGrabber, Yahoo! Shopping, or Excite to browse the Internet and obtain lists of items, prices, and merchants.

Worldwide, B2C e-commerce sales continue to grow rapidly, reaching $1.9 trillion in 2014. The Asia-Pacific region represents the world’s largest and fastest-growing B2C market; it accounts for almost 40 percent of total world- wide B2C sales.9 China’s e-commerce sales are now over $670 billion and are growing at a rate of over 40 percent per year. Other top markets with double- digit e-commerce sales growth include: United Kingdom ($99.4 billion), Japan ($89.6 billion), and Germany ($61.8 billion).10 Table 7.1 shows the estimated B2C e-commerce sales by world region from 2012 to 2017 (estimated).

One reason for the steady growth in B2C e-commerce is shoppers find that many goods and services are cheaper when purchased online, including stocks, books, newspapers, airline tickets, and hotel rooms.

Another reason for the growth in B2C e-commerce is that online B2C shoppers have the ability to design a personalized product. Nike, Inc., pro- vides a successful example of this approach to personalization. The com- pany’s online NIKEiD service enables purchasers to customize a pair of shoes by selecting from different material, features, and fit options—including the

TABLE 7.1 Forecasted global B2C e-commerce sales (USD billions)

Region

Sales (billions)

2012 2013 2014 2015 2016 2017

Asia-Pacific $301.2 $383.9 $525.2 $681.2 $855.7 $1,052.9

North America $379.8 $431.0 $482.6 $538.3 $597.9 $660.4

Western Europe $277.5 $312.0 $347.4 $382.7 $414.2 $445.0

Central and Eastern Europe $41.5 $49.5 $58.0 $64.4 $68.9 $73.1

Latin America $37.6 $48.1 $57.7 $64.9 $70.6 $74.6

Middle East and Africa $20.6 $27.0 $33.8 $39.6 $45.5 $51.4

Worldwide $1,058.2 $1,251.4 $1,504.6 $1,771.0 $2,052.7 $2,357.4

Source: “Global B2C Ecommerce Sales to Hit $1.5 Trillion This Year Driven by Growth in Emerging Markets,” e-Marketer, February 3, 2014, http://www.emark eter.com/Article/Global-B2C-Ecommerce-Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging-Markets/1010575#sthash.ZQGggr6U.dpuf.

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level of insole cushioning, sole material, and the fabric color and design of everything from the lining of the shoe to the laces. Nike also recently added a Personalized ID (PiD) service, which allows customers to further individualize their shoes by adding a personal message to their shoes—whether that be a personal mantra, a sports team affiliation, or a personal record. According to Ken Dice, NIKEiD’s vice president and general manager, “The new Personal- ized iD service is exciting because it gives athletes the opportunity to commu- nicate inspiration, support, passion and connection to the world around them in a meaningful and timely way.”11,12

Yet a third reason for the continued growth of B2C e-commerce is the effective use of social media networks by many companies looking to reach consumers, promote their products, and generate online sales. Vera Bradley is a luggage design company that produces a variety of products, including quilted cotton luggage, handbags, and accessories. The firm has more than 1.6 million Facebook followers and is one of the most followed Internet retailers on Pinterest. Indeed, Vera Bradley has been extremely conscientious in cross-posting items from Facebook, Flickr, and YouTube to Pinterest. When you visit the Vera Bradley Web site, Pinterest and other social buttons appear on the product pages so that shoppers can share their likes with friends. Vera Bradley is an example of a B2C retailer that makes social media channels work together effectively to reach more potential customers.

Facebook, Instagram, Pinterest, and Twitter are just a few social network- ing sites that are continuing to add “paid social” features designed to help e-commerce companies generate sales by reaching a targeted audience. Pin- terest is gradually rolling out “Buyable Pins,” starting with large retailers like Macy’s and Nordstrom, allowing more of the social network’s 100 million active users to purchase products online without ever leaving the site.13

Many B2C merchants have also added social commerce or social shopping tools to their own sites. For example, Target’s online Awesome Shop features user-generated images of Target products from Instagram. Customers have three options for exploring the online shop: Products, Looks, and Places. When a shopper clicks on an image in the shop, they can get details on the products shown, and with another click, they can initiate a purchase of the item from Target’s Web site.14

Another important trend is that of consumers researching products online but then purchasing those products at a local brick-and-mortar store. Sales in local stores that are stimulated through online marketing and research are called Web-influenced sales. Such sales are estimated to exceed $1.7 trillion—roughly 40 percent of total retail sales, and in some categories, such as baby/toddler and home furnishing, Web-influenced sales make up more than 55 percent of total sales.15

Amazon is the dominant B2C retailer in the United States, as illustrated in Table 7.2, which lists the country’s five largest B2C retailers.

TABLE 7.2 Largest business-to-consumer retailers in the United States Rank Company Total Web Sales (Billions of Dollars)

1 Amazon $71.8

2 Walmart $13.2

3 Apple $10.7

4 Macy’s $4.7

5 Home Depot $4.3

Source: Wahba, Phil, “This Chart Shows Just How Dominant Amazon Is,” Fortune, http://fortune.com/2015/11 /06/amazon-retailers-ecommerce.

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As a result of a 1992 Supreme Court ruling that says online retailers don’t have to collect sales taxes in states where they lack a physical presence, mil- lions of online shoppers do not pay state or local tax on their online pur- chases. Consumers who live in states with sales tax are supposed to keep track of their out-of-state purchases and report those “use taxes” on their state income tax returns. However, few tax filers report such purchases. Thus, despite having a legal basis to do so, states find it very difficult to collect sales taxes on Internet purchases. This avoidance of sales tax creates a price advan- tage for online retailers over brick-and-mortar stores, where sales taxes must be collected. It also results in the loss of about $23 billion in tax revenue that could go to state and local governments to provide services for their citizens. In 2013, and again in 2015, the U.S. Supreme Court declined to get involved in state efforts to force Web retailers such as Overstock and eBay to collect sales tax from customers. The court’s failure to act has put pressure on Con- gress to devise a national solution, as both online and traditional retailers complain about a patchwork of state laws and conflicting lower-court deci- sions; however, efforts to revise federal Internet sales tax rules have, so far, been unsuccessful. Many states are now devising ways to sidestep the Supreme Court’s rulings or initiate new challenges in the courts. Louisiana, Nebraska, and Utah are all considering measures that would expand the defi- nition of “physical presence” to include a company’s use of a third-party ship- ping company to deliver products to customers’ homes.16 In the meantime, several other states are simply moving forward with efforts to collect tax online purchases, and many merchants are already complying. Amazon, for instance, already collects sales tax on purchases in 24 states.17

Consumer-to-Consumer E-Commerce Consumer-to-consumer (C2C) e-commerce is a subset of e-commerce that involves electronic transactions between consumers using a third party to facilitate the process. eBay is an example of a C2C e-commerce site; customers buy and sell items to each other through the site. Founded in 1995, eBay has become one of the most popular Web sites in the world, with 2015 net reve- nue of $8.5 billion.18

Other popular C2C sites include Bidz.com, Craigslist, eBid, Etsy, Fiverr, Ibidfree, Kijiji, Ubid, and Taobao. The growth of C2C is responsible for a drastic reduction in the use of the classified pages of newspapers to advertise and sell personal items and services, so it has had a negative impact on that industry. On the other hand, C2C has created an opportunity for many people to make a living out of selling items on auction Web sites. According to eBay, the gross merchandise volume for items sold on its site in 2015 was $82 billion.19

Companies and individuals engaging in e-commerce must be careful that their sales do not violate the rules of various county, state, or country legal jurisdictions. More than 4,000 Web sites offer guns for sale and over 20,000 gun ads are posted each week on the Web site Armslist alone. Extending background checks to the flourishing world of online gun sales has become a highly controversial issue in the United States. Under current law, the question of when a background check must occur depends on who is selling the gun. Federal regulations require licensed dealers to perform checks, but the legal definition of who must be licensed has not been clear.20 An Execu- tive Order signed by President Barack Obama on January, 4, 2016, is designed to extend background check requirements to more types of online gun sellers, including more private sellers who had previously been exempted.21

Table 7.3 summarizes the key factors that differentiate B2B, B2C, and C2C e-commerce.

consumer-to-consumer (C2C) e-commerce: A subset of e-commerce that involves electronic transactions between consumers using a third party to facilitate the process.

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E-Government E-government is the use of information and communications technology to simplify the sharing of information, speed formerly paper-based processes, and improve the relationship between citizens and government. Government- to-citizen (G2C), government-to-business (G2B), and government- to-government (G2G) are all forms of e-government, each with different applications.

Citizens can use G2C applications to submit their state and federal tax returns online, renew auto licenses, purchase postage, and apply for student loans. Citizens can purchase items from the U.S. government through its GSA Auctions Web site, which offers the general public the opportunity to bid electronically on a wide range of government assets. Healthcare.gov is a healthcare exchange Web site created by and operated under the U.S. federal government as specified in the Patient Protection and Affordable Care Act. It is designed for use by residents in the 36 U.S. states that opted not to create their own state exchanges. By accessing this Web site, users can view health- care options, determine if they are eligible for healthcare subsidiaries, and enroll in a plan.22

G2B applications support the purchase of materials and services from pri- vate industry by government procurement offices, enable firms to bid on gov- ernment contracts, and help businesses identify government contracts on which they may bid. The Web site Business.USA.gov allows businesses to access information about laws and regulations and to download relevant forms needed to comply with federal requirements for their businesses. The http://reverseauctions.gsa.gov/reverseauctions/reverseauctions/ Web site is a business and auction exchange Web site that helps federal government agen- cies purchase information system products by using reverse auctions and by aggregating demand for commonly purchased products. FedBizOpps.gov is a Web site where government agencies post procurement notices to provide an easy point of contact for businesses that want to bid on government contracts.

G2G applications support transactions between government entities, such as between the federal government and state or local governments. Govern- ment to Government Services Online (GSO) is a suite of Web applications that enables government organizations to report information—such as birth

TABLE 7.3 Differences among B2B, B2C, and C2C Factors B2B B2C C2C

Typical value of sale Thousands or millions of dollars

Tens or hundreds of dollars

Tens of dollars

Length of sales process Days to months Days to weeks Hours to days

Number of decision makers involved

Several people to a dozen or more

One or two One or two

Uniformity of offer Typically a uniform product offering

More customized product offering

Single product offering, one of a kind

Complexity of buying process

Extremely complex; much room for negotiation on quantity, quality, options and features, price, pay- ment, and delivery options

Relatively simple; limited negotiation on price, pay- ment, and delivery options

Relatively simple; limited negotiation on payment and delivery options; negotiations focus on price

Motivation for sale Driven by a business deci- sion or need

Driven by an individual consumer’s need or emotion

e-government: The use of informa- tion and communications technology to simplify the sharing of information, speed formerly paper-based pro- cesses, and improve the relationship between citizens and government.

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Critical Thinking Exercise

and death data, arrest warrant information, and information about the amount of state aid being received—to the administration of Social Security services. This information can affect the payment of benefits to individuals. Many state governments provide a range of e-government services to various state and local agencies. For example, the state of Oregon’s transaction payment engine (TPE) option enables agencies to use an efficient Internet payment solution while adhering to statewide policies and procedures. This service is just one aspect of Oregon’s E-Government Program, whose goals are creating a uni- form state of Oregon online identity, promoting digital government, and sav- ing Oregon taxpayers money.23,24

Building a Successful B2B Web Site Your company operates a single store outside Atlanta, Georgia, that sells nearly $50 million in maintenance, repair, and operations (MRO) supplies each year. Any product that is used in the manufacturing process, but that isn’t incorporated into the product itself, can be classified as MRO including consumables like clean- ing supplies used to clean production machinery, supplies that are used to sup- port operations, and office supplies and small equipment like fans and compressors. Your customers are mainly professional buyers who work for one of the many manufacturing companies in the area. They buy items based on annual purchase contracts negotiated with your company’s sales reps.

Your company is keenly interesting in building a Web site to enable it to reach customers nationwide. The firm tried entering e-commerce a few years ago but the venture was a failure. The Web site was poorly designed so that customers found it difficult to use and the technology selected proved to be unreliable with the Web site crashing for a few hours every week. A small group of employees is working with an experienced Web designer to design the new Web site.

Review Questions 1. Provide a strong justification for creating a new B2B Web site for your firm. 2. In what ways would this new B2B Web site differ from a typical B2C

Web site?

Critical Thinking Questions 1. The Web site design team believes that the firm’s Web site should incorporate

a design and features similar to some of the best B2C Web sites. What do you think this means? Can you offer some specific design ideas and features that should be included?

2. What are some potential issues the team faces in implementing and operating this Web site?

Introduction to Mobile Commerce

Mobile commerce (m-commerce) relies on the use of mobile devices, such as tablets and smartphones, to place orders and conduct business. Smartphone manufacturers such as Apple, Huawei, Lenovo, LG, Samsung, and Xiaomi are working with communications carriers such as AT&T, Sprint/Nextel, T-Mobile, and Verizon to develop wireless devices, related technology, and services to support m-commerce. The Internet Corporation for Assigned Names and Numbers (ICANN) created a .mobi domain in 2005 to help attract mobile users to the Web. Afilias administers this domain and helps to ensure that the .mobi destinations work quickly, efficiently, and effectively with all mobile devices.

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Mobile Commerce in Perspective Mobile commerce is a rapidly growing segment of e-commerce, with Japan, the United Kingdom, and South Korea leading the world in m-commerce growth.25

The market for m-commerce in North America is maturing much later than in other countries for several reasons. In North America, responsibility for net- work infrastructure is fragmented among many providers and consumer pay- ments are usually made by credit card. In most Western European countries, consumers are much more willing to use m-commerce. Japanese consumers are generally enthusiastic about new technology and therefore have been much more likely to use mobile technologies to make purchases.

Worldwide, m-commerce accounted for 35 percent of all retail e-commerce sales in the fourth quarter of 2015. In the United States, the share of e-commerce transactions completed on a mobile device grew 15 percent from the prior year, representing 30 percent of all e-commerce transactions.26

The number of mobile Web sites worldwide is growing rapidly because of advances in wireless broadband technologies, the development of new and use- ful applications, and the availability of less costly but more powerful smart- phones. Experts point out that the relative clumsiness of mobile browsers and security concerns still must be overcome to speed the growth of m-commerce.

M-Commerce Web Sites A number of retailers have established special Web sites for mobile devices users. Table 7.4 provides a list of some of the top-ranked mobile Web sites according to a recent survey of more than 400,000 people by OC&C Strategy Consultants.

Consumers often place high value on different criteria, depending on the type of mobile site. In the OC&C survey, eBay and Amazon ranked highly due to their convenience, effective search tools, and transaction speed. The mobile site for natural cosmetics company Lush was rated highly because it created a strong emotional connection with consumers.

Advantages of Electronic and Mobile Commerce Conversion to an e-commerce or m-commerce system enables organizations to reach new customers, reduce the cost of doing business, speed the flow of goods and information, increase the accuracy of order processing and order fulfillment, and improve the level of customer service.

Reach New Customers The establishment of an e-commerce Web site enables a firm to reach new customers in new markets. Indeed, this is one of the primary reasons organi- zations give for establishing a Web site.

TABLE 7.4 Highly rated m-commerce retail Web sites Rank Company

1 eBay

2 Amazon

3 Apple

4 Burberry

5 John Lewis

6 Lush

Source: Goldfingle, Gemma, “The Top 10 M-Commerce Sites, according to OC&C’s Proposition Index,” RetailWeek, January 25, 2016, www.retail-week.com/technology/online-retail/the-top-10-m-commerce-sites-according-to-occs-prop osition-index/7004140.fullarticle.

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Founded in 1978, Shoe Carnival is a chain of more than 400 footwear stores located in 33 states.27 Shoe Carnival’s unique concept involves creating a high- energy atmosphere within each store through features such as a “spinning wheel of savings” and a team member on a microphone interacting with shoppers. According to Ken Zimmerman, vice president of e-commerce, the chain’s goal is “to entertain our customers. We create a fun place with music and excitement.” Until recently, the Shoe Carnival Web site served only as a source of information for customers; however, the company has now launched a full e-commerce site— which includes social shopping tools such as customer-generated reviews of indi- vidual items—that is allowing the company to expand its reach to customers in areas where it does not have physical stores. The company’s national advertising campaign is focused on driving more traffic to the company’s e-commerce site, and the company’s future online efforts will be focused on re-creating its “surprise and delight” concept online to differentiate it from other online shoe stores.28

Reduce Costs By eliminating or reducing time-consuming and labor-intensive steps through- out the order and delivery process, more sales can be completed in the same period and with increased accuracy. With increased speed and accuracy of customer order information, companies can reduce the need for inventory— from raw materials to safety stocks and finished goods—at all the intermedi- ate manufacturing, storage, and transportation points.

BloomNation bills itself as a “trusted community marketplace for people to list, discover, and send unique bouquets handcrafted by local florists across the country.”29 Launched as a response to the rising commissions being charged by the dominant floral wire services, including FTD, 1-800-Flowers, and Teleflora, the BloomNation site offers floral arrangements from over 1,500 florists around the country who take and post their own photos on the site. The florists are able to take advantage of the increased exposure and sta- bility that BloomNation’s site offers, without some of the staffing and other costs associated with processing individual customer orders and payments. The florists also pay lower per-order fees—just 10 percent per order rather than 27 percent charged by the large wire services.30

Speed the Flow of Goods and Information When organizations and their customers are connected via e-commerce, the flow of information is accelerated because electronic connections and commu- nications are already established. As a result, information can flow from buyer to seller easily, directly, and rapidly.

Shutterfly, an online provider of photographic products and services to both businesses and consumers, generates $1 billion in sales annually. While the vast majority of Shutterfly’s e-commerce revenue comes from B2C transactions, the com- pany also offers B2B marketing products and services through its Web site, where business customers can order customized, four-color marketing materials. The com- pany’s e-commerce capabilities, automated workflow, and large-scale production centers allow business customers to quickly customize and place their orders— cutting the project completion time from weeks to days for many clients.31,32

Increase Accuracy By enabling buyers to enter their own product specifications and order infor- mation directly, human data-entry error on the part of the supplier is elimi- nated. And order accuracy is important—no matter what the product is. Domino’s, the second-largest pizza chain in the world, was one of the first chain restaurants to offer an e-commerce site where customers could enter and pay for their orders. Half of Domino’s sales now comes through its e-commerce site. Using the site’s Easy Order feature, customers can enter their orders and address information directly—improving order and delivery accu- racy. And for customers who create a “Pizza Profile” online, ordering can be as

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simple as sending a tweet or a text (customers can initiate an order using just a pizza emoji) or just clicking a button on the Domino’s smartphone app.33

Improve Customer Service Increased and more detailed information about delivery dates and current sta- tus can increase customer loyalty. In addition, the ability to consistently meet customers’ desired delivery dates with high-quality goods and services elimi- nates any incentive for customers to seek other sources of supply.

Customers come to Sticker Mule’s e-commerce site to order customized stick- ers for a wide range of projects, whether that be to market a business, label pro- ducts, drive traffic to a Web site, or raise money for a crowdfunding project. When developing its e-commerce site, Sticker Mule placed a high priority on ease of use. Customers using the site can place their orders within a matter of minutes, and then view and approve order proofs online, further reducing the time it takes to complete orders. Sticker Mule’s Web infrastructure allows their customer service team to consolidate support inquiries from a variety of channels—including email, Web, and phone—into one place, making it easier and faster for team members to respond to customer queries. And since customer service is a top priority for Sticker Mule, their site also includes a sophisticated help center with more than 200 articles (in multiple languages) that customers can research on their own. The site also allows customers to post reviews, and even includes a Marketplace section where customers can sell their stickers.34

Multistage Model for E-Commerce A successful e-commerce system must address the many stages that consumers experience in the sales life cycle. At the heart of any e-commerce system is the user’s ability to search for and identify items for sale; select those items and negoti- ate prices, terms of payment, and delivery date; send an order to the vendor to purchase the items; pay for the product or service; obtain product delivery; and receive after-sales support. Figure 7.2 shows how e-commerce can support each

FIGURE 7.2 Multistage model for e-commerce (B2B and B2C) A successful e-commerce system addresses the stages that consu- mers experience in the sales life cycle.

1. Search and identification

Buyer

5. After-sales service

Electronic

distribution

Traditional

delivery

2. Selection and negotiation

3. Purchasing

4. Product and service delivery

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of these stages. Product delivery can involve tangible goods delivered in a tradi- tional form (e.g., clothing delivered via a shipping company) or goods and ser- vices delivered electronically (e.g., software downloaded over the Internet).

Search and Identification An employee ordering parts for a storeroom at a manufacturing plant would follow the steps shown in Figure 7.2. Assume the storeroom stocks a wide range of office supplies, spare parts, and maintenance supplies. The employee prepares a list of needed items—for example, fasteners, piping, and plastic tubing. Typically, for each item carried in the storeroom, a corporate buyer has already identified a preferred supplier based on the vendor’s price com- petitiveness, level of service, quality of products, and speed of delivery. The employee then logs on to the Internet and goes to the Web site of the pre- ferred supplier.

From the supplier’s home page, the employee can access a product cata- log and browse until he or she finds the items that meet the storeroom’s spe- cifications. The employee fills out a request-for-quotation form by entering the item codes and quantities needed. When the employee completes the quo- tation form, the supplier’s Web application calculates the total charge of the order with the most current prices and shows the additional cost for various forms of delivery—overnight, within two working days, or the next week. The employee might elect to visit other suppliers’ Web home pages and repeat this process to search for additional items or obtain competing prices for the same items.

Select and Negotiate After price quotations have been received from each supplier, the employee examines them and indicates by clicking the request-for-quotation form which items to order from a given supplier. The employee also specifies the desired delivery date. This data is used as input into the supplier’s order- processing transaction-processing system (TPS). In addition to price, an item’s quality and the supplier’s service and speed of delivery can be important in the selection and negotiation process.

B2B e-commerce systems need to support negotiation between a buyer and the selected seller over the final price, delivery date, delivery costs, and any extra charges. However, these features are not fundamental requirements of most B2C systems, which typically offer their products for sale on a “take- it-or-leave-it” basis.

Purchase Products and Services Electronically The employee completes the purchase order specifying the final agreed-upon terms and prices by sending a completed electronic form to the supplier. Complications can arise in paying for the products. Typically, a corporate buyer who makes several purchases from a supplier each year has established credit with the supplier in advance, and all purchases are billed to a corporate account. But when individual consumers make their first, and perhaps only, purchase from the supplier, additional safeguards and measures are required. Part of the purchase transaction can involve the customer providing a credit card number. Another approach to paying for goods and services purchased over the Internet is using electronic money, which can be exchanged for hard cash, as discussed later in the chapter.

Deliver Products and Services Electronic distribution can be used to download software, music, pictures, videos, and written material through the Internet faster and for less expense than shipping the items via a package delivery service. Most products can- not be delivered over the Internet, so they are delivered in a variety of

308 PART 3 • Business Information Systems

other ways: overnight carrier, regular mail service, truck, or rail. In some cases, the customer might elect to drive to the supplier and pick up the product.

Many manufacturers and retailers have outsourced the physical logistics of delivering merchandise to other companies that take care of the storing, packing, shipping, and tracking of products. To provide this service, DHL, Federal Express, United Parcel Service, and other delivery firms have devel- oped software tools and interfaces that directly link customer ordering, manufacturing, and inventory systems with their own systems of highly auto- mated warehouses, call centers, and worldwide shipping networks. The goal is to make the transfer of all information and inventory, from the manufac- turer to the delivery firm to the consumer, fast and simple.

For example, when a customer orders a printer on the Hewlett-Packard (HP) Web site, that order actually goes to FedEx, which stocks all the pro- ducts that HP sells online at a dedicated e-distribution facility in Memphis, Tennessee, a major FedEx shipping hub. FedEx ships the order, which trig- gers an email notification to the customer that the printer is on its way and an inventory notice is sent to HP that the FedEx warehouse now has one less printer in stock. See Figure 7.3.

For product returns, HP enters return information into its own system, which is linked to FedEx’s systems. This information signals a FedEx courier to pick up the unwanted item at the customer’s house or business. Customers don’t need to fill out shipping labels or package the item. Instead, the FedEx courier uses information transmitted over the Internet to a computer in his truck to print a label from a portable printer attached to his belt. FedEx has control of the return, and HP can monitor its progress from start to finish.

After-Sales Service In addition to the information required to complete an order, comprehensive customer information is also captured from each order and stored in the sup- plier’s customer database. This information can include the customer name, address, telephone numbers, contact person, credit history, and other details. For example, if a customer later contacts the supplier to complain that not all items were received, that some arrived damaged, or even that the product provides unclear instructions, any customer service representative will be able to retrieve the order information from the database. Many companies also provide extensive after-sale information on their Web sites, such as how to maintain a piece of equipment, how to effectively use a product, and how to receive repairs under warranty.

FIGURE 7.3 Product and information flow When a customer orders an HP printer online, the order goes first to FedEx, which ships the order, triggering an email notification to the customer and an inventory notice to HP.

Hewlett-Packard

FedEx distribution facility

Customer

Shipment

notification

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Shipment

notification

Order

Shipment

notification

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delivery

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delivery FedEx

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E-Commerce Challenges A company must overcome many challenges to convert its business processes from the traditional form to e-commerce processes, especially for B2C e-commerce. As a result, not all e-commerce ventures are successful. For exam- ple, Borders began an online Web site in the late 1990s, but after three years of operating in the red, the bookseller outsourced its e-commerce operations to Amazon in 2001. Borders reversed course and decided to relaunch its own Borders.com Web site in May 2008, but continued to generate disappointing sales figures. As a result of the substandard results, many top executives were replaced, including the CIO and senior vice president of sales. Finally in early 2011, Borders applied for bankruptcy protection and began closing its stores.35

Dealing with Consumer Privacy Concerns The following are three key challenges to e-commerce: (1) dealing with con- sumer privacy concerns, (2) overcoming consumers’ lack of trust, and (3) over- coming global issues. While two-thirds of U.S. Internet users have purchased an item online and most Internet users say online shopping saves them time, about one-third of all adult Internet users will not buy anything online primarily because they have privacy concerns or lack trust in online merchants. In addition to having an effective e-commerce model and strategy, companies must carefully address consumer privacy concerns and overcome consumers’ lack of trust.

Following are a few examples of recent security beaches in which per- sonal data was compromised:

● Target reported that cyberthieves compromised the credit card data and personal information of as many as 110 million customers. That data includes phone numbers, email and home addresses, credit and debit card numbers, PINs, expiration dates, and magnetic stripe information.36

● Patreon, a crowdfunding platform that allows users to make ongoing donations to a Web site, artist, or project sustained a security breach that resulted in their entire cache of data—including names, email addresses, and donation records—being published online in 2015.37,38

● More than one million CareFirst BlueCross Blue Shield patient records were compromised when hackers accessed a database containing member names, birth dates, email addresses, and subscriber information. Member password encryption prevented the hackers from accessing Social Security numbers, medical claims, and credit card and employment data.39

● The personal data of 15 million consumers was stolen when cyberthieves accessed data that mobile provider T-Mobile had shared with Experian for the purpose of conducting credit checks. The stolen data included names, addresses, and birthdates—as well as encrypted Social Security numbers, drivers’ license ID numbers, and passport ID numbers, which may also have been compromised.40

In some cases, the compromise of personal data can lead to identity theft. According to the Federal Trade Commission (FTC), “Identity theft occurs when someone steals your personal information and uses it without your permission.”41 Often stolen personal identification information (PII), such as your name, Social Security number, or credit card number, is used to commit fraud or other crimes. Thieves may use a consumer’s credit card numbers to charge items to that person’s accounts, use identification information to apply for a new credit card or a loan in a consumer’s name, or use a consumer’s name and Social Security number to receive government benefits.

Companies must be prepared to make a substantial investment to safeguard their customers’ privacy or run the risk of losing customers and generating potential class action lawsuits should the data be compromised. It is not uncommon for customers to initiate a class action lawsuit for millions of dollars

identity theft: The use of some- one’s personal identification informa- tion without his or her permission, often to commit fraud or other crimes.

310 PART 3 • Business Information Systems

in damages for emotional distress and loss of privacy. In addition to potential damages, companies must frequently pay for customer credit monitoring and identity theft insurance to ensure that their customers’ data is secure.

Within two days after the Target data breach was announced, the first law- suit was filed. The California class action lawsuit claims that Target was negligent in its failure to implement and maintain reasonable security procedures and prac- tices. A second lawsuit claims that Target broke Minnesota law by not alerting customers quickly enough after learning of the security issue. A third lawsuit was filed in California alleging both negligence and invasion of privacy.42

In order to address customers’ privacy concerns, companies looking to do business online must invest in the latest security technology and employ highly trained security experts to protect their consumers’ data. For large companies, that can mean a sizable in-house staff that monitors security issues 24/7. Smaller companies often rely on security services provided by compa- nies such as Symantec, whose Norton Secured Seal is intended to provide cus- tomers with the confidence they need to transact e-commerce business.

Akimbo Financial is a financial services company based in San Antonio, Texas. Even though Akimbo is a small player in the financial services industry, it is still obligated to comply with Payment Card Industry (PCI) and other regulations requiring encryption for online transactions and communication. And because Akimbo collects social security numbers and other confidential data, it must assure users that their data is secure. The company employs Symantec’s Secure Site with EV (Extended Validation) SSL Certificate to secure its site, and it prominently dis- plays the Norton Secured Seal. The EV certificate presents online visitors with a green bar in their browser address bar, intended to highlight the secure nature of the site. According to Akimbo CEO and founder, Houston Frost, “We have to have the green bar, because it makes people feel warm and fuzzy inside,” which is important for a start-up financial services firm looking to build its customer base.43

Overcoming Consumers’ Lack of Trust Lack of trust in online sellers is one of the most frequently cited reasons that some consumers give to explain why they are unwilling to purchase online. Can they be sure that the company or person with which they are dealing is legitimate and will send the item(s) they purchase? What if there is a problem with the product or service when it is received: for example, if it does not match the description on the Web site, is the wrong size or wrong color, is damaged during the delivery process, or does not work as advertised?

Online marketers must create specific trust-building strategies for their Web sites by analyzing their customers, products, and services. A perception of trustworthiness can be created by implementing one or more of the follow- ing strategies:

● Demonstrate a strong desire to build an ongoing relationship with custo- mers by giving first-time price incentives, offering loyalty programs, or eliciting and sharing customer feedback.

● Demonstrate that the company has been in business for a long time. ● Make it clear that considerable investment has been made in the Web site. ● Provide brand endorsements from well-known experts or well-respected

individuals. ● Demonstrate participation in appropriate regulatory programs or industry

associations. ● Display Web site accreditation by the Better Business Bureau Online or

TRUSTe programs.

Here are some tips to help online shoppers avoid problems:

● Only buy from a well-known Web site you trust—one that advertises on national media, is recommended by a friend, or receives strong ratings in the media.

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● Look for a seal of approval from organizations such as the Better Business Bureau Online or TRUSTe. See Figure 7.4.

● Review the Web site’s privacy policy to be sure that you are comfortable with its conditions before you provide personal information.

● Determine what the Web site policy is for return of products purchased. ● Be wary if you must enter any personal information other than what’s

required to complete the purchase (name, credit card number, address, and telephone number).

● Do not, under any conditions, ever provide information such as your Social Security number, bank account numbers, or your mother’s maiden name.

● When you open the Web page where you enter credit card information or other personal data, make sure that the Web address begins with “https,” and check to see if a locked padlock icon appears in the Address bar or status bar, as shown in Figure 7.5.

● Consider using virtual credit cards, which expire after one use, when doing business.

● Before downloading music, change your browser’s advanced settings to disable access to all computer areas that contain personal information.

Overcoming Global Issues E-commerce and m-commerce offer enormous opportunities by allowing manu- facturers to buy supplies at a low cost worldwide. They also offer enterprises the chance to sell to a global market right from the start. Moreover, they offer great promise for developing countries, helping them to enter the prosperous global marketplace, which can help to reduce the gap between rich and poor countries. People and companies can get products and services from around the world, instead of around the corner or across town. These opportunities, however, come with numerous obstacles and issues associated with all global systems:

● Cultural challenges. Great care must be taken to ensure that a Web site is appealing, easy to use, and inoffensive to potential customers around the world.

● Language challenges. Language differences can make it difficult to understand the information and directions posted on a Web site.

● Time and distance challenges. Significant time differences make it diffi- cult for some people to be able to speak to customer services representa- tives or to get technical support during regular waking hours.

● Infrastructure challenges. The Web site must support access by custo- mers using a wide variety of hardware and software devices.

FIGURE 7.4 Seals of approval To avoid problems when shopping online, look on the Web site for a seal of approval from organizations such as the Better Business Bureau Online or TRUSTe.

FIGURE 7.5 Web site security Web site that uses “https” in the address and a secure site lock icon.

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312 PART 3 • Business Information Systems

Critical Thinking Exercise

● Currency challenges. The Web site must be able to state prices and accept payment in a variety of currencies.

● State, regional, and national law challenges. The Web site must operate in conformance to a wide variety of laws that cover a variety of issues, including the protection of trademarks and patents, the sale of copyrighted material, the collection and safeguarding of personal or financial data, the payment of sales taxes and fees, and much more.

Extreme Sports Web Site Extreme sports encompasses certain activities perceived as having a high level of inherent danger such as BMX racing, skate boarding, mountain biking, ice climb- ing, and base jumping. You’ve always been a major fan and began selling caps and t-shirts with extreme sport themes, personalities, and inspirational sayings. As a result, over the past two years you have enjoyed traveling to many exotic venues around the world to sell your highly popular products at various events and competitions. You are thinking of starting a Web site to sell your products to extreme sports fans around the globe.

Review Questions 1. What challenges can you expect in trying to set up and run a Web site with

global appeal? How might you address these? 2. What information do you need to capture from a customer in order to accu-

rately and completely fill an order?

Critical Thinking Questions 1. What issues might come up in trying to deliver your product to customers in a

foreign country? 2. What after sales service issues might arise and how could you handle these?

Electronic and Mobile Commerce Applications

E-commerce and m-commerce are being used in innovative and exciting ways. This section examines a few of the many B2B, B2C, C2C, and m-commerce applications in retail and wholesale, manufacturing, market- ing, advertising, bartering, retargeting, price comparison, couponing, investment and finance, and banking. As with any new technology, m-commerce will succeed only if it provides users with real benefits. Com- panies involved in e-commerce and m-commerce must think through their strategies carefully and ensure that they provide services that truly meet customers’ needs.

Wholesale e-Commerce Wholesale e-commerce spending now represents more than 40 percent of all wholesale sales revenue, according to a 2015 survey.44 A key sector of whole- sale e-commerce is spending on manufacturing, repair, and operations (MRO) goods and services—from simple office supplies to mission-critical equipment, such as the motors, pumps, compressors, and instruments that keep manufacturing facilities running smoothly. MRO purchases often approach 40 percent of a manufacturing company’s total revenues, but the purchasing systems within many companies are haphazard, without automated controls. Companies face significant internal costs resulting from outdated and

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cumbersome MRO management processes. For example, studies show that a high percentage of manufacturing downtime is often caused by not having the right part at the right time in the right place. The result is lost productivity and capacity. E-commerce software for plant operations provides powerful comparative searching capabilities to enable managers to identify functionally equivalent items, helping them spot opportunities to combine purchases for cost savings. Comparing various suppliers, coupled with consolidating more spending with fewer suppliers, leads to decreased costs. In addition, auto- mated workflows are typically based on industry best practices, which can streamline processes.

MSC Industrial Supply is a leading North American distributor of MRO products and services. The company generates $2.8 billion in sales revenue from more than one million products it offers for sale—including 900,000 items that can be purchased through its Web site. In 2015, for the first time, e-commerce sales accounted for more than 50 percent of the company’s total sales.45,46

Manufacturing One approach taken by many manufacturers to raise profitability and improve customer service is to move their supply chain operations onto the Internet. Here, they can form an electronic exchange, an electronic forum where man- ufacturers, suppliers, and competitors buy and sell goods, trade market infor- mation, and run back-office operations, such as inventory control, as shown in Figure 7.6. This approach speeds up the movement of raw materials and finished products and reduces the amount of inventory that must be main- tained. It also leads to a much more competitive marketplace and lower prices.

FIGURE 7.6 Model of an electronic exchange An electronic exchange is an elec- tronic forum where manufacturers, suppliers, and competitors buy and sell goods, trade market information, and run back-office operations.

Electronic exchange

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314 PART 3 • Business Information Systems

Companies can join one of three types of exchanges based on who operates the exchange. Private exchanges are owned and operated by a single company. The owner uses the exchange to trade exclusively with established business partners. Walmart’s Retail Link is such an exchange. Consortium-operated exchanges are run by a group of traditionally competing companies with com- mon procurement needs. For example, Covisint was developed as an exchange to serve the needs of the big three auto makers. Independent exchanges are open to any set of buyers and sellers within a given market. They provide ser- vices and a common technology platform to their members and are open, usu- ally for a fee, to any company that wants to use them. For example, Tinypass is a flexible e-commerce platform that enables content publishers to choose from a variety of payment models to sell access to their media. Publishers can offer lim- ited previews to readers before they subscribe, ask for payment to view each video or article, or allow the audience to pay what they believe the content is worth. Content is defined by the publisher and can be any sort of digital media: an article, a movie, a song, a blog post, a PDF, access to a forum, or access to an entire Web site. Tinypass exchange members can use the platform to crowd- fund projects from within their own Web sites, rather than working through third party sites, such as GoFundMe or KickStarter.47,48

Several strategic and competitive issues are associated with the use of exchanges. Many companies distrust their corporate rivals and fear they might lose trade secrets through participation in such exchanges. Suppliers worry that online marketplaces will drive down the prices of goods and favor buyers. Suppliers also can spend a great deal of money configuring their sys- tems and work processes to participate in multiple exchanges. For example, more than a dozen new exchanges have appeared in the oil industry, and the printing industry has more than 20 online marketplaces. Until a clear winner emerges in particular industries, suppliers may feel compelled to sign on to several or all of them. Yet another issue is potential government scrutiny of exchange participants: When competitors get together to share information, it raises questions of collusion or antitrust behavior.

Many companies that already use the Internet for their private exchanges have no desire to share their expertise with competitors. At Walmart, the world’s largest retail chain, executives turned down several invitations to join exchanges in the retail and consumer goods industries before building its own in-house exchange, Retail Link, which connects the company to 7,000 world- wide suppliers that sell everything from toothpaste to furniture. Through Retail Link, Walmart has created a supplier-managed inventory system where it lets each supplier decide where to put SKUs (stock keeping units) and how to ship through to stores. It empowers suppliers to make these decisions by providing them with inventory and sales data by SKU by hour, by store. This in turn makes Walmart more profitable, because it can hold each supplier accountable to maximize margin, with the lowest inventory possible, to pro- duce the greatest return on investment in inventory.49

Marketing The nature of the Web enables firms to gather more information about customer behavior and preferences as customers and potential customers gather their own information and make their purchase decisions. Analysis of this data is compli- cated because of the Web’s interactivity and because each visitor voluntarily pro- vides or refuses to provide personal data such as name, address, email address, telephone number, and demographic data. Internet advertisers use the data to identify specific markets and target them with tailored advertising messages. This practice, called market segmentation, divides the pool of potential custo- mers into subgroups usually defined in terms of demographic characteristics, such as age, gender, marital status, income level, and geographic location.

market segmentation: The identi- fication of specific markets to target them with tailored advertising messages.

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In the past, market segmentation has been difficult for B2B marketers because firmographic data (addresses, financials, number of employees, and industry classification code) was difficult to obtain. Now, however, eXelate, a subsidiary of Nielsen, the marketing and media information company, has joined forces with Dun & Bradstreet to provide data as a service solution that customers can use to access a database of more than 250 million business records, includ- ing critical company information such as contact names, job titles and seniority levels, locations, addresses, number of employees, annual sales, and Standard Industry Code (SIC) and North America Industry Classification System (NAICS) classification codes. See Figure 7.7. Using this data, analysts can identify, access, and segment their potential B2B audience; estimate potential sales for each busi- ness; and rank the business against other prospects and customers.50

Advertising Mobile ad networks distribute mobile ads to publishers such as mobile Web sites, application developers, and mobile operators. Mobile ad impressions are generally bought at a cost per thousand (CPM), cost per click (CPC), or cost per action (CPA), in which the advertiser pays only if the customer clicks through and then buys the product or service. The main measures of success are the number of users reached, click through rate (CTR), and the number of actions users take, such as the number of downloads prompted by the ad. Advertisers are keenly interested in this data to measure the effectiveness of their advertising spending, and many organizations are willing to pay extra to purchase the data from a mobile ad network or a third party. Generally, there are three types of mobile ad networks—blind, premium blind, and premium networks—though no clear lines separate them. The characteristics of these mobile advertising networks are summarized in Table 7.5.

FIGURE 7.7 Nielsen marketing company eXelate, a subsidiary of Nielsen, the marketing and media information company, has joined forces with Dun & Bradstreet to provide data as a service solution that customers can use to access a database of more than 250 million business records. Source: http://info.exelate.com/b2b-audiences_1-sheet

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InMobi is a mobile advertising provider that reaches 1 billion active users with over 130 billion monthly ad impressions. The company uses a technique it calls “appographic targeting” to help marketers increase the chance of connect- ing users to the type of media and apps they are most likely to engage with. By analyzing the core functional, design, and interactive attributes of more than 10,000 apps, InMobi has divided its audience of active users into 200 “appo- graphic segments,” based on each user’s existing and previous application down- loads rather than on more traditional metrics, such as demographics or geography. Marketers can use the segments to more accurately target app-install campaigns. For example, a flight-booking app could be promoted to users who engage with apps that offer hotel-booking services or travel-related reviews.51,52

Because m-commerce devices usually have a single user, they are ideal for accessing personal information and receiving targeted messages for a particu- lar consumer. Through m-commerce, companies can reach individual consu- mers to establish one-to-one marketing relationships and communicate whenever it is convenient—in short, anytime and anywhere. See Figure 7.8.

TABLE 7.5 Characteristics of three types of mobile advertising networks Characteristic Blind Networks Premium Blind Networks Premium Networks

Degree to which advertisers can specify where ads are run

An advertiser can specify country and content chan- nel (e.g., news, sports, or entertainment) on which the ad will run but not a specific Web site.

Most advertising is blind, but for an additional charge, the advertiser can buy a specific spot on a Web site of its choice.

Big brand advertisers can secure elite locations on top-tier destinations.

Predominant pricing model and typical rate

CPC (e.g., $0.01 per click) CPM (e.g., $20 per thousand impressions)

CPM (e.g., $40 per thousand impressions)

Examples Admoda/Adultmoda AdMob BuzzCity InMobi

Jumptap Madhouse Millennial Media Quattro Wireless

Advertising.com/AOL Hands Microsoft Mobile Advertising Nokia Interactive Advertising Pudding Media YOC Group

FIGURE 7.8 M-commerce is convenient and personal Consumers are increasingly using mobile phones to purchase goods and perform other transactions online. Ge

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Bartering During the recent economic downturn, many people and businesses turned to bartering as a means of gaining goods and services. A number of Web sites have been created to support this activity, as shown in Table 7.6. Some busi- nesses are willing to barter to reduce excess inventory, gain new customers, or avoid paying cash for necessary raw materials or services. Cash-strapped customers may find bartering to be an attractive alternative to paying scarce dollars. Generally, bartering transactions have tax-reporting, accounting, and other record-keeping responsibilities associated with them. Indeed, the IRS hosts a Bartering Tax Center Web site that provides details about the tax laws and responsibilities for bartering transactions.

Retargeting An average of 74 percent of all online shopping carts are abandoned, repre- senting more than $4 trillion worth of merchandise in 2013.53 “Retargeting” is a technique used by advertisers to recapture these shoppers by using targeted and personalized ads to direct shoppers back to a retailer’s site. For example, a visitor who viewed the men’s clothing portion of a retailer’s Web site and then abandoned the Web site would be targeted with banner ads showing various men’s clothing items from that retailer. The banner ads might even display the exact items the visitor viewed, such as men’s casual slacks. The retargeting could be further enhanced to include comments and recommenda- tions from other consumers who purchased the same items. Retargeting ensures that potential consumers see relevant, targeted ads for products they’ve already expressed interest in.

Price Comparison An increasing number of companies provide mobile phone apps that enable shoppers to compare prices and products online. RedLaser enables shoppers to do a quick price comparison by simply scanning the product’s bar code. Amazon’s Price Check app also lets you search for pricing by taking a picture of a book, DVD, CD, or video game cover. The Barcode Scanner app allows shoppers to scan UPC or Quick Response codes to perform a price compari- son and read the latest product reviews.54,55

Couponing During 2015, more than $515 billion in consumer incentives were distributed via 286 billion free-standing insert (FSI) coupons, with an average face value of $1.80 per coupon.56 Surprisingly, only 0.95 percent of those coupons were redeemed even during tough economic times for many people.57

TABLE 7.6 Popular bartering Web sites Web site Purpose

Craiglist.org Includes a section where users can request an item in exchange for services or exchange services for services

Swapagift.com Enables users to buy, sell, or swap merchant gift cards

Swapstyle.com Allows users to swap, sell, or buy direct women’s accessories, clothes, cosmetics, and shoes

Swaptrees.com Users trade books, CDs, DVDs, and video games on a one- for-one basis

TradeAway.com Enables users to exchange a wide variety of new or used items, services, or real estate

318 PART 3 • Business Information Systems

Many businesses now offer a variety of digital coupons—which tend to be redeemed at higher rates than FSI coupons—including printable coupons available on a company’s Web site or delivered to customers via email. Shop- pers at some retail chains can go to the store’s Web site and load digital cou- pons onto their store loyalty card. Other retailers have programs that allow a person to enter their mobile number and a PIN at checkout to redeem cou- pons they selected online. Many consumer product good manufacturers and retailers and other businesses now send mobile coupons directly to consu- mers’ smartphones via SMS technology.

More recently, some larger retailers have been experimenting with “prox- imity marketing,” using in-store beacons to deliver coupons to customers who are already in their stores. Beacons, which can be as small as a sticker that is placed on an item or store shelf, uses Bluetooth low-energy (BLE) wire- less technology to pinpoint the location of consumers in a store and to deliver mobile coupons directly to a customer’s smartphone. A recent study estimates that by 2020 more than 1.5 billion mobile coupons will be delivered using beacon technology.58,59

The estimated number of mobile coupon redeemers is expected to increase due to the integration of couponing into social networks, along with an increase in smartphone and tablet users, new mobile apps, and location- based deals.60 See Figure 7.9.

Newer online marketplaces, such as Groupon and LivingSocial offer an updated approach to digital couponing. Discount coupons for consumers are valid only if a predetermined minimum number of people sign up for them. Merchants do not pay any money up front to participate in Groupon of LivingSocial but must pay the companies a fee (up to 50 percent for Groupon) whenever a customer purchase a coupon.

Investment and Finance The Internet has revolutionized the world of investment and finance. Perhaps the changes have been so significant because this industry had so many built- in inefficiencies and so much opportunity for improvement.

FIGURE 7.9 Growth in U.S. mobile coupon users The number of mobile coupon redeemers is increasing significantly.

160

140

120

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Tablet users

100

Mobile coupon users - millions

Year 2012 2013 2014 2015

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The brokerage business adapted to the Internet faster than any other arm of finance. See Figure 7.10. The allure of online trading that enables investors to do quick, thorough research and then buy shares in any company in a few seconds and at a fraction of the cost of a full-commission firm has brought many investors to the Web. Fidelity offers mobile trading apps for tablets, smartphones, and even Apple Watch. The apps allow investors a secure plat- form to monitor their portfolios, view real-time stock quotes, track preferred stocks, and execute trades.61

Banking Online banking customers can check balances of their savings, checking, and loan accounts; transfer money among accounts; and pay bills. These customers enjoy the convenience of not writing checks by hand, of tracking their current balances, and of reducing expenditures on envelopes and stamps. In addition, online banking customers have the satisfaction of knowing that paying bills online is good for the environment because it reduces the amount of paper used, thus saving trees and reducing green- house gases.

All of the major banks and many of the smaller banks in the United States enable their customers to pay bills online, and most support bill payment via mobile devices. Banks are eager to gain more customers who pay bills online because such customers tend to stay with the bank longer, have higher cash balances, and use more of the bank’s products and services. To encourage the use of this service, many banks have eliminated all fees associated with online bill payment.

Consumers who have enrolled in mobile banking and downloaded the mobile application to their cell phones can check credit card balances before making major purchases to avoid credit rejections. They can also transfer funds from savings to checking accounts to avoid an overdraft.

M-Pesa (M for mobile, Pesa for money in Swahili) with some 20 million users worldwide is considered by many to be the most developed mobile pay- ment system in the world. The service is operated by Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. M-Pesa enables users with a national ID card or passport to deposit, withdraw, and transfer

FIGURE 7.10 Mobile investment and finance Investment firms provide mobile trading apps to support clients on the go. iSt

oc kp ho to .c om

/a ra ko ny un un

320 PART 3 • Business Information Systems

Critical Thinking Exercise

money easily with a mobile device. Its services have expanded from a basic mobile money transfer scheme to include loans and savings products, bill pay, and salary disbursements. In 2013, more than 40 percent of Kenya’s GDP flowed through M-Pesa.62,63

Online Personalized Shopping An increasing number of Web sites offer personalized shopping consultations for shoppers interested in upscale, contemporary clothing—dresses, sports- wear, denim clothing, handbags, jewelry, shoes, and luxury gifts. Key to the success of companies such as MyTheresa and Net-a-Porter is a philosophy of high customer service and strong, personal client relationships. Net-a-Porter offers same-day delivery in Hong Kong, New York, and London, and a team of personal shoppers stock the virtual carts of women around the globe who are looking for high fashion and luxury items.64

Quintessentially Gifts is a luxury gifts and shopping service whose researchers and editorial stylists can find the rarest and most exquisite gifts for the affluent shopper. See Figure 7.11. From a McQueen Luxury Dive Toy’s underwater scooter to a Hermes Birkin handbag sans the usual two-year wait, the gift team can get it for you.65

Establishing a Consortium You are a recent business major graduate and a new manager in the supply chain management organization of Marriott International. The organization is looking to reduce the amount of money spent each year on basic supplies such as linens and towels, cleaning supplies, furniture, and appliances. You have been asked to explore the feasibility of establishing an electronic exchange (consortium) of other hotel chains and the suppliers of the items in an attempt to lower total costs.

Review Questions 1. Explain how such an electronic exchange might operate. 2. What are some of the pros and cons of participating in an electronic

exchange?

Critical Thinking Questions 1. Identify several strategic and competitive issues that may complicate the

formation of such a consortium. 2. Would you recommend that Marriott continue to explore the feasibility of

setting up a consortium? Why or why not?

FIGURE 7.11 Luxury gifts online Quintessentially Gifts is an online shopping service that features unusual luxury gifts. Source: www.quintessentiallygifts.com

CHAPTER 7 • Electronic and Mobile Commerce 321

Strategies for Successful E-Commerce and M-Commerce

With all the constraints to e-commerce already discussed in this chapter, it’s clear that an effective Web site must be one that is easy to use and accom- plishes the goals of the company yet is safe, secure, and affordable to set up and maintain. However, before building a Web site, a company must first define an effective e-commerce model and strategy. The next sections exam- ine several issues for a successful e-commerce site.

Defining an Effective E-Commerce Model and Strategy The first major challenge is for the company to decide on the effective e-commerce model it wants to use and formulate an effective e-commerce strategy. Although companies can select from a number of approaches, the most successful e-commerce models include three basic components: commu- nity, content, and commerce, as shown in Figure 7.12. Discussion forums and other social shopping tools can build a loyal community of people who are interested in and enthusiastic about the company and its products and ser- vices. Providing useful, accurate, and timely content, such as industry and economic news and stock quotes, is a sound approach to encourage people to return to your Web site time and again. Commerce involves consumers and businesses paying to purchase physical goods, information, or services that are posted or advertised online.

Defining the Functions of a Web Site When building a Web site, you should first decide which tasks the site must accomplish. Most people agree that an effective Web site is one that creates an attractive presence and that meets the needs of its visitors, which might include the following:

● Obtaining general information about the organization ● Obtaining financial information for making an investment decision in the

organization ● Learning the organization’s position on social issues ● Learning about the products or services that the organization sells ● Buying the products or services that the company offers ● Checking the status of an order

FIGURE 7.12 Content, commerce, and community A successful e-commerce model includes three basic components.

Industry news

Economic news

Stock prices

Content

Consumers and

businesses buying

and selling

Commerce

Community Discussion forums

Shopping tools

322 PART 3 • Business Information Systems

● Getting advice or help on effective use of the products ● Registering a complaint about the organization’s products ● Registering a complaint concerning the organization’s position on social

issues ● Providing a product testimonial or an idea for product improvement or a

new product ● Obtaining information about warranties or service and repair policies for

products ● Obtaining contact information for a person or department in the

organization

After a company determines which objectives its site should accomplish, it can move on planning and developing the site, keeping in mind that the pri- orities and objectives of customers may change over time. As the number of e-commerce shoppers increases and they become more comfortable—and more selective—making online purchases, a company might need to redefine the basic business model of its site to capture new business opportunities. For example, consider the major travel sites such as Expedia, Travelocity, CheapTickets, Orbitz, and Priceline. These sites used to specialize in one area of travel—inexpensive airline tickets. Now they offer a full range of travel products, including airline tickets, auto rentals, hotel rooms, tours, and last- minute trip packages. Expedia provides in-depth hotel descriptions to help comparison shoppers and even offers 360-degree visual tours and expanded photo displays. It also entices flexible travelers to search for rates, compare airfares, and configure hotel and air prices at the same time. Expedia has also developed numerous hotel partnerships to reduce costs and help secure great values for consumers. Meanwhile, Orbitz has launched a special full-service program for corporate business travelers.

Establishing a Web Site Companies large and small can establish Web sites. Some companies elect to develop their sites in-house, but this decision requires a Web development staff that is experienced with HTML, Java, and Web design software. Many firms, especially those with few or no experienced Web developers, have decided to outsource the building of their Web sites in order to get their sites up and running faster and cheaper than they could by doing the job them- selves. Web development firms can provide organizations with prebuilt tem- plates and Web site builder tools to enable customers to construct their own Web sites. Businesses can custom design a new Web site or redesign an exist- ing Web site. Many of these firms have worked with thousands of customers to help them get their Web sites up and running.

Web site hosting companies such as HostWay and BroadSpire make it possible to set up a Web page and conduct e-commerce within a matter of days, with little up-front cost. However, to allow visitors to pay for merchan- dise with credit cards, a company needs a merchant account with a bank. If your company doesn’t already have one, it must establish one.

Another model for setting up a Web site is the use of a storefront broker, a business that serves as an intermediary between your Web site and online mer- chants who have the actual products and retail expertise. The storefront broker deals with the details of the transactions, including who gets paid for what, and is responsible for bringing together merchants and reseller sites. The storefront broker is similar to a distributor in standard retail operations, but in this case, no product moves—only electronic data flows back and forth. Products are ordered by a customer at your site, orders are processed through a user interface pro- vided by the storefront broker, and the product is shipped by the merchant.

Shopify is a Canadian-based firm that helps retailers create their own online store without all the technical work involved in developing their own

storefront broker: A company that acts as an intermediary between your Web site and online merchants who have the products and retail expertise.

CHAPTER 7 • Electronic and Mobile Commerce 323

Web site or the huge expense of contracting someone else to build it. Clients can select a stylish e-commerce Web site template, customize it to meet their unique needs, upload product information, and then start taking orders and accepting payments. Thousands of online retailers, including General Electric, CrossFit, Tesla Motors, Red Bull, Foo Fighters, and GitHub built their Web sites using the Shopify platform. To date, more than 240,000 online stores have used Shopify to generate more than $14 billion in sales.66

Building Traffic to Your Web Site The Internet includes hundreds of thousands of e-commerce Web sites. With all those potential competitors, a company must take strong measures to ensure that the customers it wants to attract can find its Web site. The first step is to obtain and register a domain name, which should say something about your business. For instance, stuff4u might seem to be a good catchall, but it doesn’t describe the nature of the business—it could be anything. If you want to sell soccer uniforms and equipment, then you’d try to get a domain name such as www.soccerstuff4u.com, www.soccerequipment.com, or www.stuff4soccercoaches.com. The more specific the Web address, the better.

The next step to attracting customers is to make your site search-engine friendly by improving its rankings. Following are several ideas on how to accomplish this goal:

● Include meta tags in your site’s home page. A meta tag is an HTML code, not visible on the displayed Web page, that contains keywords represent- ing your site’s content. Search engines use these keywords to build indexes pointing to your Web site. Keywords are critical to attracting cus- tomers, so they should be chosen carefully. They should clearly define the scope of the products or services you offer.

● Use Web site traffic data analysis software to turn the data captured in the Web log file into useful information. This data can tell you the URLs from which your site is being accessed, the search engines and keywords that find your site, and other useful information. Using this data can help you identify search engines to which you need to market your Web site, allowing you to submit your Web pages to them for inclusion in the search engine’s index.

● Provide quality, keyword-rich content. Be careful not to use too many keywords, as search engines often ban sites that do this. Judiciously place keywords throughout your site, ensuring that the Web content is sensible and easy to read by humans as well as search engines.

● Add new content to the Web site on a regular basis. Again, this makes the site attractive to humans as well as search engines.

● Acquire links to your site from other reputable Web sites that are popular and related to your Web site. Avoid the use of low-quality links, as they can actually hurt your Web site’s rating.

The use of the Internet is growing rapidly in markets throughout Europe, Asia, and Latin America. Obviously, companies that want to succeed on the Web cannot ignore this global shift. A company must be aware that consu- mers outside the United States will access sites with a variety of devices. A Web site’s design should reflect that diversity if the company wants to be successful in other markets. In Europe, for example, closed-system iDTVs (integrated digital televisions) are becoming popular for accessing online con- tent, with more than 50 percent of the population now using them. Because such devices have better resolution and more screen space than the PC moni- tors that many U.S. consumers use to access the Internet, iDTV users expect more ambitious graphics. Successful global firms operate with a portfolio of sites designed for each market, with shared sourcing and infrastructure to

meta tag: An HTML code, not visible on the displayed Web page, that con- tains keywords representing your site’s content, which search engines use to build indexes pointing to your Web site.

324 PART 3 • Business Information Systems

support the network of stores and with local marketing and business develop- ment teams to take advantage of local opportunities. Service providers con- tinue to emerge to solve the cross-border logistics, payments, and customer service needs of these global retailers.

Maintaining and Improving Your Web Site Web site operators must constantly monitor the traffic to their sites and the response times experienced by visitors. AMR Research, a Boston-based inde- pendent research analysis firm, reports that Internet shoppers expect service to be better than or equal to their in-store experience. Nothing will drive potential customers away faster than experiencing unreasonable delays while trying to view or order products or services. To keep pace with technology and increasing traffic, it might be necessary to modify the software, databases, or hardware on which a Web site runs to ensure acceptable response times.

Retailing giant Walmart recently invested over $2 billion as part of a mul- tiyear project designed to improve its Web site and strengthen its e-commerce infrastructure. Walmart’s technology team overhauled the company’s e-commerce capabilities from the ground up—with changes to the look of the Web site, the launch of an improved, proprietary site search engine, and upgrades to the underlying transaction software and supporting databases and Web servers. In addition to revamping its Web site to make it easier for customers to shop, Walmart continues to add to the number of items available through its e-commerce site, with a recent focus on expanding its online gro- cery offerings.67,68

Web site operators must also continually be alert to new trends and devel- opments in the area of e-commerce and be prepared to take advantage of new opportunities. For example, recent studies show that customers more fre- quently visit Web sites they can customize. Personalization is the process of tailoring Web pages to specifically target individual consumers. The goal is to meet the customer’s needs more effectively, make interactions faster and eas- ier, and consequently, increase customer satisfaction and the likelihood of repeat visits. Building a better understanding of customer preferences can also aid in cross-selling related products and more expensive products. The most basic form of personalization involves using the consumer’s name in an email campaign or in a greeting on the Web page. Amazon uses a more advanced form of personalization in which the Web site greets each repeat customer by name and recommends a list of new products based on the cus- tomer’s previous purchases.

Businesses use two types of personalization techniques to capture data and build customer profiles. Implicit personalization techniques capture data from actual customer Web sessions—primarily based on which pages were viewed and which weren’t. Explicit personalization techniques capture user- provided information, such as information from warranties, surveys, user registrations, and contest-entry forms completed online. Data can also be gathered through access to other data sources such as the Bureau of Motor Vehicles, Bureau of Vital Statistics, and marketing affiliates (firms that share marketing data). Marketing firms aggregate this information to build data- bases containing a huge amount of consumer behavioral data. During each customer interaction, powerful algorithms analyze both types of data in real time to predict the consumer’s needs and interests. This analysis makes it pos- sible to deliver new, targeted information before the customer leaves the site. Because personalization depends on gathering and using personal user infor- mation, privacy issues are a major concern.

Salesforce Marketing Cloud is a provider of digital marketing automation and analytics software and services that its customers use to personalize email marketing, target mobile messaging campaigns, and make personalized,

personalization: The process of tailoring Web pages to specifically target individual consumers.

CHAPTER 7 • Electronic and Mobile Commerce 325

Critical Thinking Exercise

predictive recommendations to online customers. Room & Board, a Minnesota-based national furniture chain specializing in modern furniture and home accessories, uses Salesforce to create a digital experience that reflects the ways their customers use the Web as well as one that extends the com- pany’s personalized sales approach to its Web site. The Salesforce system, which ties into customers’ sales histories as well as years’ worth of data about what styles and individual pieces of furniture work well together and what products customers tend to view and purchase in groups, allows the company to make increasingly effective personal recommendations to its online custo- mers. Customers who engage with Room & Board’s recommendations place online orders with 40 percent higher average values than those who don’t.69

The tips and real-world examples presented in this section represent just a few ideas that can help a company set up and maintain an effective e-commerce site. With technology and competition changing constantly, man- agers should read articles in print and online to keep up to date on ever- evolving issues.

Door-to-Dorm Laundry Service You have decided to start a door-to-dorm laundry service for the college students at the local university. Students log on to your Web site and provide specific infor- mation to create an account including address information needed for pickup and delivery plus credit, charge, or debit card information for payment. At the time of the initial pickup, students are given a large plastic bag that they fill with their laundry. You pick up the laundry and wash, dry, fold, and return it within one week. Once the student has created an account, they can text, email, or logon on to the Web site to request future pickups.

Review Questions 1. Define the basic functions that this Web site must perform in order to meet

the basic needs of the laundry service as well as attract and maintain the inter- ests of students. What are some things you might do to entice students to return time and time again to your Web site?

2. What actions can you take to increase traffic and draw students to your Web site?

Critical Thinking Questions 1. Can you identify additional laundry-related services that might be added to

your basic wash, dry, and fold offering that would be attractive to students? How could the initial Web site design allow for these potential opportunities?

2. What steps might you take to personalize the Web site so that the students feel welcome each time they visit?

Technology Infrastructure Required to Support E-Commerce and M-Commerce

Now that we’ve examined some key factors in establishing an effective e-commerce initiative, let’s look at some of the technical issues related to e-commerce systems and the technology that makes it possible. Successful implementation of e-business requires significant changes to existing business processes and substantial investment in IS technology. These technology com- ponents must be chosen carefully and be integrated to support a large volume of transactions with customers, suppliers, and other business partners world- wide. In surveys, online consumers frequently note that poor Web site perfor- mance (e.g., slow response time, inadequate customer support, and lost

326 PART 3 • Business Information Systems

orders) drives them to abandon some e-commerce sites in favor of those with better, more reliable performance. This section provides a brief overview of the key technology infrastructure components. See Figure 7.13.

Hardware A Web server hardware platform complete with the appropriate software is a key ingredient to e-commerce infrastructure. The amount of storage capacity and computing power required of the Web server depends primarily on two things: the software that must run on the server and the volume of e-commerce transactions that must be processed. The most successful e-commerce solutions are designed to be highly scalable so that they can be upgraded to meet unexpected user traffic.

Key Web site performance measures include response time, transaction success rate, and system availability. Table 7.7 shows the values for the key measures for five popular online retailers for one week.

FIGURE 7.13 Key technology infrastructure components E-commerce systems require spe- cific kinds of hardware and software to be successful.

High-speed connection to network

E-commerce software

Server software

Server operating system

Web server hardware

Network

Internet

Value-added network

Virtual private network

TABLE 7.7 Key performance measures for some popular retail Web sites

Site Response Time (seconds) Success Rate

Outage Time During One Week

Zappos 0.71 100% 0

Apple Store 0.82 100% 0

Costco 1.02 100% 0

Nike 1.60 100% 0

Best Buy 2.00 100% 0

Source: “Performance Index: Top Retailers,” Keynote, February 21, 2016, www.keynote.com/performance -indexes/retail-us.

CHAPTER 7 • Electronic and Mobile Commerce 327

A key decision facing a new e-commerce company is whether to host its own Web site or to let someone else do it. Many companies decide that using a third-party Web service provider is the best way to meet initial e-commerce needs. The third-party company rents space on its computer system and pro- vides a high-speed connection to the Internet, thus minimizing the initial out-of-pocket costs for e-commerce start-up. The third party can also provide personnel trained to operate, troubleshoot, and manage the Web server.

Web Server Software In addition to the Web server operating system, each e-commerce Web site must have Web server software to perform fundamental services, including security and identification, retrieval and sending of Web pages, Web site tracking, Web site development, and Web page development. The two most widely used Web server software packages are Apache HTTP Server and Microsoft Internet Information Services.

E-Commerce Software After you have located or built a host server, including the hardware, operat- ing system, and Web server software, you can begin to investigate and install e-commerce software to support five core tasks: catalog management to create and update the product catalog, product configuration to help customers select the necessary components and options, shopping cart facilities to track the items selected for purchase (see Figure 7.14), e-commerce transaction pro- cessing, and Web traffic data analysis to provide details to adjust the opera- tions of the Web site.

Mobile Commerce Hardware and Software For m-commerce to work effectively, the interface between the mobile device and its user must improve to the point that it is nearly as easy to purchase an item on a wireless device as it is to purchase it on a PC. In addition, network speeds must continue to improve so that users do not become frustrated.

FIGURE 7.14 Electronic shopping cart An electronic shopping cart allows online shoppers to view their selec- tions and add or remove items.

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Security is also a major concern, particularly in two areas: the security of the transmission itself and the trust that the transaction is being made with the intended party. Encryption can provide secure transmission. Digital certifi- cates can ensure that transactions are made between the intended parties.

The mobile devices used for m-commerce have several limitations that com- plicate their use. Their screens are small, perhaps no more than several square inches, and might be able to display only small portions of a Web site. In addi- tion, entering data on a mobile device can be tedious and error prone. Mobile devices also have less processing power and less bandwidth than desktop or laptop computers, which are usually connected to a high-speed LAN. They also operate on limited-life batteries. For these reasons, Web developers must often rewrite Web applications so that users with mobile devices can access them.

Electronic Payment Systems Electronic payment systems are a key component of the e-commerce infra- structure. Current e-commerce technology relies on user identification and encryption to safeguard business transactions. Actual payments are made in a variety of ways, including electronic cash, electronic wallets, and smart, credit, charge, and debit cards. Web sites that accept multiple payment types convert more visitors to purchasing customers than merchants who offer only a single payment method.

Authentication technologies are used by many organizations to con- firm the identity of a user requesting access to information or assets. A digital certificate is an attachment to an email message or data embedded in a Web site that verifies the identity of a sender or Web site. A certifi- cate authority (CA) is a trusted third-party organization or company that issues digital certificates. The CA is responsible for guaranteeing that the people or organizations granted these unique certificates are in fact who they claim to be. Digital certificates thus create a trust chain throughout the transaction, verifying both purchaser and supplier identities.

Many organizations that accept credit cards to pay for items purchased via e-commerce have adopted the Payment Card Industry (PCI) security standard. This standard spells out measures and security procedures to safeguard the card issuer, the cardholder, and the merchant. Some of the measures include installing and maintaining a firewall configuration to control access to compu- ters and data, never using software or hardware vendor-supplier defaults for system passwords, and requiring merchants to protect stored data, encrypt transmission of cardholder information across public networks, use and regu- larly update antivirus software, and restrict access to sensitive data on a need- to-know basis.

Various measures are being implemented to increase the security associ- ated with the use of credit cards at the time of purchase. The Address Verifi- cation System is a check built into the payment authorization request that compares the address on file with the card issuer to the billing address pro- vided by the cardholder. The Card Verification Number technique is a check of the additional digits typically printed on the back of the card (or on the front, in the case of American Express cards). Visa has Advanced Authoriza- tion, a Visa-patented process that provides an instantaneous rating of that transaction’s potential for fraud—using factors such as the value of the trans- action, type of merchant, time of day the purchase is being made, and whether the site is one where the card owner has previously shopped. The card issuer can then send an immediate response to the merchant regarding whether to accept or decline the transaction. The technology is applied to every Visa credit and check card purchase today, and has contributed to a two-thirds reduction in system-wide fraud for Visa over the past two decades. Visa has continued to add other features and data inputs to its fraud-detection

digital certificate: An attachment to an email message or data embedded in a Web site that verifies the identity of a sender or Web site.

certificate authority (CA): A trusted third-party organization or com- pany that issues digital certificates.

CHAPTER 7 • Electronic and Mobile Commerce 329

systems, such as extended cardholder transaction data and even mobile loca- tion confirmation.70

The Federal Financial Institutions Examination Council has developed a set of guidelines called “Authentication in an Internet Banking Environment,” which recommend two-factor authorization. This approach adds another iden- tity check along with the password system. A number of multifactor authenti- cation schemes can be used, such as biometrics, one-time passwords, or hardware tokens that plug into a USB port on the computer and generate a password that matches the ones used by a bank’s security system.

The use of biometric technology to secure digital transactions has been slow to develop due to cost and privacy concerns. However, MasterCard recently announced it will begin rolling out its new MasterCard Identity Check service that allows users to take an initial ID photo that will be used to create a digital map of their face, which will be stored on MasterCard’s ser- vers. When the user wants to make a payment using their smartphone, the MasterCard app will capture their image, which, along with a user-entered password, will be authenticated before the transaction is approved. Master- Card’s system also offers a fingerprint sensor that can be used to verify pur- chases.71 Apple’s new ApplePay system makes use of the fingerprint sensors on newer iPhones. Consumers paying with ApplePay, which is tied to a credit or debit card, just hold their iPhone close to the contactless reader with their finger on the Touch ID button. 72

Transport Layer Security All online shoppers fear the theft of credit card numbers and banking information. To help prevent this type of identity theft, the Transport Layer Security communications protocol is used to secure sensitive data. Transport Layer Security (TLS) is a communications protocol or system of rules that ensures privacy between communicating applications and their users on the Internet. TLS enables a client (like a Web browser) to initiate a tempo- rary, private conversation with a server (like a shopping site on the Web or an online bank). Before the client and server start communicating, they perform an automated process called a “handshake” where they exchange information about who they are, and which secret codes and algorithms they’ll use to encode their messages to each other. Then for the duration of the conversation, all the data that passes between the client and server is encrypted so that even if somebody does listen in, they won’t be able to determine what’s being com- municated. TLS is the successor to the Secure Sockets Layer (SSL).

In addition to TLS handling the encryption part of a secure e-commerce transaction, a digital certificate is assigned to the Web site to provide positive server identification so shoppers can be assured of with whom that are dealing.

Electronic Cash Electronic cash is an amount of money that is computerized, stored, and used as cash for e-commerce transactions. Typically, consumers must open an account with an electronic cash service provider by providing identification information. When the consumers want to withdraw electronic cash to make a purchase, they access the service provider via the Internet and present proof of identity—a digital certificate issued by a certification authority or a username and password. After verifying a consumer’s identity, the system debits the con- sumer’s account and credits the seller’s account with the amount of the pur- chase. ApplePay, PayPal, Square, Stripe, and WePay are leading online payment service providers that facilitate the use of electronic cash.

PayPal enables any person or business with an email address to securely, easily, and quickly send and receive payments online. To send money, you enter the recipient’s email address and the amount you want to send. You

Transport Layer Security (TLS): A communications protocol or system of rules that ensures privacy between communicating applications and their users on the Internet.

electronic cash: An amount of money that is computerized, stored, and used as cash for e-commerce transactions.

330 PART 3 • Business Information Systems

can pay with a credit card, debit card, or funds from a checking account. The recipient gets an email message that says, “You’ve Got Cash!” Recipients can then collect their money by clicking a link in the email message that takes them to www.paypal.com. To receive the money, the user also must have a credit card or checking account to accept fund transfers. To request money for an auction, invoice a customer, or send a personal bill, you enter the reci- pient’s email address and the amount you are requesting. The recipient gets an email message and instructions on how to pay you using PayPal. Today over 179 million Internet users use PayPal to send money in more than 100 currencies and some 90 percent of eBay purchases go through PayPal.73

PayPal is rolling out Beacon, a hardware device for merchants that uses Bluetooth technology to improve the shopper’s experience. Consumers must download the PayPal app to their smartphone and opt in to the service to use Beacon for hands-free check-in and payments. Beacon can communicate with compatible point-of-sale systems from Erply, Leaf, Leapset, Micros, NCR, ShopKeep, or Vend. When Beacon consumers walk into a store, Beacon will trigger a vibration or sound to confirm a successful check-in and their photo will appear on the screen of the merchant’s point-of-sale system so they can be identified. Payment requires only a verbal confirmation and a receipt is emailed to the consumer. Using Beacon, a drugstore could fill your prescrip- tions or your name could be added to a wait list for tables at a restaurant sim- ply by walking into the establishment.74

The use of smartphones to make purchases and transfer funds between consumers and businesses has become commonplace. The goal is to make the payment process as simple and secure as possible and for it to work on many different phones and through many different mobile network providers—not simple tasks. Fortunately, the intelligence built into the iPhone and other smartphones can make this all possible.

You can use several services (e.g., Phone Transact iMerchant Pro, Square, ROAMPay, and PayWare Mobile) to plug a credit card reader device into the headphone jack on a cell phone to accept credit card payments. Intuit’s GoPayment service does not require a credit card reader but provides soft- ware that lets you enter the credit card number.

With Xipwire, consumers can text someone with a special code to place a purchase on their monthly phone bill and bypass any credit card system alto- gether. A free Starbucks mobile app that runs on iPhone and Android smart- phones enables customers to order and pay for their java using their smartphones—without ever having to wait in line. App users, whose mobile purchases are tied to a credit card, can even tip their barista digitally.75

Credit, Charge, Debit, and Smart Cards Many online shoppers use credit and charge cards for most of their Internet purchases. A credit card, such as Visa or MasterCard, has a preset spending limit based on the user’s credit history, and each month the user can pay all or part of the amount owed. Interest is charged on the unpaid amount. A charge card, such as American Express, carries no preset spending limit, and the entire amount charged to the card is due at the end of the billing period. You can’t carry a balance from month to month with a charge card like you can with a credit card. Charge cards require customers to pay in full every month or face a fee. Debit cards look like credit cards, but they operate like cash or a personal check. The debit card is linked directly to your savings or checking account. Each time you use the card, money is automatically taken from your checking or savings account to cover the purchase. Credit, charge, and debit cards currently store limited information about you on a magnetic stripe. This information is read each time the card is swiped to make a pur- chase. All credit card customers are protected by law from paying more than $50 for fraudulent transactions.

CHAPTER 7 • Electronic and Mobile Commerce 331

The smart card is a credit card–sized device with an embedded microchip to provide electronic memory and processing capability. Smart cards can be used for a variety of purposes, including storing a user’s financial facts, health insurance data, credit card numbers, and network identification codes and passwords. They can also store monetary values for spending.

Smart cards are better protected from misuse than conventional credit, charge, and debit cards because the smart-card information is encrypted. Con- ventional credit, charge, and debit cards clearly show your account number on the face of the card. The card number, along with a forged signature, is all that a thief needs to purchase items and charge them against your card. A smart card makes credit theft practically impossible because a key to unlock the encrypted information is required, and there is no external number that a thief can identify and no physical signature a thief can forge. Table 7.8 com- pares various types of payment systems.

Here in the United States, credit cards with only magnetic stripes are being replaced by cards with chips that employ the EMV (Europay, Master- card, Visa) global standard for working with point-of-sale systems. Each time the EMV card is used or inserted into a point-of-sale device for payment, it creates a unique transaction code that can never be reused. Unlike the Euro- pean version of the card which requires the user to enter a PIN number to com- plete the transaction, the U.S. card user simply signs the receipt. While such cards are nearly impossible to counterfeit, the account number of these cards is clearly visible and can be used by fraudsters for online purchases.

The United States financial institutions elected to implement the chip- and-sign EMV card rather than chip-and-PIN card. The later card requires the user to enter their personal PIN number for each transaction. While the chip in the EMV cards prevents the use of counterfeit cards, it is expected that card-present fraud in stores will migrate to card-not-present fraud online and that total dollar volume of fraud will actually increase. It is projected that counterfeit card fraud in the U.S. will fall by roughly $1.8 billion between 2015 and 2018 due to EMV chips, however, online card (card-not-present) fraud will rise $3.1 billion. That’s a projected net card fraud gain of $1.3 bil- lion during the initial post EMV time period—a very poor financial return on the $8 billion issuers and merchants are spending to deploy EMV.76

TABLE 7.8 Comparison of payment systems Payment System Description Advantages Disadvantages

Credit card Carries preset spending limit based on the user’s credit history

Each month the user can pay all or part of the amount owed

Unpaid balance accumu- lates interest charges— often at a high rate of interest

Charge card Looks like a credit card but carries no preset spending limit

Does not involve lines of credit and does not accu- mulate interest charges

The entire amount charged to the card is due at the end of the billing period or the user must pay a fee

Debit card Looks like a credit card or automated teller machine (ATM) card

Operates like cash or a personal check

Money is immediately deducted from user’s account balance

Smart card Is a credit card device with embedded microchip capable of storing facts about cardholder

Better protected from mis- use than conventional credit, charge, and debit cards because the smart card information is encrypted

Slowly becoming more widely used in the United States

332 PART 3 • Business Information Systems

Critical Thinking Exercise

P-Card A p-card (procurement card or purchasing card) is a credit card used to streamline the traditional purchase order and invoice payment processes. The p-card is typically issued to selected employees who must follow company rules and guidelines that may include a single purchase limit, a monthly spending limit, or merchant category code restrictions. Due to an increased risk of unauthorized purchases, each p-card holder’s spending activity is reviewed periodically by someone independent of the cardholder to ensure adherence to the guidelines. Spending on p-cards is expected to increase from $245 billion in 2013 to $377 billion in 2018.77

Third Party Operation of Web Site Your firm has been hosting and operating its own Web site for over five years now. However, in the face of negative consumer reviews and poor performance, management is considering having a third-party host and operate the Web site.

Review Questions 1. What parameters might be used to measure the current performance of the

Web site? 2. What are the pros and cons of having a third-party host and operate your Web

site?

Critical Thinking Questions 1. Management is concerned that the migration to chip-and-sign EMV cards will

increase the level of online consumer fraud. Do you have any ideas to combat this increase in fraud?

2. What other potential risks and opportunities lie in the future of B2C e-commerce?

p-card (procurement card or purchasing card): A credit card used to streamline the traditional pur- chase order and invoice payment processes.

Summary

Principle: Electronic and mobile commerce are evolving, providing new ways of con- ducting business that present both potential benefits and problems.

Electronic commerce is the conducting of business activities (e.g., distribu- tion, buying, selling, marketing, and servicing of products or services) electron- ically over computer networks. Business-to-business (B2B) e-commerce allows manufacturers to buy at a low cost worldwide, and offers enterprises the chance to sell to a global market. Currently, the greatest dollar volume of e-commerce sales falls under the category of B2B e-commerce. Business- to-consumer (B2C) e-commerce enables organizations to sell directly to consu- mers, eliminating intermediaries. In many cases, this practice squeezes costs and inefficiencies out of the supply chain and can lead to higher profits and lower prices for consumers. Consumer-to-consumer (C2C) e-commerce involves consumers selling directly to other consumers. Online auctions are the chief method by which C2C e-commerce is currently conducted. E-government involves the use of information and communications technology to simplify the sharing of information, speed formerly paper-based processes, and improve the relationship between citizens and government.

Mobile commerce is the use of mobile devices such as tablets and smart- phones to facilitate the sale of goods or services—anytime and anywhere. Mobile commerce is a rapidly growing segment of e-commerce, with Japan,

CHAPTER 7 • Electronic and Mobile Commerce 333

the United Kingdom, and South Korea leading the world in m-commerce growth. The market for m-commerce in North America is maturing much later than in other countries for several reasons. Numerous retailers have estab- lished special Web sites for users of mobile devices.

Conversion to an e-commerce or m-commerce system enables organiza- tions to reach new customers, reduce the cost of doing business, speed the flow of goods and information, increase the accuracy of order-processing and order fulfillment, and improve the level of customer service.

A successful e-commerce system must address the many stages consumers experience in the sales life cycle. At the heart of any e-commerce system is the ability of the user to search for and identify items for sale; select those items; negotiate prices, terms of payment, and delivery date; send an order to the vendor to purchase the items; pay for the product or service; obtain product delivery; and receive after-sales support.

From the perspective of the provider of goods or services, an effective e-commerce system must be able to support the activities associated with sup- ply chain management and customer relationship management.

A firm faces three key challenges when converting its business processes from the traditional form to e-commerce processes: (1) dealing effectively with consumer privacy concerns, (2) successfully overcoming consumers’ lack of trust, and (3) overcoming global issues.

Principle: E-commerce and m-commerce can be used in many innovative ways to improve the operations of an organization.

Many manufacturers are joining electronic exchanges, where they can work with competitors and suppliers to buy and sell goods, trade market infor- mation, and run back-office operations, such as inventory control. They are also using e-commerce to improve the efficiency of the selling process by mov- ing customer queries about product availability and prices online.

The Web allows firms to gather much more information about customer behav- ior and preferences than they could using other marketing approaches. This new technology has greatly enhanced the practice of market segmentation and has enabled many companies to establish closer relationships with their customers.

The Internet has revolutionized the world of investment and finance, espe- cially online stock trading and online banking. The Internet has also created many options for electronic auctions, where geographically dispersed buyers and sellers can come together.

The numerous m-commerce applications include advertising, bartering, retar- geting, price comparison, couponing, investment and finance, and banking.

Principle: E-commerce and m-commerce offer many advantages yet raise many challenges.

Businesses and people use e-commerce and m-commerce to reduce trans- action costs, speed the flow of goods and information, improve the level of customer service, and enable the close coordination of actions among manufac- turers, suppliers, and customers.

E-commerce and m-commerce also enable consumers and companies to gain access to worldwide markets. They offer great promise for developing countries, enabling them to enter the prosperous global marketplace and hence helping to reduce the gap between rich and poor countries.

Because e-commerce and m-commerce are global systems, they face cul- tural, language, time and distance, infrastructure, currency, product and ser- vice, and state, regional, and national law challenges.

334 PART 3 • Business Information Systems

Principle: Organizations must define and execute an effective strategy to be success- ful in e-commerce and m-commerce.

Most people agree that an effective Web site is one that creates an attractive presence and meets the needs of its visitors. E-commerce start-ups must decide whether they will build and operate the Web site themselves or outsource this function. Web site hosting services and storefront brokers provide alternatives to building your own Web site.

To build traffic to your Web site, you should register a domain name that is relevant to your business, make your site search-engine friendly by including a meta tag in your home page, use Web site traffic data analysis software to attract additional customers, and modify your Web site so that it supports global commerce. Web site operators must constantly monitor the traffic and response times associated with their sites and adjust software, databases, and hardware to ensure that visitors have a good experience when they visit.

Web site operators must also continually be alert to new trends and devel- opments in the area of e-commerce and be prepared to take advantage of new opportunities, including personalization—the process of tailoring Web pages to specifically target individual consumers.

Principle: E-commerce and m-commerce require the careful planning and integra- tion of a number of technology infrastructure components.

A number of infrastructure components must be chosen and integrated to support a large volume of transactions with customers, suppliers, and other business partners worldwide. These components include hardware, Web server software, and e-commerce software.

M-commerce presents additional infrastructure challenges, including improving the ease of use of wireless devices, addressing the security of wire- less transactions, and improving network speed. The Wireless Application Pro- tocol (WAP) is a standard set of specifications to enable development of m-commerce software for wireless devices. The development of WAP and its derivatives addresses many m-commerce issues.

Electronic payment systems are a key component of the e-commerce infra- structure. A digital certificate is an attachment to an email message or data embedded in a Web page that verifies the identity of a sender or a Web site. To help prevent the theft of credit card numbers and banking information, the Transport layer Security (TLS) communications protocol is used to secure all sen- sitive data. Several electronic cash alternatives require the purchaser to open an account with an electronic cash service provider and to present proof of identity whenever payments are to be made. Payments can also be made by credit, charge, debit, smart cards, and p-cards. Retail and banking industries are devel- oping means to enable payments using the cell phone like a credit card.

Key Terms

business-to-business (B2B) e-commerce

business-to-consumer (B2C) e-commerce

certificate authority (CA)

consumer-to-consumer (C2C) e-commerce

digital certificate

e-government

electronic cash

electronic exchange

identity theft

market segmentation

meta tag

p-card (procurement card or purchasing card)

personalization

storefront broker

Transport Layer Security (TLS)

CHAPTER 7 • Electronic and Mobile Commerce 335

Chapter 7: Self-Assessment Test

Electronic and mobile commerce are evolving, providing new ways of conducting business that present both potential benefits and problems.

1. e-commerce activities include identifying and comparing competitive suppliers and pro- ducts, negotiating and establishing prices and terms, ordering and tracking shipments, and steering organizational buyers to preferred suppliers and products.

2. involves conducting business activities (e.g., distribution, buying, selling, marketing, and servicing of products or services) electronically over computer networks. a. B2B b. C2C c. B2C d. E-commerce

3. Popular B2C Web sites have helped raise expectations as to how e-commerce must operate, and many B2B companies are responding to those heightened expectations by investing heavily in their B2B platforms. True or False?

4. The largest B2C retailer in the United States is . a. Amazon b. Staples c. Apple d. Walmart

5. The elimination of intermediate organizations between the producer and the consumer is called .

E-commerce and m-commerce can be used in many innovative ways to improve the operations of an organization.

6. B2B is smaller and growing more slowly than B2C. True or False?

7. is not a key challenge for e-commerce. a. Dealing with consumer privacy concerns b. Training customers on how to access and use

e-commerce Web sites c. Overcoming consumers’ lack of trust d. Overcoming global issues

8. The Internet Corporation for Assigned Names and Numbers (ICANN) created a domain called to attract mobile users to the Web.

E-commerce and m-commerce offer many advantages yet raise many challenges.

9. The market for m-commerce is North America is maturing much sooner than in other countries. True or False?

10. Key components of a multistage model for e-commerce includes search and identification, selection and negotiation, purchasing, product and service delivery and .

11. Which of the following is NOT considered to be a key challenge to e-commerce? a. Dealing with consumer privacy concerns b. Overcoming consumer’s lack of trust c. Overcoming global cultural challenges, lan-

guage, time and distance, infrastructure, and currency challenges

d. Low user interest in access to global markets and competitive pricing

12. Some businesses are willing to as a means to reduce excess inventory, gain new cus- tomers, or avoid paying cash for necessary raw materials or services.

13. The security standard spells out mea- sures and security procedures to safeguard the card issuer, the cardholder, and the merchant.

Organizations must define and execute an effective strategy to be successful in e-commerce and m-commerce.

14. divides the pool of potential customers into subgroups usually defined in terms of demographic characteristics, such as age, gender, marital status, income level, and geographic location.

15. Mobile ad impressions are generally bought at a cost per thousand (CPM), cost per action (CPA), or (CPC).

E-commerce and m-commerce require the careful planning and integration of a number of technology infrastructure components.

16. The amount of storage capacity and computing power required of a Web server depends pri- marily on . a. the geographical location of the server and

number of different products sold b. the software that must run on the server and

the volume of e-commerce transactions c. the size of the business organization and the

location of its customers d. the number of potential customers and aver-

age dollar value of each transaction 17. Key Web site performance measures include

response time, transaction success rate, and sys- tem availability. True or False?

336 PART 3 • Business Information Systems

Chapter 7: Self-Assessment Test Answers

1. Buy-side 2. d. 3. True 4. a. 5. disintermediation 6. False 7. b. 8. .mobi 9. False

10. after-sales service 11. d. 12. barter 13. Payment Card Industry or PCI 14. Market segmentation 15. cost per click 16. b. 17. True

Review Questions

1. Briefly define the term electronic commerce, and identify six forms of electronic commerce based on the parties involved in the transactions.

2. What is buy-side e-commerce and how does it differ from sell-side e-commerce?

3. What is disintermediation? 4. What region of the world represents the world’s

largest and fastest B2C market? 5. What are Web-influenced sales and what is a

reasonable estimate of total Web-influenced sales?

6. What is the status of background checks on online gun sales?

7. Identify three forms of e-government e-commerce.

8. Why is the market for m-commerce in North America maturing much later than in other regions of the world?

9. Outline specific actions online shoppers can take to ensure that they are dealing with a legitimate and reputable Web site.

10. Identify six global issues associated with e-commerce.

11. What is an electronic exchange? Provide an example.

12. What is market segmentation? What is its purpose?

13. What is the difference between blind, premium blind, and premium networks for mobile advertising?

14. What is meant by retargeting? What percent of all online shopping carts are abandoned?

15. Identify three key Web site performance measures.

16. What is a digital certificate? What is a certificate authority? What is the Payment Card Industry security standard? What is the Transport Security Layer?

17. Why is it necessary to continue to maintain and improve an existing Web site?

18. Identify the key elements of the technology infrastructure required to successfully implement e-commerce within an organization.

Discussion Questions

1. Identify and briefly discuss three reasons for the steady growth in B2C e-commerce.

2. Briefly discuss the status of online retailers collecting sales taxes on online sales.

3. Identify and briefly discuss five advantages of electronic and mobile commerce.

4. Identify and briefly discuss the five stages con- sumers experience in the sales life cycle that must be supported by a successful e-commerce system.

5. Identify and briefly discuss three key chal- lenges that an organization faces in creating a successful e-commerce operation. What steps

can an organization take to overcome these barriers?

6. Briefly discuss three models for selling mobile ad impressions. What are the primary measures for the success of mobile advertising?

7. Discuss how you might go about increasing the amount of traffic to your Web site.

8. What is personalization of Web pages? How might one go about doing this?

9. Briefly describe the differences between a credit, charge, debit and smart card.

10. Identify and briefly describe three m-commerce applications you have used.

CHAPTER 7 • Electronic and Mobile Commerce 337

11. Discuss the use of e-commerce to control spend- ing on manufacturing, repair, and operations (MRO) of goods and services.

12. Outline the key steps in developing a corporate global e-commerce strategy.

Problem-Solving Exercises

1. Do research to learn more about the American Consumer Satisfaction Index methodology devel- oped by the University of Michigan. Prepare a brief slide presentation about the methodology and how it was used to rate B2C Web sites. Using this information, develop one final slide provid- ing at least five recommendations for someone developing a B2C Web site.

2. Use PowerPoint or some other presentation preparation software to produce a presentation of the key steps that an organization must take in

the aftermath of a data breach to calm its custo- mers and restore their faith in the firm.

3. Your washing machine just gave out and must be replaced within the week! Use your Web-enabled smartphone (or borrow a friend’s) to perform a price and product comparison to identify the manufacturer and model that best meets your needs and the retailer with the lowest delivered cost. Obtain peer input to validate your choice. Write a brief summary of your experience, and identify the Web sites you found most useful.

Team Activities

1. As a team, develop a set of criteria that you would use to evaluate the effectiveness of a mobile advertising campaign to boost the sales of one of your firm’s products. Identify the measures you would use and the data that must be gathered.

2. Imagine that your team has been hired as con- sultants to a large organization that has just suf- fered a major public relations setback due to a large-scale data breach that it handled poorly.

Identify three things that the organization must do if it wishes to regain consumer confidence.

3. As a team, develop a set of criteria that you would use to evaluate the effectiveness of a mobile advertising campaign to boost the popularity of a candidate for an elected state government posi- tion. Identify the measures you would use and the data that must be gathered.

Web Exercises

1. Do research to capture data on the growth of B2C e-commerce and retail sales over the past 10 years. Use the charting capability of your spreadsheet software to plot the growth of B2C e-commerce and retail sales and predict the year that B2C e-commerce will exceed 10 percent of retail sales. Document any assumptions you make.

2. Do research on the Web to find a dozen Web sites that offer mobile coupons. Separate the sites into two groups: those that provide coupons for a single retailer and those that aggregate coupons for multiple retailers. Produce a table that sum- marizes your results and shows the approximate number of coupons available at each site.

Career Exercises

1. Do research and write a brief report on the impact of mobile advertising on sales and marketing.

2. Do research to identify three top organizations that develop and operate e-commerce Web sites for their clients. Visit their Web sites and identify current job openings. What sort of responsibili- ties are associated with these positions? What

experience and education requirements are needed to fill these positions? Do any of these positions appeal to you? Why or why not?

3. For your chosen career field, describe how you might use or be involved with e-commerce. If you have not chosen a career yet, answer this ques- tion for someone in marketing, finance, or human resources.

338 PART 3 • Business Information Systems

Case Studies

Case One

Facebook Moves into E-Commerce On the social networking site Facebook, users create profiles that allow them to connect with friends, organizations, and companies through posts and ads that appear in their personal News Feed as well as through Pages that are designed to help organizations and companies connect with interested users. And with more than 1.4 billion active users, including 900 million who visit the site every day, Facebook represents a huge potential online marketplace.

Over the years, Facebook has experimented with many different features designed to help marketers connect with prospective customers—from banner ads to sponsored links to highly visual engagement ads that allow advertisers to show several clickable images or videos within a single News Feed ad. Although Facebook has incorporated ads for some time, it is now focusing more intently on tools that make it easier for customers to purchase something immediately based on an ad they see—ideally, all while staying within Facebook’s site. In particular, the company is concentrating on ways it can streamline mobile purchasing, currently an often slow and cumbersome process. According to Emma Rodgers, Facebook’s head of product marketing for commerce, “We’re looking to give people an easier way to find products that will be interesting to them on mobile, make shopping easier and help businesses drive sales.”

For starters, Facebook is testing a new Shopping tool within the Favorites section that will aggregate a personalized mix of products users are likely to be interested in based on their Facebook likes and connections. In addition, Facebook has begun experimenting with “conversational commerce,” a highly personalized form of e-commerce in which consumers and retailers conduct entire transactions within a messaging application—in this case, Facebook’s Messenger app.

Facebook has also been rolling out a new mobile ad feature it calls Canvas, which offers marketers a customizable space where they can use video, images, text, and “call- to-action buttons” (such as Book Now, Sign Up, and Shop Now) to engage with consumers. When Facebook users click on a Canvas, they will almost instantaneously see a full- screen ad that lives within Facebook’s infrastructure—rather than being redirected to an advertiser’s Web site, which may be slow to load and not always optimized for mobile devices. Canvas appeals to marketers looking for a new way to engage customers without losing them as they are being redirected to an outside Web site, and it offers Facebook the chance to keep more of a user’s online activity within its site.

Recently, Facebook has been testing a “shop” concept that goes one step further—allowing companies using Shopify’s e-commerce platform to build what amounts to a mini e-commerce site within their Page through the use of a Buy button. For now, retailers involved in the test can choose between an option that directs shoppers to their own sites and one that keeps the entire shopping experience—from product discovery to checkout—within Facebook.

A recent study found that 13 percent of all the time spent on mobile apps is spent within Facebook’s apps, and

according to a Facebook survey, nearly half of its users come to Facebook to actively look for products. Facebook clearly intends to capitalize on these trends with e-commerce and m-commerce initiatives that will likely continue to evolve and expand. And marketers looking for new ways to extend customer engagement to online purchases will certainly be paying attention.

Critical Thinking Questions 1. What are some of the privacy concerns that consumers

might have in terms of shopping on a social network such as Facebook, which already has access to so much personal information?

2. Are people likely to use Facebook’s current e-commerce offerings the same way they might shop on Amazon?

3. Do research online to find out more about some of the e-commerce initiatives of other social networks, such as Instagram, Pinterest, and Twitter. What features do they offer that differentiate them from Facebook? Do you think any of these sites will ever be a strong com- petitor to Amazon in terms of total e-commerce sales? If not, what niche could they succeed at?

SOURCES: “Easy and Effective Facebook Ads,” Facebook, www.face book.com/business/products/ads, accessed February 29, 2016; “Face- book Pushes Shopping Features in Move to E-Commerce,” Reuters, October 12, 2015, http://uk.reuters.com/article/us-facebook-retail -idUKKCN0S61N720151012; “FB Moves into E-Commerce, Challenges Amazon with New In-App,” Money Control, October 13, 2015, www .moneycontrol.com/news/technology/fb-moves-into-e-commerce-chal lenges-amazonnew-in-app_3559061.html; Stambor, Zak, “Facebook Makes a Major E-Commerce Move,” Internet Retailer, October 12, 2015, www.internetretailer.com/2015/10/09/facebook-makes-major-e-com merce-move; Mac, Ryan, “Facebook Goes All in On E-Commerce by Bringing Businesses onto Messenger, Forbes, March 25, 2015, www .forbes.com/sites/ryanmac/2015/03/25/facebook-goes-all-in-on-e-com merce-by-bringing-businesses-onto-messenger/#132d7acd4747; Plum- mer, Quinten, “Facebook May Launch Risky Messenger Ad Program,” E-Commerce Times, February 22, 2016, www.ecommercetimes.com/story /83139.html; “Introducing Canvas, A Full-Screen Ad Experience Built for Bringing Brands and Products to Life on Mobile,” Facebook, February 25, 2016, www.facebook.com/business/news/introducing-canvas; Plum- mer, Quinten, “Facebook Gives Marketers a Blank Canvas,” E-Commerce Times, February 27, 2016, www.ecommercetimes.com/story/83165.html; Kantrowitz, Alex, “Facebook Takes Big Step Forward On Commerce, Builds Shops into Pages,” BuzzFeed, July 15, 2015, www.buzzfeed.com /alexkantrowitz/facebook-takes-big-step-forward-on-commerce-builds -shops-int#.kxovdqa3V; Stambor, Zak, “Facebook Launches Another Buy Button Test,” Internet Retailer, July 17, 2015, www.internetretailer.com /2015/07/17/facebook-launches-another-buy-button-test.

Case Two

MobiKash: Bringing Financial Services to Rural Africa Full participation in the twenty-first century economy requires access to financial services. However, this access is a luxury for many citizens of African nations. Due to the long distances between bank branches and the lack of rapid, cost-

CHAPTER 7 • Electronic and Mobile Commerce 339

effective transportation to the urban areas in which banks are typically found, fewer than 10 percent of Africans participate in formal banking. Those who do often face time-consuming inefficiencies.

A new company, MobiKash Afrika, hopes to change this by empowering people in Africa with a secure and independent mobile commerce system that is easy to use. In planning its system, MobiKash established several standards:

● The service must be independent of specific mobile telephone operators.

● The service must be independent of specific banks or financial institutions.

● The service must work with all bill issuers. ● The service must not require the use of a smartphone.

MobiKash offers its members five services, all accessible from a mobile phone: loading money into their MobiKash account from any bank account, paying bills, sending money to any other mobile phone user or bank account, managing a bank or MobiKash account, and obtaining or depositing cash. Only the last pair of services requires members to visit a physical location where cash can be handled, but that site doesn’t have to be a bank. MobiKash agents in market towns, convenient to rural areas, can handle transactions that require cash. Approximately 3,000 MobiKash agents operate in Kenya. Account holders don’t even need to visit a bank to set up their MobiKash accounts: in fact, anyone with a mobile phone to whom a MobiKash user sends money becomes a MobiKash user automatically.

MobiKash charges for some services. Withdrawing cash costs 25 to 75 Kenya shillings (Kshs) (about U.S. $0.30 to $0.90), for withdrawals up to Kshs 10,000 (about U.S. $20), with higher fees for larger withdrawals. Paying bills from a mobile phone incurs a fixed fee of Kshs 25, no matter how large the bill is. The largest fee that MobiKash charges is Kshs 350 (about U.S. $4), for cash withdrawals in excess of Kshs 75,000 (about U.S. $900). This fee schedule is consistent with the financial resources of MobiKash users and the value those users place on each financial service.

The MobiKash system is based on Sybase 365 mCommerce software. Several factors contributed to this choice, including the local presence of Sybase in Africa with experience in similar applications, its understanding of how

to integrate with African financial institutions, and the system’s ability to work with any mobile telephone. It operates from an existing Sybase data center in Frankfurt, Germany.

MobiKash services expects to expand in east, west, and southern Africa, starting with Zimbabwe. It is working with Masary, an Egyptian e-wallet firm, to cover northern Africa as well. Work is also under way to support intercontinental fund transfers to and from North America, Europe, and the Middle East. As for the future, CEO Duncan Otieno said, “We see MobiKash in the next five years playing with the international or global mobile commerce space in at least 40 countries. The plans for building this network are already in progress.”

Critical Thinking Questions 1. Firms can base m-commerce systems on commercially

available software, as MobiKash did here. Alterna- tively, they can write their own software. List three pros and cons of each approach. Do you think MobiKash made the right choice?

2. What challenges does a company like MobiKash face when they try to penetrate different national markets in developing countries? Why might Kenya be a good choice for the launch of m-commerce operations in Africa?

3. Contrast your m-commerce needs with those of a typical rural African. Would you find the MobiKash offering attractive in full, in part (which parts?), or not at all?

SOURCES: Masary, www.e-masary.com, accessed March 1, 2012; MobiKash Afrika, “The First Intra-region Mobile Network and Bank Agnostic Mobile Commerce Solution,” Computerworld case study, www .eiseverywhere.com/file_uploads/e1bfbec2f385506b3890cbd7e b7e9dd9_MobiKash_Afrika_-_The_First_Intra-region_Mobile_Network_ and_Bank_Agnostic_Mobile_Commerce_Solution.pdf, accessed March 1, 2012; MobiKash Africa Web site, www.mobikash.com, accessed March 1, 2012; “Reaching the Unbanked in a MobiKash World,” interview with CEO Duncan Otieno, MobileWorld, www.mobileworldmag.com /reaching-the-unbanked-in-a-mobikash-world/, December 28, 2011; Sybase, “MobiKash Africa: Customer Case Study,” www.sybase.com/files /Success_Stories/Mobikash-CS.pdf, accessed March 1, 2012.

Notes

1. Demery, Paul, “B2B E-Commerce Sales Will Top $1.13 Trillion by 2020,” Internet Retailer, April 2, 2015, www .internetretailer.com/2015/04/02/new-report-predicts -1-trillion-market-us-b2b-e-commerce.

2. Ibid. 3. Davis, Don, “E-commerce Software Spending Will Nearly

Double in the U.S. by 2019,” February 9, 2015, www .internetretailer.com/2015/02/09/us-e-commerce-soft ware-spending-nearly-double-2019.

4. “Mastering Omni-Channel B2B Customer Engagement,” Accenture, October 2015, www.accenture.com/us-en /insight-mastering-omni-channel-b2b-customer-engage ment.aspx.

5. Tepper, Nona, “E-Commerce Accounts for 41% of Grainger Sales in 2015, B2B E-Commerce World, January

26, 2016, www.b2becommerceworld.com/2016/01/26 /e-commerce-accounts-41-grainger-sales-2015.

6. “Our Strengths at Work: 2015 Fact Book,” Grainger, http://phx.corporate-ir.net/External.File?item=UG FyZW50SUQ9Mjc5MDI1fENoaWxk SUQ9LTF8VHlwZT0z&t=1, accessed February 24, 2016.

7. Linder, Matt, “E-Commerce Revenue for Retailers with Stores and Websites Grows over 36% in Q3,” Internet Retailer, October 29, 2015, www.internetretailer.com /2015/10/29/e-commerce-retailers-stores-and-Websites -grows-over-36.

8. “Press Release: MarketLive’s Fall Performance Index Shows Double-Digit Revenue Gains for E-Commerce Retailers; Smartphones & Direct Traffic Are Major Trends,” Market Wired, October 8, 2015, www.market

340 PART 3 • Business Information Systems

wired.com/press-release/marketlives-fall-performance -index-shows-double-digit-revenue-gains-e-commerce -2067871.htm.

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19. Ibid. 20. Luo, Michael, McIntire, Mike, and Palmer, Griff, “Seeking

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21. Rose, Joel, “Obama Aims to Expand Background Checks to Online Gun Sales,” NPR, January 8, 2016, www.npr .org/2016/01/06/462114352/obama-aims-to-expand -background-checks-to-online-gun-sales.

22. Nussbaum, Alex, “Accenture Wins U.S. Contract for Obamacare Enrollment,” Bloomberg, January 12, 2014, www.bloomberg.com/news/2014-01-12/accenture-wins -u-s-contract-for-obamacare-enrollment-Website.html.

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24. “Making the Internet Work for Oregon,” State of Oregon, www.oregon.gov/DAS/ETS/EGOV/pages/ev_internet .aspx#Objectives, accessed February 27, 2016.

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26. Ibid. 27. “About Shoe Carnival,” Shoe Carnival, www.shoecarni

val.com/aboutshoecarnival, www.shoecarnival.com /aboutshoecarnival, accessed February 27, 2016.

28. “Customer Stories: Shoe Carnival,” Rackspace, http://stor ies.rackspace.com/wp-content/uploads/2015/09/CRP -Shoe-Carnival-Case-Study-Final.pdf, accessed February 27, 2016.

29. “About Us,” BloomNation, htps://www.bloomnation .com/about-us, accessed February 27, 2016.

30. Cowley, Stacy, “Florist-Friendly Marketplaces Help Local Flower Shops Hang On,” New York Times, February 10, 2016, www.nytimes.com/2016/02/11/business/smallbusi ness/florist-friendly-marketplaces-help-local-flower -shops-hang-on.html?ref=topics.

31. Demery, Paul, “Online Photo Service Shutterfly Posts A 16% Increase in Q2 Sales, Internet Retailer, August 24, 2015, www.internetretailer.com/2015/08/24/online -photo-service-shutterfly-posts-16-increase-q2-sales.

32. “About Shutterfly,” Shutterfly, http://businesssolutions .shutterfly.com/Learn, accessed February 27, 2016.

33. Ryssdal, Kai and Tommy Andres, “Domino’s CEO Patrick Doyle: Tech with a Side of Pizza,” Marketplace, Septem- ber 24, 2015, www.marketplace.org/2015/09/24/busi ness/corner-office/dominos-ceo-patrick-doyle-tech-side -pizza.

34. “About,” Sticker Mule, www.stickermule.com/about, accessed February 29, 2016.

35. Wahba, Phil, “Borders Files for Bankruptcy, to Close Stores,” The Huffington Post, February 16, 2011, www .huffingtonpost.com/2011/02/16/borders-files-for-bank ruptcy_n_823889.html.

36. Leger, Donna Leinwand, “Target Data Breach under Close Investigative Scrutiny,” USA Today, January 13, 2014, www.usatoday.com/story/news/nation/2014/01 /10/target-data-breach-investigations-continue /4421345/.

37. “These Companies Lost Your Data in 2015’s Biggest Hacks, Breaches,” ZDNet, August 14, 2015, www.zdnet .com/pictures/biggest-hacks-security-data-breaches-2015.

38. Goodin, Dan, “Gigabytes of User Data from Hack of Patreon Donations Site Dumped Online,” Ars Technica, October 1, 2015, http://arstechnica.com/security/2015 /10/gigabytes-of-user-data-from-hack-of-patreon-dona tions-site-dumped-online.

39. “The Top 10 Security Breaches of 2015, Forbes, Decem- ber 31, 2015, www.forbes.com/sites/quora/2015/12/31 /the-top-10-security-breaches-of-2015/4/#58cc002e15e9.

40. Greenberg, Andy, “Hack Brief: Hackers Steal 15M T-Mobile Customers’ Data from Experian,” Wired, October 1, 2015, www.wired.com/2015/10/hack-brief -hackers-steal-15m-t-mobile-customers-data-experian.

41. “What Is Identity Theft,” Federal Trade Commission, www.consumer.ftc.gov/articles/pdf-0014-identity-theft .pdf, accessed February 10, 2014.

CHAPTER 7 • Electronic and Mobile Commerce 341

42. “Target Debit and Credit Card Breach Lawsuit,” LawyersandSettlements.com, www.lawyersandsettle ments.com/lawsuit/data-breach.html#.Uvom26-A1Ms, accessed February 11, 2014.

43. “Akimbo Financial,” Symantec, www.symantec.com/con tent/en/us/enterprise/customer_successes/b-akimbo -financial-SuccessStory-en-us.pdf accessed February 11, 2016.

44. Tepper, Nona, “Wholesalers Call E-Commerce Their Top Sales Channel for 2015,” Internet Retailer, March 2, 2015, www.internetretailer.com/2015/03/02/wholesa lers-call-e-commerce-their-top-sales-channel-2015.

45. “About MSC,” MSC Industrial Supply Co., www.mscdir ect.com/corporate/about-msc, accessed February 28, 2016.

46. Tepper, Nona, “E-Commerce Accounts for All the Q2 Sales Growth at MSC Industrial Supply,” Internet Retailer, April 27, 2015, www.internetretailer.com/2015 /04/27/e-commerce-builds-sales-growth-msc-industrial -supply.

47. “Tinypass in Ruby,” Tinypass Press Releases, www.tiny pass.com/blog/category/press-releases/, accessed Febru- ary 11, 2016.

48. “Crowdfunding…Your Way,” Tinypass, http://publisher. tinypass.com/archives/howto/crowdfund, accessed Feb- ruary 27, 2016.

49. Petersen, Chris, “Walmart’s Secret Sauce: How the Largest Survives and Thrives,” RetailCustomer Experience.com, March 27, 2013, www.retailcustomerex perience.com/blog/10111/Walmart-s-secret-sauce-How -the-largest-survives-and-thrives.

50. “Exelate and Dun & Bradstreet Collaborate to Offer One of the Most Comprehensive B2B Datasets in Digital Media,” Nielsen, February 25, 2016, www.nielsen.com /us/en/press-room/2016/exelate-and-dun-bradstreet-col laborate-to-offer-one-of-the-most-comprehensive-b2b -datasets-in-digital-media.html.

51. “InMobi Launches Appographic Targeting—An Industry- first, App-Interest-Based Audience Targeting Capability,” InMobi, March 5, 2015, www.inmobi.com/company /press/inmobi-launches-appographic-targeting-an-indus try-first-app-interest-based.

52. Jatain, Visheshwar, “Top 8 Best-Paying Mobile Ad Net- works You Should Try,” AdPushup (blog), May 29, 2015, www.adpushup.com/blog/top-8-best-paying-mobile-ad -networks-you-should-try.

53. Smith, Cooper, “Shopping Cart Abandonment: Online Retailers’ Biggest Headache Is Actually a Huge Oppor- tunity,” Business Insider, July 23, 2015, www.businessin sider.com/heres-how-retailers-can-reduce-shopping-cart -abandonment-and-recoup-billions-of-dollars-in-lost -sales-2015-7.

54. Steele, Chandra, “The 11 Best Shopping Apps to Com- pare Prices,” PCMag, November 23, 2015, www.pcmag .com/slideshow/story/290959/the-11-best-shopping-apps -to-compare-prices.

55. “Barcode Scanner,” Google Play, https://play.google.com/ store/apps/details?id=com.google.zxing.client.android, accessed February 28, 2016.

56. Loechner, Jack, “FSI Coupon Incentives Continue to Grow,” MediaPost, January 21, 2016, www.mediapost

.com/publications/article/266825/fsi-coupon-incentives -continue-to-grow.html.

57. Dunn, Amy, “Coupon Use Plummets, and Some Wonder Whether It’s the End of an Era,” NewsObserver.com, March 9, 2013, www.newsobserver.com/2013/03/09 /2735590/coupon-use-plummets-and-some-wonder .html#storylink=cpy.

58. Heller, Laura, “Beacons to Push 1.6 Billion Coupons by 2020,” FierceRetail, December 10, 2015, www.fiercere tail.com/story/beacons-push-16-billion-coupons-2020 /2015-12-10.

59. Maycotte, H.O., “Beacon Technology: The Where, What, Who, How and Why,” Forbes, September 1, 2015, www .forbes.co.m/sites/homaycotte/2015/09/01/beacon-tech nology-the-what-who-how-why-and-where/#b74a5664fc19.

60. Donovan, Fred, “Mobile Couponers to Fuel 11% Growth in Digital Coupon Use This Year,” FierceMobileIT, Octo- ber 21, 2013, www.fiercemobileit.Com/Story/Mobile-Cou poners-Fuel-11ex-Growth-Digital-Coupon-Use-Year /2013-10-21#Ixzz2teth8gu8.

61. “Fidelity Mobile Apps,” Fidelity, www.fidelity.com /mobile/overview, accessed February 28, 2016.

62. Perez, Sarah, “How T-Mobile’s New Mobile Banking Service Compares with Simple and Amex Serve,” Tech Crunch, January 22, 2014, http://Techcrunch.Com/2014 /01/22/How-T-Mobiles-New-Mobile-Banking-Service-Com pares-With-Simple-And-Amex-Serve.

63. Runde, Daniel, “M-Pesa and The Rise of the Global Mobile Money Market,” Forbes, August 12, 2015, www .forbes.com/sites/danielrunde/2015/08/12/m-pesa-and -the-rise-of-the-global-mobile-money-market/#7058eca 423f5.

64. Pressler, Jessica, “The World Is Not Enough,” New York, August 11, 2015, http://nymag.com/thecut/2015/08/net -a-porter-bigger-better-future.html.

65. “About Us,” Quintessentially Gifts, www.quintessential lygifts.com/about-us, accessed February 14, 2014.

66. “About Us,” Shopify, www.shopify.com/about, accessed February 27, 2016.

67. Nash, Kim S., “Wal-Mart, Reporting Slower E-Commerce Growth, Makes Plans to Expand Number of Products Available Online,” Wall Street Journal, February 18, 2016, http://blogs.wsj.com/cio/2016/02/18/wal-mart -reporting-slower-e-commerce-growth-makes-plans-to -expand-number-of-products-available-online.

68. Nash, Kim S., “Wal-Mart Revamps E-Commerce Tech- nology as Amazon Applies Pressure,” Wall Street Journal, November 25, 2015, http://blogs.wsj.com/cio/2015/11 /25/wal-mart-revamps-e-commerce-technology-as-ama zon-applies-pressure.

69. “Room & Board,” Salesforce, www.salesforce.com/custo mers/stories/room-and-board.jsp, accessed February 29, 2016.

70. Nelson, Mark, “Outsmarting Fraudsters with Advanced Analytics,” VISA, https://usa.visa.com/visa-everywhere /security/outsmarting-fraudsters-with-advanced-analyt ics.html, accessed February 29, 2016.

71. Pesce, Nicole, “MasterCard Will Launch ‘Selfie Pay’ Tech- nology This Summer,” Daily News, February 23, 2016, www.nydailynews.com/life-style/mastercard-launch -selfie-pay-technology-summer-article-1.2540983.

342 PART 3 • Business Information Systems

72. “Apple Pay,” Apple, www.apple.com/apple-pay, accessed February 29, 2016.

73. “Who We Are,” PayPal, www.paypal.com/us/Webapps /mpp/about, accessed February 29, 2016.

74. Rao, Leena, “Paypal Debuts Its Newest Hardware, Beacon, a Bluetooth LE Enabled Device for Hands-Free Check Ins and Payments,” Tech Crunch, September 9, 2013, http://Techcrunch.Com/2013/09/09/Paypal -Debuts-Its-Newest-Hardware-Beacon-A-Bluetooth -Le-Enabled-Device-For-Hands-Free-Check-Ins-And -Payments/.

75. “Get the Starbucks App for iPhone and Android,” Starbucks, www.starbucks.com/coffeehouse/mobile-apps, accessed February 29, 2016.

76. Wetherington, Lee, “Chip and Quill: How EMV Will Increase Card Fraud in the U.S.,” Information Week, November 18, 2014, www.banktech.com/fraud/chip -and-quill-how-emv-will-increase-card-fraud-in-the-us /a/d-id/1317543.

77. Morgan, Orson, “Commercial Payments Overview,” VISA, October 2014, www.des.wa.gov/sitecollectiondocuments /contractingpurchasing/pcard/visacmrclpymtoview.pptx.

CHAPTER 7 • Electronic and Mobile Commerce 343

CHAPTER

8 Enterprise Systems

dizain/Shutterstock.com

Know?Did Yo u

• Automatic Data Processing (ADP) is a major provider of business outsourcing solutions for payroll administration for 610,000 organizations in more than 125 countries. It uses a batch processing system to prepare the pay- checks of one out of six workers in the United States, as well as 12 million other workers around the world.

• The Red Cross uses a cloud-based CRM platform from Salesforce so that volunteers and employees can quickly access the data and services required to get the

organization’s operations up and running during a disaster. The Red Cross has even integrated social networking tools into its CRM system, providing the organization with new channels to connect with volun- teers and donors as well as new tools for delivering disaster-relief updates to the public, soliciting financial and volunteer help, and helping people affected by a disaster communicate with family and friends.

Principles Learning Objectives

• An organization must have information systems that support routine, day-to-day activities and that help a company add value to its products and services.

• Identify the basic activities and business objec- tives common to all transaction processing systems.

• Describe the transaction processing systems associated with the order processing, purchas- ing, and accounting business functions.

• An organization that implements an enterprise system is creating a highly integrated set of sys- tems, which can lead to many business benefits.

• Identify the basic functions performed and the benefits derived from the implementation of an enterprise resource planning system, customer resource management, and product lifecycle management system.

• Describe the hosted software model for enterprise systems and explain why this approach is so appealing to SMEs.

• Identify the challenges that organizations face in planning, building, and operating their enterprise systems.

• Identify tips for avoiding many of the common causes for failed enterprise system implementations.

Why Learn about Enterprise Systems? Individuals and organizations today are moving from a collection of nonintegrated transaction processing systems to highly integrated enterprise systems that perform routine business processes and maintain records about them. These systems support a wide range of business activities associated with supply chain management, customer relationship management, and product lifecycle management. Although they were initially thought to be cost effective only for very large companies, even small and mid-sized companies are now implementing these systems to reduce costs, speed time to market, and improve service.

In our service-oriented economy, outstanding customer service has become a goal of virtually all companies. To provide good customer service, employees who work directly with customers—whether in sales, customer service, or marketing—require high-quality and timely data to make good decisions. Such workers might use an enterprise system to check the inventory status of ordered items, view the production-planning schedule to tell a customer when an item will be in stock, or enter data to schedule a delivery.

No matter what your role, it is very likely that you will provide input to or use the output from your organization’s enterprise systems. Your effective use of these systems will be essential to raise the productivity of your firm, improve customer service, and enable better decision making. Thus, it is important that you understand how these systems work and what their capabilities and limitations are.

As you read this chapter, consider the following:

• What advantages do integrated enterprise systems offer an organization?

• What factors should organizations consider when adopting enterprise systems to support their business processes and plan for the future?

This chapter begins with an overview of the individual transaction proces- sing systems that support the fundamental operations of many organiza- tions. Their processing methods, objectives, and primary activities are covered. Then enterprise systems, collections of integrated information sys- tems that share a common database, are discussed. Enterprise systems ensure that data can be shared across all business functions and all levels of management to support the operational and management decision mak- ing needed to run the organization. The basic functions and benefits of these systems as well as the challenges of successfully implementing them are discussed.

Transaction Processing Systems

Many organizations employ transaction processing systems (TPSs), which capture and process the detailed data necessary to update records about the fundamental business operations of the organization. These systems include order entry, inventory control, payroll, accounts payable, accounts receivable, and the general ledger, to name just a few. The input to these systems includes basic business transactions, such as customer orders, pur- chase orders, receipts, time cards, invoices, and customer payments. The processing activities include data collection, data editing, data correction, data processing, data storage, and document production. The result of pro- cessing business transactions is that the organization’s records are updated to reflect the status of the operation at the time of the last processed transaction.

A TPS also provides valuable input to management information systems, decision support systems, and knowledge management systems. Indeed, transaction processing systems serve as the foundation for these other sys- tems. See Figure 8.1.

346 PART 3 • Business Information Systems

Transaction processing systems support routine operations associated with business processes, such as customer ordering and billing, shipping, employee payroll, purchasing, and accounting. TPSs use a large amount of input and output data to update the official records of the company about orders, sales, customers, and so on. TPSs, however, don’t provide much support for decision making.

Headquartered in Chicago, Revere Electric Supply is an electrical distribu- tor with a large customer base it serves from eight locations across the Mid- west. The company receives orders from its customers through a variety of channels, including email, fax, phone, EDI (electronic data interchange), and the company’s e-commerce Web site. Revere’s customer service agents often spend 20 to 30 minutes entering an order into the company’s ERP system until the company rolled out an order automation system that cut transaction processing time by 95 percent, while also improving order accuracy.1

The Helen Ross McNabb Center is a community-based, nonprofit organi- zation that provides behavioral health services to families in eastern Tennes- see who are struggling due to the impact of mental illness, addiction, and other challenges.2 Because the organization is a nonprofit, keeping its operat- ing costs under control is particularly important. The center implemented a Web-based human resources platform with payroll and benefits transaction processing functions that have allowed the organization to add 400 employees without having to increase their human resource staffing levels.3

Because TPSs often perform activities related to customer contacts—such as order processing and invoicing—these information systems play a critical role in providing value to the customer. For example, by capturing and track- ing the movement of each package, shippers such as FedEx and DHL can pro- vide timely and accurate data on the exact location of a package. Shippers and receivers can access an online database and, by providing the tracking number of a package, find the package’s current location. If the package has been delivered, they can see who signed for it (a service that is especially use- ful in large companies where packages can become “lost” in internal distribu- tion systems and mailrooms). Such a system provides the basis for added value through improved customer service.

Traditional Transaction Processing Methods and Objectives With batch processing systems, business transactions are accumulated over a period of time and prepared for processing as a single unit or batch. See Figure 8.2a. Transactions are accumulated for as long as necessary to meet the needs of the users of that system. For example, it might be important to process invoices and customer payments for the accounts receivable system daily. On the other hand, the payroll system might process time cards biweekly to create checks, update employee earnings records, and distribute labor costs. The essential characteristic of a batch processing system is the delay between an event and the eventual processing of the related transaction to update the organization’s records. For many applications, batch processing is an appropriate and cost effective approach. Payroll transactions and billing are typically done via batch processing.

FIGURE 8.1 TPS, MIS/DSS, and special information systems in perspective A TPS provides valuable input to MIS, DSS, and KM systems.

Less

Special information systems and knowledge

management systems

MIS/DSS

TPS More

Less

Routine Decision support

Input and output

Sophistication and complexity

of processing and analysis

Information vs. data

batch processing system: A form of data processing whereby business transactions are accumulated over a period of time and prepared for pro- cessing as a single unit or batch.

CHAPTER 8 • Enterprise Systems 347

Automatic Data Processing (ADP) is a major provider of business outsour- cing solutions for payroll administration for 610,000 organizations in more than 125 countries. It uses a batch processing system to prepare the pay- checks of one out of six workers in the United States, as well as 12 million other workers around the world.4

Sumerian is an IT company that specializes in helping organizations plan and manage their hardware and software infrastructure to avoid processing backlogs and other system capacity issues. The firm recently worked with a large brokerage firm that needed to optimize its global trading platform, which handles over 70 percent of its business transactions. Of particular con- cern were the brokerage’s overnight batch processing activities, which must be completed within a five-hour window to ensure the company’s systems are updated by the time the markets open each morning. Using analytics soft- ware, Sumerian was able to reduce the brokerage’s overnight batch proces- sing time by 15 percent, allowing the firm’s systems to handle an increasing volume of trading transactions while staying within the five-hour processing window.5

With online transaction processing (OLTP), each transaction is pro- cessed immediately without the delay of accumulating transactions into a batch, as shown in Figure 8.2b. Consequently, at any time, the data in an online system reflects the current status. This type of processing is essential for businesses that require access to current data such as airlines, ticket agen- cies, and stock investment firms. Many companies find that OLTP helps them provide faster, more efficient service—one way to add value to their activities in the eyes of the customer. See Figure 8.3.

FIGURE 8.2 Batch versus online transaction processing (a) Batch processing inputs and processes data in groups. (b) In online processing, transactions are completed as they occur.

Data entry of accumulated transactions

Input (batched)

Output

(a) Batch Processing

Terminal

Output

Terminal

Central computer (processing)

(b) Online Transaction Processing

Immediate processing of each transaction

online transaction processing (OLTP): A form of data processing where each transaction is processed immediately without the delay of accumulating transactions into a batch.

348 PART 3 • Business Information Systems

Online payments giant PayPal Holdings, Inc., employs a massive OLTP system to process more than 13 million payments each day through its Brain- tree, PayPal, Venmo, and Xoom products. The payments between merchants and consumers—as well as between individual users—total more than $280 billion annually.6

The specific business needs and goals of the organization define the method of transaction processing best suited for the various applications of the company. Increasingly, the need for current data for decision making is driving many organizations to move from batch processing systems to online transaction processing systems when it is economically feasible. For example, the State of Wisconsin Department of Health Services (DHS) runs the Women, Infants, and Children (WIC) program. WIC’s goal is to support and sustain the health and well-being of nutritionally at-risk pregnant, breastfeeding, and postpartum women, as well as their infants and children. DHS employed a batch processing system to manage this program and processed the WIC data in a batch at the end of the day. This practice created a built-in delay in obtaining information needed for decision-making and government-reporting requirements. However, DHS needs up-to-date data to avoid dual participa- tion incidents, such as a client or caregiver receiving more WIC checks than allowed for one month or receiving WIC checks and the Commodity Supple- mental Food Program (CSFP) payments at the same time. DHS moved to an online transaction processing system to ensure that all data is now available on a current basis. The system is Web-based and WIC staff needs only a Web browser and secure Internet access to work with the data.7

Figure 8.4 shows the traditional flow of key pieces of information from one TPS to another for a typical manufacturing organization. When transac- tions entered into one system are processed, they create new transactions that flow into another system.

Because of the importance of transaction processing, organizations expect their TPSs to accomplish a number of specific objectives, including the following:

● Capture, process, and update databases of business data required to sup- port routine business activities

● Ensure that the data is processed accurately and completely

FIGURE 8.3 Example of an OLTP system Hospitality companies such as ResortCom International can use an OLTP system to manage timeshare payments and other financial transactions. iSt

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CHAPTER 8 • Enterprise Systems 349

● Avoid processing fraudulent transactions ● Produce timely user responses and reports ● Reduce clerical and other labor requirements ● Help improve customer service ● Achieve competitive advantage

A TPS typically includes the following types of systems:

● Order processing systems. Running these systems efficiently and reli- ably is so critical that the order processing system is sometimes referred to as the lifeblood of the organization. The processing flow begins with the receipt of a customer order. The finished product inventory is checked to see if sufficient inventory is on hand to fill the order. If suffi- cient inventory is available, the customer shipment is planned to meet the customer’s desired receipt date. A product pick list is printed at the ware- house from which the order is to be filled on the day the order is to be shipped. At the warehouse, workers gather the items needed to fill the order and enter the item identifier and quantity for each item to update the finished product inventory. When the order is complete and sent on its way, a customer invoice is created, with a copy included in the cus- tomer shipment.

● Accounting systems. The accounting systems must track the flow of data related to all the cash flows that affect the organization. As mentioned ear- lier, the order processing system generates an invoice for customer orders to include with the shipment. This information is also sent to the accounts receivable system to update the customer’s account. When the customer pays the invoice, the payment information is also used to update the custo- mer’s account. The necessary accounting transactions are sent to the gen- eral ledger system, which tracks amounts owed from customers and amounts due to vendors. Similarly, as the purchasing systems generate pur- chase orders and those items are received, information is sent to the accounts payable system to manage the amounts owed by the company.

FIGURE 8.4 Integration of a firm’s TPS When transactions entered into one system are processed, they create new transactions that flow into another system.

Amounts paid by customers

Order entry/ order configuration

Employee

Shipment planning Finished product inventory

Inventory status

Orders

Raw materials Packing materials Spare parts Inventory

Shipment execution

Pick list

Purchase order processing

Purchase order request

Inventory status report

Invoicing

Shipped orders

Items and quantities picked for each order

Customer Invoice

Accounts receivable

Amounts owed by customer

Receiving

Purchase order

Supplier

Materials and invoice

Purchase order

Check General ledger

Amounts owed by customers Amounts owed by company Amounts paid by company

Payroll Labor costs

Employee

PaychecksTime cards

Budget Expense transactions

Products

Payment

Customer order request

Accounts payable

Receiving notice

350 PART 3 • Business Information Systems

Data about amounts owed and paid by customers to the company and from the company to vendors and others are sent to the general ledger system, which records and reports all financial transactions for the company.

● Purchasing systems. The traditional transaction processing systems that support the purchasing business function include inventory control, pur- chase order processing, receiving, and accounts payable. Employees place purchase order requests in response to shortages identified in inventory control reports. Purchase order information flows to the receiving system and accounts payable systems. A record is created upon receipt of the items ordered. When the invoice arrives from the supplier, it is matched to the original order and the receiving report, and a check is generated if all data is complete and consistent.

In the past, organizations knitted together a hodgepodge of systems to accomplish the transaction processing activities shown in Figure 8.4. Some of the systems might have been applications developed using in-house resources, some may have been developed by outside contractors, and others may have been off-the-shelf software packages. Much customization and mod- ification of this diverse software was typically necessary for all the applica- tions to work together efficiently. In some cases, it was necessary to print data from one system and then manually reenter it into other systems. Of course, this increased the amount of effort required and increased the likeli- hood of processing delays and errors.

The approach taken today by many organizations is to implement an inte- grated set of transaction processing systems—from a single or limited number of software vendors—that handle most or all of the transaction processing activ- ities shown in Figure 8.4. The data flows automatically from one application to another with no delay or need to reenter data. For example, Lukas Nursery, a fourth-generation family-owned agribusiness in central Florida, recently imple- mented a suite of software applications that is now integrated into the garden center’s POS system. The nursery consolidated its systems (including several manual systems) into an integrated retail business management solution pro- vided by one vendor, allowing it to update its business practices, optimize sea- sonal inventory, manage a customer loyalty program, and make more informed business decisions through the use of the software’s analytics capabilities.8,9

Table 8.1 summarizes some of the ways that companies can use transac- tion processing systems to achieve competitive advantage.

TABLE 8.1 Examples of TPSs yielding significant benefits Competitive Advantage Example

Better relationship with suppliers

Internet marketplace to allow the company to pur- chase products from suppliers at discounted prices

Costs dramatically reduced

Warehouse management system employing RFID technology to reduce labor hours and improve inventory accuracy

Customer loyalty increased

Customer interaction system to monitor and track each customer interaction with the company

Inventory levels reduced Collaborative planning, forecasting, and replenish- ing system to ensure the right amount of inventory is in stores

Superior information gathering

Order configuration system to ensure that products ordered will meet customer’s objectives

Superior service provided to customers

Tracking systems that customers can access to determine shipping status

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Depending on the specific nature and goals of the organization, any of the objectives in Table 8.1 might be more important than others. By meeting these objectives, TPSs can support corporate goals such as reducing costs; increasing productivity, quality, and customer satisfaction; and running more efficient and effective operations.

Transaction Processing Systems for Entrepreneurs and Small and Medium-Sized Enterprises Many software packages provide integrated transaction processing system solutions for small and medium-sized enterprises (SMEs), wherein SME is a legally independent enterprise with no more than 500 employees. Integrated transaction processing systems for SMEs are typically easy to install and oper- ate and usually have a low total cost of ownership, with an initial cost of a few hundred to a few thousand dollars. Such solutions are highly attractive to firms that have outgrown their current software but cannot afford a complex, high-end integrated system solution. Table 8.2 presents some of the dozens of such software solutions available.

Sage is a provider of accounting, ERP, human resources, payroll, asset man- agement, and payment systems software. Its Sage 300 Construction and Real Estate software provides an integrated set of applications specifically designed for customers in the construction, property management, and real estate industries, and its Sage Construction Anywhere application offers cloud-based construction management services that can be incorporated with the Sage 300 software.10

Echo Valley Irrigation is a golf course and sports field irrigation design and construction company founded in 1986. For years, Echo Valley utilized a patch- work of processes and technologies to run its business. As the company contin- ued to grow, however, its systems were not keeping up. Eventually, Echo Valley implemented the Sage 300 software package, which provides the com- pany with an accounting platform with a range of automated functions, includ- ing a tool that allows project managers to perform a job-specific profit-and-loss analysis when bidding on new projects. The firm also takes advantage of Sage Construction Anywhere, which enables job foremen to track project status, gen- erate reports, and approve payroll through Web-based services.11

Transaction Processing Activities Along with having common characteristics, all TPSs perform a common set of basic data-processing activities. TPSs capture and process data that describes

TABLE 8.2 Sample of integrated TPS solutions for SMEs Vendor Software Type of TPS Offered Target Customers

AccuFund AccuFund Financial reporting and accounting Nonprofit, municipal, and government organizations

OpenPro OpenPro Complete ERP solution, including financials, supply chain management, e-commerce, customer relationship management, and retail POS system

Manufacturers, distributors, and retailers

Intuit QuickBooks Financial reporting and accounting Manufacturers, professional services, contractors, nonprofits, and retailers

Sage Sage 300 Construction and Real Estate

Financial reporting, accounting, and operations

Contractors, real estate developers, and residential builders

Redwing TurningPoint Financial reporting and accounting Professional services, banks, and retailers

352 PART 3 • Business Information Systems

fundamental business transactions. This data is used to update databases and to produce a variety of reports for people both within and outside the enter- prise. The business data goes through a transaction processing cycle that includes data collection, data editing, data correction, data processing, data storage, and document production. See Figure 8.5.

Data Collection Capturing and gathering all data necessary to complete the processing of transactions is called data collection. In some cases, it can be done manually, such as by collecting handwritten sales orders or inventory update forms. In other cases, data collection is automated via special input devices such as scanners, point-of-sale (POS) devices, and terminals.

Data collection begins with a transaction (e.g., taking a customer order) and results in data that serves as input to the TPS. Data should be captured at its source and recorded accurately in a timely fashion, with minimal manual effort and in an electronic or digital form that can be directly entered into the computer. This approach is called source data automation. An example of source data automation is an automated device at a retail store that speeds the checkout process—either UPC codes read by a scanner or RFID signals picked up when the items approach the checkout stand. Using UPC bar codes or RFID tags is quicker and more accurate than having a clerk enter codes manually at the cash register. The product ID for each item is deter- mined automatically, and its price retrieved from the item database. The point-of-sale TPS uses the price data to determine the customer’s total. The store’s inventory and purchase databases record the number of units of an item purchased, along with the price and the date and time of the purchase. The inventory database generates a management report notifying the store

FIGURE 8.5 Transaction processing activities A transaction processing cycle includes data collection, data edit- ing, data correction, data proces- sing, data storage, and document production.

Document production

Data editing

Data collection

Data correction

Data processing

Data storage

Original data

Bad data

Good data

TPS reports

transaction processing cycle: The process of data collection, data editing, data correction, data proces- sing, data storage, and document production.

data collection: Capturing and gathering all data necessary to com- plete the processing of transactions.

source data automation: Captur- ing data at its source and recording it accurately in a timely fashion, with minimal manual effort and in an elec- tronic or digital form so that it can be directly entered into the computer.

CHAPTER 8 • Enterprise Systems 353

manager to reorder items that have fallen below the reorder quantity. The detailed purchases database can be used by the store or sold to marketing research firms or manufacturers for detailed sales analysis. See Figure 8.6.

Many grocery stores combine POS scanners and coupon printers. The sys- tems are programmed so that each time a specific product—for example, a box of cereal—crosses a checkout scanner, an appropriate coupon, perhaps a milk coupon, is printed. Companies can pay to be promoted through the system, which is then programmed to print those companies’ coupons if the customer buys a competing brand. These TPSs help grocery stores increase profits by improving their repeat sales and bringing in revenue from other businesses.

Many mobile POS (point of sale) systems operate on iPads, iPhones, and iPod Touch devices. Some mobile POS systems include marketing tools that SMEs can use to thank first-time customers and send automated emails to longtime customers who have not visited recently.

Cloud-based POS systems provide a range of capabilities, including advanced integration with digital loyalty programs, various accounting tools, and the ability to generate gift cards and coupons. An SME can implement such a system for a few thousand dollars compared to more traditional cash register-based POS systems that can cost tens of thousands.12 The owners of The Creative Wedge, an artisan market that sells cheese and charcuterie along with craft beer and local wine, implemented a truly mobile POS system that allows them to sell product out of their store as well as at various local events, including farmer’s markets and festivals.13

Data Editing An important step in processing transaction data is to check data for validity and completeness to detect any problems, a task called data editing. For example, quantity and cost data must be numeric, and names must be alphabetic; other- wise, the data is not valid. Often, the codes associated with an individual transac- tion are edited against a database containing valid codes. If any code entered (or scanned) is not present in the database, the transaction is rejected.

Data Correction It is not enough simply to reject invalid data. The system should also provide error messages that alert those responsible for editing the data. Error messages must specify the problem so proper corrections can be made.

FIGURE 8.6 Point-of-sale transaction processing system The purchase of items at the check- out stand updates a store’s inventory database and its database of purchases.

MIS/DSS Management reports

POS transaction processing system

Scanner

Item database

UPC

Quantity Date Time

Customer’s receipt

Inventory database

Purchases database

MIS/DSS

UP C a

nd qu

ant ity

Item, quantity date, time, price

Management reports

UPC Price, description

MIS/DSS Management reports

RFID A chip sending out radio waves

data editing: Checking data for validity and completeness to detect any problems.

354 PART 3 • Business Information Systems

Critical Thinking Exercise

A data correction involves reentering data that was not typed or scanned properly. For example, a scanned UPC code must match a code in a master table of valid UPCs. If the code is misread or does not exist in the table, the checkout clerk is given an instruction to rescan the item or type the informa- tion manually.

Data Processing Another major activity of a TPS is data processing, performing calculations and other data transformations related to business transactions. Data proces- sing can include classifying data, sorting data into categories, performing cal- culations, summarizing results, and storing data in the organization’s database for further processing. In a payroll TPS, for example, data processing includes multiplying an employee’s hours worked by the hourly pay rate. Overtime pay, federal and state tax withholdings, and deductions are also calculated.

Data Storage Data storage involves updating one or more databases with new transactions. After being updated, this data can be further processed by other systems so that it is available for management reporting and decision making. Thus, although transaction databases can be considered a by-product of transaction processing, they can significantly affect nearly all other information systems and decision-making processes within an organization.

Document Production Document production involves generating output records, documents, and reports. These can be hard-copy paper reports or displays on computer screens (sometimes referred to as soft copy). Printed paychecks, for example, are hard-copy documents produced by a payroll TPS, whereas an outstanding balance report for invoices might be an electronic report displayed by an accounts receivable TPS. Often, as shown earlier in Figure 8.6, results from one TPS flow downstream to become input to other systems, which might use the results of an inventory database update to create a stock exception report, a type of management report showing items with inventory levels below the specified reorder point.

In addition to major documents such as checks and invoices, most TPSs provide other useful management information, such as printed or on-screen reports that help managers and employees perform various activities. A report showing current inventory is one example; another might be a document list- ing items ordered from a supplier to help a receiving clerk check the order for completeness when it arrives. A TPS can also produce reports required by local, state, and federal agencies, such as statements of tax withholding and quarterly income statements.

TPS Needed to Support Small Business Cal is setting up a small business to prep, cook, and deliver healthy and nutrition- ally balanced meals to customers in his local area. Cal meets with prospective cus- tomers to acquaint them with the program, discuss their eating habits and nutritional needs, and help them select from one of several menus (vegetarian, gluten free, low carb but high protein) that meets their needs. Twice a week Cal and his workers buy food ingredients based on what has been ordered. They then cook three or four days of meals for each customer and seal them in airtight bags for reheating. Deliveries are made twice a week. All the customer has to do is take the bag from the refrigerator and pop it into the microwave for 60 seconds.

Business has really taken off and Cal has had to hire two part-time cooks and two part-time delivery people. Cal has been so busy lining up new customers,

data correction: Reentering data that was not typed or scanned properly.

data processing: Performing cal- culations and other data transforma- tions related to business transactions.

data storage: Updating one or more databases with new transactions.

document production: Generating output records, documents, and reports.

CHAPTER 8 • Enterprise Systems 355

shopping, and cooking that he has not had time to carefully track all his expenses. He pays his workers in cash, but realizes he will need to set up a for- mal payroll system and start deducting for taxes, social security, and Medicaid. Cal also wishes he had some sort of system that could help him better plan the kinds and amounts of ingredients needed based on customer orders. As it is, he usually purchases too much of the various ingredients and ends up giving left- overs away at the free store.

Review Questions 1. What kind of transaction processing systems does Cal need to manage and

support the basic functions of his business? 2. Identify six specific tasks that the TPS must perform to meet his needs.

Critical Thinking Questions 1. Should Cal consider developing his own programs using spreadsheet and data-

base software or should he purchase an integrated package to meet his needs? 2. Business is going so well that Cal is thinking of expanding the scope of his

business to include catering for weddings, parties, and various business func- tions. As the scope of his business expands, how might this impact the choice of transaction processing systems?

Enterprise Systems

An enterprise system is central to individuals and organizations of all sizes and ensures that information can be shared with authorized users across all business functions and at all levels of management to support the running and managing of a business. Enterprise systems employ a database of key operational and planning data that can be shared by all, eliminating the pro- blems of missing information and inconsistent information caused by multiple transaction processing systems that each support only one business function or one department in an organization. Examples of enterprise systems include enterprise resource planning systems that support supply chain processes, such as order processing, inventory management, and purchasing, and cus- tomer relationship management systems that support sales, marketing, and customer service-related processes.

Businesses rely on enterprise systems to perform many of their daily activities in areas such as product supply, distribution, sales, marketing, human resources, manufacturing, accounting, and taxation so that work can be performed quickly without waste or mistakes. Without such systems, recording and processing busi- ness transactions would consume huge amounts of an organization’s resources. This collection of processed transactions also forms a storehouse of data invalu- able to decision making. The ultimate goal of such systems is to satisfy customers and provide significant benefits by reducing costs and improving service.

Enterprise Resource Planning Enterprise resource planning (ERP) is a set of integrated programs that manage a company’s vital business operations for an entire organization, even a com- plex, multisite, global organization. Recall that a business process is a set of coordinated and related activities that takes one or more types of input and cre- ates an output of value to the customer of that process. The customer might be a traditional external business customer who buys goods or services from the firm. An example of such a process is capturing a sales order, which takes cus- tomer input and generates an order. The customer in a business process might also be an internal customer, such as an employee in another department of

enterprise system: A system cen- tral to the organization that ensures information can be shared with autho- rized users across all business func- tions and at all levels of management to support the running and managing of a business.

356 PART 3 • Business Information Systems

the firm. For example, the shipment process generates the internal documents workers need in the warehouse and shipping departments to pick, pack, and ship orders. At the core of the ERP system is a database that is shared by all users so that all business functions have access to current and consistent data for operational decision making and planning, as shown in Figure 8.7.

ERP systems evolved from materials requirement planning (MRP) systems developed in the 1970s. These systems tied together the production planning, inventory control, and purchasing business functions for manufacturing organiza- tions. During the late 1980s and early 1990s, many organizations recognized that their legacy TPSs lacked the integration needed to coordinate activities and share valuable information across all the business functions of the firm. As a result, costs were higher and customer service was poorer than desired. Large organiza- tions, specifically members of the Fortune 1000, were the first to take on the challenge of implementing ERP. As they did, they uncovered many advantages as well as some disadvantages, which are summarized in the following sections.

Advantages of ERP Increased global competition, new needs of executives for control over the total cost and product flow through their enterprises, and ever- more-numerous customer interactions drive the demand for enterprise-wide access to real-time information. ERP offers integrated software from a single vendor to help meet those needs. The primary benefits of implementing ERP include improved access to quality data for operational decision making, elim- ination of costly, inflexible legacy systems, improvement of work processes, and the opportunity to upgrade and standardize technology infrastructure. ERP vendors have also developed specialized systems that provide effective solutions for specific industries and market segments.

Improved Access to Quality Data for Operational Decision Making ERP systems operate via an integrated database, using one set of data to sup- port all business functions. For example, the systems can support decisions on optimal sourcing or cost accounting for the entire enterprise or business units. With an ERP system, data is integrated from the start, eliminating the need to gather data from multiple business functions and/or reconcile data from more than one application. The result is an organization that looks seamless, not only to the outside world but also to the decision makers who are deploying resources within the organization. Data is integrated to facilitate operational decision making and allows companies to provide better customer service and support, strengthen customer and supplier relationships, and generate new business opportunities. To ensure that an ERP system contributes to improved decision making, the data used in an ERP system must be of high quality.

FIGURE 8.7 Enterprise resource planning system An ERP integrates business pro- cesses and the ERP database.

Production and supply chain management

Customer relationship management and sales ordering

Financial and managerial accounting

ERP database(s)

CHAPTER 8 • Enterprise Systems 357

Based in New York, Women’s World Banking is a global nonprofit focused on providing low-income women access to the financial tools and resources they need to build secure and prosperous lives. The organization works through a network of 40 institutions in 29 countries to create new financial products that must meet the needs of women in each of its markets while also being sustainable for its partner financial institutions.14 Women’s World Banking needs access to detailed transaction information so it can maintain complete transparency into its balances by entity, donor, and grant—even down to the project level. To accomplish this, the organization previously utilized two stand-alone systems that often gave front and back office staff very different views of the organization’s key performance metrics, resulting in time-consuming data entry and reconciliation between the two systems. To streamline its operations, Women’s World Banking implemented an ERP system that provides it with access to the data it needs to apply for new funding grants, quickly and accurately report on existing grants, and make decisions regarding investments in new business development opportu- nities. Since its ERP roll-out, the organization has cut 200 hours of accounts payable and grant-reporting time annually, reduced data entry by 14 hours per month, and gained greater visibility into its spending across multiple enti- ties, grants, donors, and projects.15

Elimination of Costly, Inflexible Legacy Systems Adoption of an ERP system enables an organization to eliminate dozens or even hundreds of separate systems and replace them with a single integrated set of applications for the entire enterprise. In many cases, these systems are decades old, the original developers are long gone, and the systems are poorly documented. As a result, the systems are extremely difficult to fix when they break, and adapting them to meet new business needs takes too long. They become an anchor around the organization that keeps it from moving ahead and remaining competitive. An ERP system helps match the capabilities of an organization’s information systems to its business needs— even as these needs evolve.

Steinwall Scientific is a Minnesota-based precision thermoplastic injection molder specializing in manufacturing plastic parts using engineering-grade resins. The company, which has been in business for more than 45 years, employs 110 employees and has facilities that encompass more than 100,000 square feet of manufacturing and warehouse space spread across five acres.16

For many years, most aspects of the company’s business were managed using an outdated proprietary system that had been originally programmed by the company’s president as a simple inventory management program. In addition to its internally developed system, Steinwall was also using a separate IBM accounting software program. However, the company’s two main systems were unable to communicate with each other, creating ongoing data entry errors and significant manufacturing bottlenecks as the company worked to take on new clients. Ultimately, Steinwall made the choice to upgrade its sys- tem to a single-database manufacturing ERP system. Over the course of six months, Steinwall gradually moved all of its processing tasks, along with all of its data, to the new system. Among the many benefits that Steinwall has experienced after moving all of its business functions to its new ERP system are improved inventory control, enhanced warehouse management, and a greater efficiency across all its departments.17

Improvement of Work Processes Competition requires companies to structure their business processes to be as effective and customer oriented as possible. To further that goal, ERP vendors do considerable research to define the best business processes. They gather requirements of leading organizations within the same industry and combine

358 PART 3 • Business Information Systems

them with findings from research institutions and consultants. The individual application modules included in the ERP system are then designed to support these best practices, the most efficient and effective ways to complete a business process. Thus, implementation of an ERP system ensures work processes will be based on industry best practices. For example, for managing customer payments, the ERP system’s finance module can be configured to reflect the most efficient practices of leading companies in an industry. This increased efficiency ensures that everyday business operations follow the optimal chain of activities, with all users supplied the information and tools they need to complete each step.

Prime Meats has been providing high-quality, aged steaks to steakhouses and other restaurants around the country for more than 20 years. Recently, the Atlanta-based company also began offering its USDA Prime and Choice quality steaks directly to consumers through its e-commerce Web site. The company found success with its new business model, but it also found chal- lenges as it existing systems were unable to keep up with the company’s growth. To overcome these challenges, Prime Meats implemented an ERP sys- tem that offered the company a flexible, fully integrated end-to-end business and accounting software along with prepackaged industry best practice func- tionality for handling the specific pricing, packaging, and delivery require- ments of an online meat business.18,19

Opportunity to Upgrade and Standardize Technology Infrastructure When implementing an ERP system, an organization has an opportunity to upgrade the information technology (such as hardware, operating systems, and databases) that it uses. While centralizing and formalizing these decisions, the organization can eliminate the hodgepodge of multiple hardware plat- forms, operating systems, and databases it is currently using—most likely from a variety of vendors. Standardizing on fewer technologies and vendors reduces ongoing maintenance and support costs as well as the training load for those who must support the infrastructure.

Whirlpool is the world’s leading manufacturer of home appliances, with over 97,000 employees and $20 billion in sales generated from operations in 170 countries.20 While the company has utilized a collection of ERP systems across its global operations for years, the company recently undertook a com- plete overhaul of all its ERP infrastructure, with the goal of creating a new operational backbone that will support the company’s growth for the next decade. As the company moves forward with its implementation of next- generation SAP ERP software, the company is also updating its ERP infrastruc- ture to a hybrid cloud system hosted by IBM. As part of the project, Whirlpool’s IT team is also spending time cleaning up duplicate and inaccurate data, a result of years of cumulative and regionalized ERP system customizations.21

Leading ERP Systems ERP systems are commonly used in manufacturing companies, colleges and universities, professional service organizations, retailers, and healthcare orga- nizations. The business needs for each of these types of organizations varies greatly. In addition, the needs of a large multinational organization are far dif- ferent from the needs of a small, local organization. Thus, no one ERP soft- ware solution from a single vendor is “best” for all organizations. To help simplify comparisons, ERP vendors are classified as Tier I, II, or III according to the type of customers they target.22

● Tier I vendors target large multinational firms with multiple geographic locations and annual revenues in excess of $1 billion. Tier I ERP system solutions are highly complex and expensive to implement and support. Implementation across multiple locations can take years. The primary Tier I vendors are Oracle and SAP.

best practices: The most efficient and effective ways to complete a business process.

CHAPTER 8 • Enterprise Systems 359

● Tier II vendors target medium-sized firms with annual revenues in the $50 million to $1 billion range operating out of one or more locations. Tier II solutions are much less complex and less expensive to implement and support. There are two dozen or more Tier II vendors, including Oracle, SAP, Microsoft, Infor, Epicor, and Lawson.

● Tier III vendors target smaller firms with annual revenues in the $10 mil- lion to $50 million range that typically operate out of a single location. Tier III solutions are comparatively easy and inexpensive to implement and support. There are dozens of Tier III vendors, including Abas, Bluebee Software, Cincom Systems, Compiere, ESP Technologies, Frontier Software, GCS Software, Microsoft, Netsuite, PDS, Plex, and Syspro. Many of the Tier I and Tier II vendors also offer solutions for smaller firms. See Figure 8.8.

Large organizations were the leaders in adopting ERP systems as only they could afford the associated large hardware and software costs and dedi- cate sufficient people resources to the implementation and support of these systems. Many large company implementations occurred in the 2000s and involved installing the ERP software on the organizations’ large mainframe computers. In many cases, this required upgrading the hardware at a cost of millions of dollars.

Smaller organizations moved to ERP systems about 10 years after larger organizations did. The smaller firms simply could not afford the investment required in hardware, software, and people to implement and support ERP. However, ERP software vendors gradually created new ERP solutions with much lower start-up costs and faster, easier implementations. Some ERP ven- dors introduced cloud-based solutions, which further reduced the start-up costs by avoiding the need to purchase expensive ERP software and make major hardware upgrades. Instead, with a cloud-based solution, organizations could rent the software and run it on the vendor’s hardware. Plex and NetSuite are two of the many cloud-based ERP solutions that enable users to access an ERP application using a Web browser and avoid paying for and maintaining expensive hardware.

FIGURE 8.8 ERP software Microsoft Dynamics is an ERP solu- tion that is very popular among small businesses. Mi

cr os of t pr od uc t sc re en sh ot s us ed

w ith

pe rm is si on

fr om

M ic ro so ft Co rp or at io n

360 PART 3 • Business Information Systems

As an alternative, many organizations elect to implement open-source ERP systems from vendors such as Compiere. With open-source software, organi- zations can see and modify the source code to customize it to meet their needs. Such systems are much less costly to acquire and are relatively easy to modify to meet business needs.

Organizations frequently need to customize the vendor’s ERP software to integrate other business systems, to add data fields or change field sizes, or to meet regulatory requirements. A wide range of software service organizations can perform the system development and maintenance.

Supply Chain Management An organization can use an ERP system within a manufacturing organization to support what is known as supply chain management (SCM), which includes planning, executing, and controlling all activities involved in raw material sourcing and procurement, conversion of raw materials to finished products, and the warehousing and delivery of finished product to custo- mers. The goal of SCM is to decrease costs and improve customer service, while at the same time reducing the overall investment in inventory in the supply chain.

Another way to think about SCM is that it manages materials, informa- tion, and finances as they move from supplier to manufacturer to wholesaler to retailer to consumer. The materials flow includes the inbound movement of raw materials from supplier to manufacturer as well as the outbound movement of finished product from manufacturer to wholesaler, retailer, and customer. The information flow involves capturing and transmitting orders and invoices among suppliers, manufacturers, wholesalers, retailers, and customers. The financial flow consists of payment transactions among suppliers, manufacturers, wholesalers, retailers, customers, and their finan- cial institutions.

Newman Technology manufactures exhaust parts and other compo- nents for automobiles, motorcycles, and all-terrain vehicles (ATVs). Before switching to a cloud-based SCM system from Plex, the company had been relying on an outdated and inflexible spreadsheet and paper purchase order system that made forecasting, managing, and tracking orders chal- lenging. The updated SCM system has streamlined Newman’s supply chain, cutting down on manual procedures (and paper), improving inventory and forecasting accuracy, and freeing up more time for buyers to develop sup- plier relationships.23

The ERP system for a manufacturing organization typically encompasses SCM activities and manages the flow of materials, information, and finances. Manufacturing ERP systems follow a systematic process for developing a pro- duction plan that draws on the information available in the ERP system database.

The process starts with sales forecasting to develop an estimate of future customer demand. This initial forecast is at a fairly high level, with estimates made by product group rather than by each product item. The sales forecast extends for months into the future; it might be developed using an ERP soft- ware module or produced by other means, using specialized software and techniques. Many organizations are moving to a collaborative process with major customers to plan future inventory levels and production rather than relying on an internally generated sales forecast.

The sales and operations plan (S&OP) takes demand and current inventory levels into account and determines the specific product items that need to be produced as well as when to meet the forecast future demand. Production capacity and any seasonal variability in demand must also be considered.

supply chain management (SCM): A system that includes planning, executing, and controlling all activities involved in raw material sourcing and procurement, the conversion of raw materials to finished products, and the warehousing and delivery of finished products to customers.

CHAPTER 8 • Enterprise Systems 361

Demand management refines the production plan by determining the amount of weekly or daily production needed to meet the demand for indi- vidual products. The output of the demand management process is the master production schedule, which is a production plan for all finished goods.

Detailed scheduling uses the production plan defined by the demand management process to develop a detailed production schedule that specifies production scheduling details such as which item to produce first and when production should be switched from one item to another. A key decision is how long to make the production runs for each product. Longer production runs reduce the number of machine setups required, thus reducing produc- tion costs. Shorter production runs generate less finished product inventory and reduce inventory holding costs.

Materials requirement planning (MRP) determines the amount and timing for placing raw material orders with suppliers. The types and amounts of raw materials required to support the planned production schedule are determined by the existing raw material inventory and the bill of materials (BOM), which serves as a recipe of ingredients needed to make each item. The quantity of raw materials to order also depends on the lead time and lot sizing. Lead time is the amount of time it takes from the placement of a purchase order until the raw materials arrive at the pro- duction facility. Lot size refers to the discrete quantities that the supplier will ship, which can result in purchasing complexities if those amounts don’t line up with quantities that are economical for the manufacturer to receive or store. For example, a supplier might ship a certain raw material in units of 80,000-pound rail cars. The producer might need 95,000 pounds of the raw material. A decision must be made to order one or two rail cars of the raw material.

Purchasing uses the information from MRP to place purchase orders for raw materials with qualified suppliers. Typically, purchase orders are released so that raw materials arrive just in time to be used in production and to mini- mize warehouse and storage costs. Often, producers will allow suppliers to tap into data via an extranet that enables them to determine what raw materi- als the producer needs, minimizing the effort and lead time to place and fill purchase orders.

Production uses the high-level production schedule to plan the details of running and staffing the production operation. This more detailed schedule takes into account employee, equipment, and raw material availability along with detailed customer demand data.

Sales ordering is the set of activities that must be performed to capture a customer sales order. Essential sales order steps include recording the items to be purchased, setting the sales price, recording the order quantity, deter- mining the total cost of the order including delivery costs, and confirming the customer’s available credit. If the item(s) the customer wants to order are out of stock, the sales order process should communicate this fact and suggest other items to substitute for the customer’s initial choice. Setting sales prices can be quite complicated and can include quantity discounts, promotions, and incentives. After the total cost of the order is determined, a company must check the customer’s available credit to see if this order is within the credit limit. Figure 8.9 shows a sales order entry window in SAP business software.

ERP systems do not work directly with manufacturing machines on the production floor, so they need a way to capture information about what was produced. This data must be passed to the ERP accounting modules to keep an accurate count of finished product inventory. Many companies have com- puters on the production floor, which are used to track the number of cases of each product item produced, typically by having a worker scan a UPC

362 PART 3 • Business Information Systems

code on the packing cases used to ship the material. Other approaches for capturing production quantities include using RFID chips and manually enter- ing the data.

Separately, production quality data can be added based on the results of quality tests run on a sample of the product for each batch of product pro- duced. Typically, this data includes the batch identification number, which identifies the production run and the results of various product quality tests.

Retailers as well as manufacturers use demand forecasting to match pro- duction to consumer demand and to allocate products to stores. Curry’s Art Store, which has been supplying arts and crafts materials and framing services since 1911, has an inventory that includes more than 20,000 SKUs available to customers in its 10 stores and through its e-commerce Web site. Because much of Curry’s business is seasonal, with peaks in demand during back- to-school time and near major holidays, it utilizes a complex supply chain management system, which provides it with accurate long-range forecasting tools that help ensure it has the stock it needs to meet demand surges. The system has the tools the company needs to manage a supply chain that includes in-store and online retails sales in addition to bulk orders from large educational institutions, and it also supports Curry’s complicated warehousing and distribution needs.24

Customer Relationship Management A customer relationship management (CRM) system helps a company man- age all aspects of customer encounters, including marketing, sales, distribution, accounting, and customer service. See Figure 8.10. Think of a CRM system as an address book with a historical record of all the organization’s interactions with each customer. The goal of CRM is to understand and anticipate the needs of current and potential customers to increase customer retention and loyalty while optimizing the way that products and services are sold. CRM is used primarily by people in the sales, marketing, distribution, accounting, and service organizations to capture and view data about customers and to improve communications. Businesses implementing CRM systems often report benefits such as improved customer satisfaction, increased customer retention, reduced operating costs, and the ability to meet customer demand.

FIGURE 8.9 Sales order entry window Sales ordering is the set of activities that must be performed to capture a customer sales order. Source: SAP AG

customer relationship management (CRM) system: A system that helps a company manage all aspects of customer encounters, including marketing, sales, distribution, accounting, and customer service.

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CRM software automates and integrates the functions of sales, marketing, and service in an organization. The objective is to capture data about every contact a company has with a customer through every channel and to store it in the CRM system so that the company can truly understand customer actions. CRM software helps an organization build a database about its custo- mers that describes relationships in sufficient detail so that management, salespeople, customer service providers, and even customers can access infor- mation to match customer needs with product plans and offerings, remind them of service requirements, and report on the other products the customers have purchased.

Small, medium, and large organizations in a wide variety of industries choose to implement CRM for many reasons, depending on their needs. Con- sider the following examples:

● Expensify is a financial services firm that provides online expense- management services for customers around the world. The company has grown quickly since it was founded in San Francisco in 2008, and it recently opened a London office to support its expansion into the European market. As a start-up, Expensify’s initial attempts at CRM were built around an Excel spreadsheet. Before long, the company shifted to Google Apps’ CRM tools, but soon found those could not handle its increasing volume of customer data. Eventually, the com- pany implemented a customizable CRM system that provides all the tools Expensify’s sales and customers service teams require—without the need to manage and coordinate workflows in other systems. Expensify’s top priorities for a CRM system included automated and customizable lead-prioritization tools, the ability to track all sales communication within one system, and the ability to generate in-depth

FIGURE 8.10 Customer relationship management system A CRM system provides a central repository of customer data used by the organization.

Social media

Customer data

Means of communication

Users and providers of customer data

Text messages

Distribution

Accounting

Marketing Customer

service

Sales

Customers

In-person contacts

Phone calls

364 PART 3 • Business Information Systems

reports to identify areas of opportunity within a geographic region as well as for individual salespeople.25

● TUMI luggage, handbags, and travel accessories are available through a global network of 100 company-owned stores as well as department and specialty stores in over 70 countries. Since it started in 1965, TUMI has placed a priority on offering a wide selection of high-quality business and travel products. Although TUMI’s culture is focused on providing world-class service, the company’s outdated systems were getting in the way of its relationships with both wholesale and retail customers. For instance, tracking an order or a repair job for a customer typically meant putting a caller on hold and calling the warehouse for an update. To address its customer service issues, TUMI chose to implement a CRM application that was integrated with a comprehensive ERP system designed to help the company improve its inventory tracking, sales fore- casting, and financial reporting. Now, TUMI’s customer service team is able to quickly provide customers with precise real-time information about order and repair status. And because TUMI tracks individual cus- tomer purchases using the CRM software, it is better able to keep up with market trends and respond to customers’ changing needs—all of which have helped drive a 20 percent increase in sales since the system was implemented.26

● The American Red Cross was founded in 1881 by Clara Barton as a non- profit, humanitarian organization. Today, the organization relies on 35,000 employees and more than 500,000 volunteers to deliver a range of services across the United States, including providing relief to people affected by disasters, supporting members of the military and their fami- lies, and collecting, processing, and distributing blood supplies. The Red Cross uses a cloud-based CRM platform from Salesforce to manage its relationships with its large network of financial donors, volunteers, blood donors, and recipients. Because its CRM system is cloud-based, Red Cross volunteers and employees can quickly access the data and services required to get the organization’s operations up and running during a disaster. The Red Cross integrated social networking tools into its CRM system, providing the organization with new channels to con- nect with volunteers and donors as well as new tools for delivering disaster-relief updates to the public, soliciting financial and volunteer help, and helping people affected by a disaster communicate with family and friends.27,28

The key features of a CRM system include the following:

● Contact management. The ability to track data on individual customers and sales leads and then access that data from any part of the organiza- tion. See Figure 8.11, which shows the SAP Contact Manager.

● Sales management. The ability to organize data about customers and sales leads and then to prioritize the potential sales opportunities and identify appropriate next steps.

● Customer support. The ability to support customer service representa- tives so that they can quickly, thoroughly, and appropriately address cus- tomer requests and resolve customer issues while collecting and storing data about those interactions.

● Marketing automation. The ability to capture and analyze all customer interactions, generate appropriate responses, and gather data to create and build effective and efficient marketing campaigns.

● Analysis. The ability to analyze customer data to identify ways to increase revenue and decrease costs, identify the firm’s “best customers,” and determine how to retain and find more of them.

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● Social networking. The ability to create and join sites such as Facebook, where salespeople can make contacts with potential customers.

● Access by mobile devices. The ability to access Web-based customer relationship management software by smartphones, tablets, and other mobile devices.

● Import contact data. The ability for users to import contact data from various data service providers that can be downloaded for free directly into the CRM application.

The focus of CRM involves much more than installing new software. Moving from a culture of simply selling products to placing the customer first is essential to a successful CRM deployment. Before any software is loaded onto a computer, a company must retrain employees. Who handles customer issues and when must be clearly defined, and computer systems need to be integrated so that all pertinent information is available immedi- ately, whether a customer calls a sales representative or a customer service representative.

Nu Skin Enterprises is a $2 billion direct sales organization that develops and distributes nutritional supplements and personal care products through a network of more than 5,000 independent sales distributors. The company’s 250 call center agents are the key point of contact between the company and its customers and distributors; however, rapid turnover of call center staff and three disconnected customer contact tools meant that many customers became quickly frustrated during their interactions with the company. A solution to Nu Skin’s customer service challenges came in the form of a CRM system from SAP, which was integrated with the company’s existing SAP ERP system to provide agents immediate access to customer sales histories. Nu Skin call center employees now use the system’s customer interaction center and order management tools to resolve callers’ queries more quickly, and with frustra- tion levels down—for both agents and customers—agents have been able to focus on developing stronger relationship with customers and distributors and increasing sales.29,30

Table 8.3 lists a few highly rated CRM systems.31

FIGURE 8.11 SAP Contact Manager Contact management involves tracking data on individual custo- mers and sales leads and accessing that data from any part of the organization. Source: SAP AG

366 PART 3 • Business Information Systems

Due to the popularity of mobile devices, shoppers can easily compare products and prices on their mobile phones and instantly tweet their experi- ences with a brand to dozens of friends. Savvy retailers today use their CRM systems to stay on top of what these customers are saying on social networks. For instance, Wells Fargo Bank uses social media to keep track of what its customers are saying and then responds quickly to their issues and questions to improve customer satisfaction.32

Most CRM systems can now be accessed via smartphones to gain work with the most current customer information even while on the move. How- ever, in a recent survey, just under 25 percent of salespeople who have a smartphone use it to access their firm’s CRM system. Another 10 percent of salespeople worked for a company whose CRM system did not allow mobile access.33

Product Lifecycle Management Product lifecycle management (PLM) is an enterprise business strategy that creates a common repository of product information and processes to support the collaborative creation, management, dissemination, and use of product and packaging definition information.

Product lifecycle management (PLM) software provides a means for managing the data and processes associated with the various phases of the product life cycle, including sales and marketing, research and development, concept development, product design, prototyping and testing, manufacturing process design, production and assembly, delivery and product installation, ser- vice and support, and product retirement and replacement. See Figure 8.12. As products advance through these stages, product data is generated and distrib- uted to various groups both within and outside the manufacturing firm. This data includes design and process documents, bill of material definitions, prod- uct attributes, product formulations, and documents needed for FDA and envi- ronmental compliance. PLM software provides support for the key functions of configuration management, document management, engineering change man- agement, release management, and collaboration with suppliers and original equipment manufacturers (OEMs).

The scope of PLM software may include computer-aided design, computer- aided engineering, and computer-aided manufacturing. Computer-aided design (CAD) is the use of software to assist in the creation, analysis, and modification of the design of a component or product. Its use can increase the productivity of the designer, improve the quality of design, and create a data- base that describes the item. This data can be shared with others or used in

TABLE 8.3 Highly rated CRM systems Vendor/Product Select Customers Pricing Starts At

Infusionsoft CRM Clean Corp Swim Fitness

$67 per user/month

OnContact CRM 7 Prudential Carfax

$50 per user/month

Oracle Marketing Cloud Bass Pro Shops Whole Foods

$80 per user/month

Prophet CRM AT&T Century 21

$24 per user/month

Sage Software CRM Panasonic Lockheed Martin

$39 per user/month

Salesforce Sales Cloud Dell Dr. Pepper Snapple

$5 per user/month

product lifecycle management (PLM): An enterprise business strat- egy that creates a common repository of product information and processes to support the collaborative creation, management, dissemination, and use of product and packaging definition information.

product lifecycle management (PLM) software: Software that pro- vides a means for managing the data and processes associated with the various phases of the product life cycle, including sales and marketing, research and development, concept development, product design, proto- typing and testing, process design, production and assembly, delivery and product installation, service and sup- port, and product retirement and replacement.

computer-aided design (CAD): The use of software to assist in the creation, analysis, and modification of the design of a component or product.

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the machining of the part or in other manufacturing operations. Computer-aided engineering (CAE) is the use of software to analyze the robustness and perfor- mance of components and assemblies. CAE software supports the simulation, vali- dation, and optimization of products and manufacturing tools. CAE is extremely useful to design teams in evaluating and decision making. Computer-aided manufacturing (CAM) is the use of software to control machine tools and related machinery in the manufacture of components and products. The model generated in CAD and verified in CAE can be input into CAM software, which then controls the machine tool. See Figure 8.13.

Sales & marketing

Research & development

Concept development

Product design

Prototype & test

Process design

Production &

assembly

Product delivery & installation

Service & support

Retire & replace

PLM software supports the product development lifecycle

FIGURE 8.12 Scope of PLM software Using PLM software, organizations can manage the data and processes associated with the various phases of the product life cycle.

FIGURE 8.13 CAD, CAE, and CAM software In manufacturing, the model gener- ated in CAD and verified in CAE can be entered into CAM software, which then controls the machine tool.

CAD CAE

Create, analyze, modify design

Simulate, validate optimize, design

Use digital design to control machine tools

PLM

CAM

computer-aided engineering (CAE): The use of software to analyze the robustness and performance of components and assemblies.

computer-aided manufacturing (CAM): The use of software to control machine tools and related machinery in the manufacture of components and products.

368 PART 3 • Business Information Systems

Some organizations elect to implement a single, integrated PLM system that encompasses all the phases of the product life cycle with which it is most concerned. Other organizations choose to implement multiple, separate PLM software components from different vendors over time. This piecemeal approach enables an organization to choose the software that best meets it needs for a particular phase in the product life cycle. It also allows for incre- mental investment in the PLM strategy. However, it may be difficult to link all the various components together in such a manner that a single comprehen- sive database of product and process data is created.

Use of an effective PLM system enables global organizations to work as a single team to design, produce, support, and retire products, while capturing best practices and lessons learned along the way.34 PLM powers innovation and improves productivity by connecting people across global product devel- opment and manufacturing organizations with the product and process knowledge they need to succeed. See Figure 8.14.

PLM software and its data are used by both internal and external users. Internal users include engineering, operations and manufacturing, procurement and sourcing, manufacturing, marketing, quality assurance, customer service, regulatory, and others. External users include the manufacturer’s design part- ners, packaging suppliers, raw material suppliers, and contract manufacturers. These users must collaborate to define, maintain, update, and securely share product information throughout the life cycle of the product. Frequently, these external users are asked to sign nondisclosure agreements to reduce the risk of proprietary information being shared with competitors.

Based in Fort Collins, Colorado, Water Pik develops and sells a variety of personal and oral healthcare products under the Waterpik brand. The com- pany prides itself on innovation and since its founding in 1962, Water Pik has acquired over 500 patents. Over time, the company’s approach to managing its product information through traditional directory structures on file systems was resulting in an increasing number of inefficiencies in Water Pik’s develop- ment and manufacturing processes. To better manage its CAD product data, Water Pik chose to implement SofTech’s ProductCenter PLM software. The company now uses the software to manage product information—which is

FIGURE 8.14 PLM business strategy PLM powers innovation and improves productivity.

Mechanical engineers

Chemical engineers

Market research analyst

Director of engineering

Package designer

Manufacturing

Production planner

Purchasing agent

Product designer

Sales

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secured through permissions—for three of its four main product lines. Water Pik also uses the software to manage all of its business processes, which are automatically set to expire every two years, triggering a review and update process that helps the company ensure that its procedures are current and compliant with various industry standards.35,36

Table 8.4 presents a list of some of the top-rated PLM software products (in alphabetic order) according to a 2013 report by Business-Software.com.37

PLM software is created for two broad categories of manufacturing: dis- crete manufacturing and process manufacturing. Discrete manufacturing is the production of distinct items such as autos, airplanes, furniture, or toys that can be decomposed back into their basic components. Process manufacturing is the production of products—such as soda, laundry deter- gent, gasoline, and pharmaceutical drugs—that are the result of a chemical process; these products cannot be easily decomposed back into their basic components. Within these two broad categories, PLM software manufacturers specialize in specific industries such as aircraft manufacturing, consumer goods manufacturing, or drug manufacturing.

Table 8.5 outlines the benefits a business can realize when using a PLM system effectively.

Industrial Control Associates Inc. (ICA) specializes in providing engineer- ing, design, construction, and start-up support services for programmable logic control (PLC) systems for government agencies and industrial clients in the Southeast and abroad. Its diverse client base includes the Department of

TABLE 8.4 Highly rated PLM software products

Organization Primary PLM Software Product Technology Model Select Customers

Arena Cloud PLM Cloud-based solution SiriusXM, SunLink

Infor Optiva On-premise solution Henkel, Sypris

Integware Enovia Collaborative PLM On-premise solution Cummins, Steelcase

PTC Windchill SaaS solution Medco Equipment, InterComm

SAP PLM On-premise solution Porsche, Anadarko Petroleum

Siemens Teamcenter On-premise solution Procter & Gamble, BAE Systems

SofTech ProductCenter PLM SaaS solution Hayward Tyler Motors, Monarch Hydraulics

Sopheon Accolade Cloud-based solution PepsiCo, ConAgra

TABLE 8.5 Benefits of a PLM system Benefit How Achieved

Reduce time to market

● By connecting design, research and development, pro- curement, manufacturing, and customer service seam- lessly through a flexible collaboration environment

● By improving collaboration among the organization and its suppliers, contract manufacturers, and OEMs

Reduce costs ● By reducing prototyping costs through the use of soft- ware simulation

● By reducing scrap and rework through improved processes ● By reducing the number of product components through

standardization

Ensure regulatory compliance

● By providing a secure repository, tracking and audit trails, change and document management controls, workflow and communications, and improved security

discrete manufacturing: The production of distinct items such as autos, airplanes, furniture, or toys that can be decomposed into their basic components.

process manufacturing: The production of products—such as soda, laundry detergent, gasoline, and pharmaceutical drugs—that are the result of a chemical process; these products cannot be easily decomposed into their basic components.

370 PART 3 • Business Information Systems

Energy, DuPont Chemical, Procter & Gamble Paper Products, and Tyson Foods. ICA uses Siemens PLM software—which serves as a repository for all of the company’s product data—to manage its product design processes, improve the quality of its drawings and bills of materials (BOMs), and increase the accuracy of its machine designs. The software also provides Web-based collaboration tools that make it easy for ICA and its clients to work together throughout the design process, cutting down on redesign work and increasing customers’ confidence in ICA’s design process. Since implementing the Siemens’ software, the company has achieved a 30 percent reduction in the time it takes to complete a job and has cut its remanufactur- ing rate from 20 percent down to 2 percent.38,39

Overcoming Challenges in Implementing Enterprise Systems Implementing an enterprise system, particularly for a large organization, is extremely challenging and requires tremendous amounts of resources, the best IS and businesspeople, and plenty of management support. In spite of all this, many enterprise system implementations fail, and problems with an enterprise system implementation can require expensive solutions. The following is a sam- ple of major enterprise system implementation project failures:

● The state of Michigan sued HP over a $49 million IT project for the Secretary of State’s office that remains incomplete after 10 years. Michigan is asking for more than $11 million in damages, and it is looking to reclaim its attorney’s fee as well as the costs involved with rebidding and re-procuring the contract. The state is also asking that HP be required to turn over source code for an online services portal that HP delivered as part of the project.40

● H.B. Fuller, a large U.S. industrial adhesives and sealants manufacturer, was awarded $14 million in an arbitration case against consulting agency Accenture in connection with a failed companywide SAP ERP system implementation. Problems with the system became apparent almost as soon as it was implemented, which was behind schedule. In addition to the $60 million in planned capital expenditures, Fuller spent over $8 million in the first two months after the system was launched to address problems related to the implementation.41

● The Hawaii Department of Transportation (HDOT) sued Ciber, Inc., alleging the consulting firm engaged in fraud and other misconduct on an ERP software implementation project for the state agency. HDOT accuses Ciber of misrepresenting its capabilities in order to secure the state contract and submitting erroneous invoices and fictitious project change orders. Eventually, Ciber was terminated from the project after a series of missed deadlines and problems with software bugs and missing functionality. HDOT is seeking tens of millions in damages, including more than $8 million in fees it paid to Ciber.42

Half of nearly 200 ERP implementations worldwide evaluated by Pano- rama, an ERP consulting firm, were judged to be failures. Table 8.6 lists and describes the most significant challenges to successful implementation of an enterprise system.43

The following list provides tips for avoiding many common causes for failed enterprise system implementations:

● Assign a full-time executive to manage the project. ● Appoint an experienced, independent resource to provide project over-

sight and to verify and validate system performance. ● Allow sufficient time to transition from the old way of doing things to the

new system and new processes. ● Allocate sufficient time and money for training staff; many project man-

agers recommend budgeting 30 to 60 days per employee for training. ● Define metrics to assess project progress and to identify project-related risks.

CHAPTER 8 • Enterprise Systems 371

● Keep the scope of the project well defined and contained to essential business processes.

● Be wary of modifying the enterprise system software to conform to your firm’s business practices.

Hosted Software Model for Enterprise Software Many business application software vendors are pushing the use of the hosted software model. The goal is to help customers acquire, use, and benefit from the new technology while avoiding much of the associated complexity and high start-up costs. Applicor, Intacct, NetSuite, SAP, and Workday are among the software vendors who offer hosted versions of their ERP or CRM software at a cost of $50 to $200 per month per user.

This pay-as-you-go approach is appealing because organizations can exper- iment with powerful software capabilities without making a major financial investment. Organizations can then dispose of the software without large investments if the software fails to provide value or otherwise misses expecta- tions. Also, using the hosted software model means the business firm does not need to employ a full-time IT person to maintain key business applications. The business firm can expect additional savings from reduced hardware costs and costs associated with maintaining an appropriate computer environment (such as air conditioning, power, and an uninterruptible power supply).

Table 8.7 lists the advantages and disadvantages of hosted software. LoneStar Heart is a California company that researches and develops restor-

ative therapies and technologies for patients with advanced heart failure. In its early years as a start-up company, LoneStar relied on a paper-based approach to document control that resulted in researchers spending extensive time searching and managing product documentation—taking them away from their critical design and development work. To gain efficiencies in its development processes and free up time for its research and development team, LoneStar eventually decided to implement a cloud-based PLM that would support

TABLE 8.6 Challenges to successful enterprise system implementation Challenge Description

Cost and disruption of upgrades

Most companies have other systems that must be integrated with the enterprise system, such as finan- cial analysis programs, e-commerce operations, and other applications that communicate with suppliers, customers, distributors, and other business partners. Integration of multiple systems adds time and com- plexity to an ERP implementation.

Cost and long implementation lead time

The average ERP implementation cost is $5.5 million with an average project duration of just over 14 months.

Difficulty in managing change

Companies often must radically change how they operate to conform to the enterprise work processes. These changes can be so drastic to longtime employees that they depart rather than adapt to the change, leav- ing the firm short of experienced workers.

Management of software customization

The base enterprise system may need to be modified to meet mandatory business requirements. System customizations can become extremely expensive and further delay implementation.

User frustration with the new system

Effective use of an enterprise system requires changes in work processes and in the details of how work gets done. Many users initially balk at these changes and require extensive training and encouragement.

372 PART 3 • Business Information Systems

Critical Thinking Exercise

employees in the company’s facilities as well as those who work remotely. The PLM system from Omnify Software provides LoneStar with a secure, yet easily accessible centralized product information database and the tools it requires to maintain compliant with the extensive set of FDA regulations governing its work. By using a cloud-based PLM, LoneStar was able to avoid close to $40,000 in server installation and maintenance costs annually.44,45

Implementing CRM iProspect is a global digital performance marketing firm. It works to increase Web site traffic for its clients through services such as search engine optimization, lead generation, Web site analytics, and Web site conversion enhancement. Its clients include such firms as Adidas, American Express, Coca-Cola, Ford Motor Company, General Motors, and Sharp Electronics. The firm needs a formal means of captur- ing information about its customers and their interactions with the company. It also hopes to implement a CRM system that will capture its best business practices to enable it to build on sales and customer satisfaction successes.

Review Questions 1. What specific tasks must this CRM software perform? 2. What are the potential benefits that iProspect might capture from use of a

CRM system?

Critical Thinking Questions 1. The CFO has asked you to lead a team to assess the potential benefits associ-

ated with this system. Who would you choose to make up this team (job title and organization)? How could your team attempt to quantify the potential benefits of such a system?

2. What are the pros and cons of choosing a hosted software solution to “test drive” a potential CRM solution?

TABLE 8.7 Advantages and disadvantages of hosted software model Advantages Disadvantages

Decreased total cost of ownership

Potential availability and reliability issues

Faster system start-up Potential data security issues

Lower implementation risk Potential problems integrating the hosted products of different vendors

Management of systems outsourced to experts

Savings anticipated from outsourcing may be offset by increased effort to manage vendor

Summary

Principle: An organization must have information systems that support routine, day- to-day activities and that help a company add value to its products and services.

Transaction processing systems (TPSs) are at the heart of most information systems in businesses today. A TPS is an organized collection of people, pro- cedures, software, databases, and devices used to capture fundamental data about events that affect the organization (transactions) and that use that data to update the official records of the organization.

CHAPTER 8 • Enterprise Systems 373

The methods of TPSs include batch and online processing. Batch proces- sing involves the collection of transactions into batches, which are entered into the system at regular intervals as a group. Online transaction processing (OLTP) allows transactions to be processed as they occur.

Organizations expect TPSs to accomplish a number of specific objectives, including processing data generated by and about transactions, maintaining a high degree of accuracy and information integrity, compiling accurate and timely reports and documents, increasing labor efficiency, helping provide increased and enhanced service, and building and maintaining customer loyalty. In some situa- tions, an effective TPS can help an organization gain a competitive advantage.

Order processing systems capture and process customer order data—from the receipt of the order through creation of a customer invoice.

Accounting systems track the flow of data related to all the cash flows that affect the organization.

Purchasing systems support the inventory control, purchase order proces- sing, receiving, and accounts payable business functions.

Organizations today, including SMEs, typically implement an integrated set of TPSs from a single or limited number of software vendors to meet their transaction processing needs.

All TPSs perform the following basic activities: data collection, which involves the capture of source data to complete a set of transactions; data editing, which checks for data validity and completeness; data correction, which involves provid- ing feedback regarding a potential problem and enabling users to change the data; data processing, which is the performance of calculations, sorting, categoriz- ing, summarizing, and storing data for further processing; data storage, which involves placing transaction data into one or more databases; and document pro- duction, which involves outputting electronic or hard-copy records and reports.

Principle: An organization that implements an enterprise system is creating a highly integrated set of systems, which can lead to many business benefits.

ERP software supports the efficient operation of business processes by integrating activities throughout a business, including sales, marketing, manufacturing, logistics, accounting, and staffing.

Implementing an ERP system can provide many advantages, including allowing access to data for operational decision making; eliminating costly, inflexible legacy systems; providing improved work processes; and creating the opportunity to upgrade technology infrastructure.

Some of the disadvantages associated with ERP systems are that they are time consuming, difficult, and expensive to implement; they can also be diffi- cult to integrate with other systems.

No one ERP software solution is “best” for all organizations. SAP, Oracle, Infor, and Microsoft are among the leading ERP suppliers.

Although the scope of ERP implementation can vary, most manufacturing organizations use ERP to support the supply chain management (SCM) activi- ties of planning, executing, and controlling all activities involved in raw mate- rial sourcing and procurement, conversion of raw materials to finished products, and the warehousing and delivery of finished product to customers.

The production and supply chain management process starts with sales forecasting to develop an estimate of future customer demand. This initial fore- cast is at a fairly high level, with estimates made by product group rather than by individual product item. The sales and operations plan (S&OP) takes demand and current inventory levels into account and determines the specific product items that need to be produced as well as when to meet the forecast future demand. Demand management refines the production plan by determin- ing the amount of weekly or daily production needed to meet the demand for individual products. Detailed scheduling uses the production plan defined by

374 PART 3 • Business Information Systems

the demand management process to develop a detailed production schedule that specifies details such as which item to produce first and when production should be switched from one item to another. Materials requirement planning determines the amount and timing for placing raw material orders with suppli- ers. Purchasing uses the information from materials requirement planning to place purchase orders for raw materials and transmit them to qualified suppli- ers. Production uses the detailed schedule to plan the logistics of running and staffing the production operation. Sales ordering is the set of activities that must be performed to capture a customer sales order. The individual applica- tion modules included in the ERP system are designed to support best prac- tices, the most efficient and effective ways to complete a business process.

Organizations are implementing customer relationship management (CRM) systems to manage all aspects of customer encounters, including marketing, sales, distribution, accounting, and customer service. The goal of CRM is to understand and anticipate the needs of current and potential customers to increase customer retention and loyalty while optimizing the way products and services are sold.

Manufacturing organizations are implementing product lifecycle manage- ment (PLM) software to manage the data and processes associated with the vari- ous phases of the product life cycle, including sales and marketing, research and development, concept development, product design, prototyping and testing, manufacturing process design, production and assembly, delivery and product installation, service and support, and product retirement and replacement. These systems are used by both internal and external users to enable them to collabo- rate and capture best practices and lessons learned along the way.

The most significant challenges to successful implementation of an enter- prise system include the cost and disruption of upgrades, the cost and long implementation lead time, the difficulty in managing change, the management of software customization, and user frustration with the new system.

Business application software vendors are experimenting with the hosted software model to see if the approach meets customer needs and is likely to generate significant revenue. This approach is especially appealing to SMEs due to the low initial cost, which makes it possible to experiment with power- ful software capabilities.

Key Terms

batch processing system

best practices

computer-aided design (CAD)

computer-aided engineering (CAE)

computer-aided manufacturing (CAM)

customer relationship management (CRM) system

data collection

data correction

data editing

data processing

data storage

discrete manufacturing

document production

enterprise system

online transaction processing (OLTP)

process manufacturing

product lifecycle management (PLM)

product lifecycle management (PLM) software

source data automation

supply chain management (SCM)

transaction processing cycle

Chapter 8: Self-Assessment Test

An organization must have information systems that support routine, day-to-day activities and that help a company add value to its products and services.

1. Transaction processing systems (TPSs) capture and process the fundamental data about events that affect the organization called that are used to update the official records of the organization.

CHAPTER 8 • Enterprise Systems 375

2. The essential characteristic of a(n) transaction processing system is that it processes transactions as they occur.

3. Which of the following is not one of the basic components of a TPS? a. Databases b. Networks c. Procedures d. Analytical models

4. involves providing feedback regarding a potential data problem and enables users to change the data. a. Data collection b. Data correction c. Data editing d. Data processing

5. The specific business needs and goals of the organization define the method of transaction processing best suited for the various application of the company. True or False?

6. Which of the following is not an objective of an organization’s batch transaction processing system? a. Capture, process, and update databases of

business data required to support routine business activities

b. Ensure that data is processed immediately upon occurrence of a business transaction

c. Avoid processing fraudulent transactions d. Produce timely user responses and reports

7. Business data goes through a cycle that includes data collection, data , data correc- tion, data processing, data storage, and docu- mentation production.

8. Unfortunately, there are few choices for software packages that provide integrated transaction processing system solutions for small and medium-sized enterprises. True or False?

9. Capturing and gathering all the data necessary to complete the processing of transactions is called .

An organization that implements an enterprise sys- tem is creating a highly integrated set of systems, which can lead to many business benefits.

10. Small organizations were slow to adopt ERP sys- tems because of the relative complexity and cost of implementing these systems. True or False?

11. The individual application modules included in an ERP system are designed to support

, the most efficient and effective ways to complete a business process.

12. software helps a customer manage all aspects of customer encounters, including marketing, sales, distribution, accounting, and customer service.

13. The hosted software model for enterprise soft- ware helps customers acquire, use, and benefit from new technology while avoiding much of the associated complexity and high start-up costs. True or False?

14. is software used to analyze the robustness and performance of components and assemblies. a. PLM b. CAD c. CAE d. CAM

15. Many multinational companies roll out standard IS applications for all to use. However, standard applications often don’t account for all the dif- ferences among business partners and employees operating in other parts of the world. Which of the following is a frequent modification that is needed for standard software? a. Software might need to be designed with local

language interfaces to ensure the successful implementation of a new IS.

b. Customization might be needed to handle date fields correctly.

c. Users might also have to implement manual processes and overrides to enable systems to function correctly.

d. All of the above

Chapter 8: Self-Assessment Test Answers

1. transactions 2. online 3. d 4. b 5. True 6. b 7. editing 8. False

9. data collection 10. True 11. best practices 12. Customer relationship management (CRM) 13. True 14. c 15. d

376 PART 3 • Business Information Systems

Review Questions

1. Identify and briefly describe six basic transaction processing activities performed by all transaction processing systems.

2. Provide a data processing example for which the use of a batch processing system to handle transactions is appropriate. Provide an example for which the use of online transaction processing is appropriate.

3. What is an enterprise system? Identify and briefly discuss the goals of three types of enterprise systems.

4. What are best practices? 5. Define supply chain management (SCM). 6. What is a Tier I ERP software vendor? 7. What are some of the advantages and disadvan-

tages of the hosted software model?

8. How does materials requirement planning support the purchasing process in an ERP environment? What are some of the issues and complications that arise in materials requirement planning?

9. Identify and briefly describe at least four key business capabilities provided by the use of a CRM system.

10. Identify the basic business processes included within the scope of product lifecycle management.

11. Discuss the difference between discrete and pro- cess manufacturing.

12. What is source data automation? What benefits can it be expected to deliver?

Discussion Questions

1. Identify and discuss key benefits that are com- mon to the use of ERP, CRM, and PLM enterprise systems, whether it be for a small, medium, or large organization.

2. Identify and briefly discuss five challenges to the successful implementation of an enterprise system. Provide several tips to overcome these challenges.

3. Assume that you are the owner of a small bicycle sales and repair shop serving hundreds of custo- mers in your area. Identify the kinds of customer information you would like your firm’s CRM system to capture. How might this information be used to provide better service or increase revenue? Identify where or how you might capture this data.

4. Why were SMEs slow to adopt ERP software? What changed to make ERP software more attractive for SMEs?

5. Briefly describe the hosted software model for enterprise software and discuss its primary appeal for business organizations.

6. Explain how CAD, CAE, and CAM software can work together to support the product develop- ment life cycle.

7. In what ways is the implementation of a CRM system simpler and less risky for an SME than for a large multinational corporation?

8. You are a member of the engineering organiza- tion for an aircraft parts manufacturer. The firm is considering the implementation of a PLM system. Make a convincing argument for selecting a sys- tem whose scope includes CAD, CAE, and CAM software.

9. What benefits should the suppliers and customers of a firm that has successfully implemented an ERP system expect to see? How might an ERP implementation affect an organization’s suppliers?

10. Many organizations are moving to a collabora- tive process with their major suppliers to get their input on designing and planning future product modification or new products. Explain how a PLM system might enhance such a pro- cess. What issues and concerns might a manu- facturer have in terms of sharing product data with suppliers?

Problem-Solving Exercises

1. Develop a list of seven key criteria that a non- profit charitable organization should consider in selecting a CRM system. Discuss each criterion and assign a weight representing the relative importance of that criterion, Develop a simple spreadsheet to use in scoring various CRM alter- natives in terms of how well they meet those cri- teria on a scale of 1 to 10. Do research on one CRM package and use your spreadsheet to develop its score.

2. Imagine that you are a new employee in the engineering organization of a large camping equipment and outdoor furniture manufacturing firm. The company is considering implementing a PLM system to better manage the design and manufacture of its products. You have been invited to a meeting to share your thoughts on how such a system might be used and what capa- bilities are most important. How would you pre- pare for this meeting? What points would you

CHAPTER 8 • Enterprise Systems 377

make? Develop a presentation containing three to six slides that summarize your thoughts.

3. In a spreadsheet program, enter the ingredients and quantity required to make your favorite homemade cookie. This represents a simple bill

of materials (BOM). Add a column to show the cost for each ingredient. Now “explode” the BOM to show the quantity and cost of each ingredient required to make 10,000 cookies.

Team Activities

1. Your team is working with the owner of a small appliance sales and repair shop serving hundreds of customers in your area. How might the owner use a CRM system to capture customer data that could be used to provide better service and increase revenue?

2. With your team members, meet with several business managers at a firm that has implemen- ted an enterprise system. Interview them to doc- ument the scope, cost, and schedule for the overall project. Find out why the organization decided it was time to implement the enterprise system. Make a list of what the business man- agers see as the primary benefits of the

implementation. What were the biggest hurdles they had to overcome? Are there any remaining issues that must be resolved before the project can be deemed a success? What are they? With the benefit of 20–20 hindsight, is there anything they would have done differently that could made the project go more smoothly?

3. As a team, do research online to identify three candidate PLM software packages. Based on information presented on each company’s Web site, score each alternative using a set of criteria your team agrees upon. Which candidate PLM software does your team select?

Web Exercises

1. Do research online to identify several companies that have implemented an enterprise system in the last few years. Classify the implementation as a success, partial success, or failure. What is your basis for making this classification?

2. Do research online to find several sources that discuss the challenges associated with the imple- mentation of an enterprise system. Is there gen- eral agreement among the sources as to what the most significant challenges are? What advice is offered as to the most effective way to overcome

these challenges? Develop your own list of the five most significant challenges and five most effective tactics for overcoming these challenges.

3. Using the Web, identify several software services firms that offer consulting services to help orga- nizations implement enterprise systems. Gain an understanding of what sort of services they offer and become familiar with several of their success stories. If you had to choose one of the software services firms to assist your SME organization, which one would you choose and why?

Career Exercises

1. Initially thought to be cost-effective for only very large companies, enterprise systems are now being implemented in SME’s to reduce costs, improve service, and increase sales revenue. A firm’s finance and accounting personnel play a dual role in the implementation of such a system: (1) they must ensure a good payback on the investment in information systems and (2) they must also ensure that the system meets the needs of the finance and accounting organization. Identify three or four tasks that the finance and accounting people need to perform to ensure that these two goals are met.

2. Enterprise system software vendors need busi- ness systems analysts who understand both information systems and business processes. Make a list of six or more specific qualifications

needed to be a strong business systems analyst who supports the implementation and conversion to an enterprise system within an SME. Are there additional/different qualifications needed for someone who is doing similar work but for a large multinational organization?

3. Imagine that you are a commercial solar heating salesperson for a manufacturing and installation firm. You make frequent sales calls on potential customers in a three-state area. The purpose of these sales calls is to acquaint the firms with your company’s products and get them to consider purchase of your products. Describe the basic functionality you would want in your organiza- tion’s CRM system for it to help you identify potential new customers and to support you in preparing and making sales presentations.

378 PART 3 • Business Information Systems

Case Studies

Case One

Dunkin’ Donuts Prepares for Rapid Growth Dunkin’ Donuts has a strong following of customers around the world who rely on the restaurant chain’s coffee, donuts, and other baked goods to get their day started. Established in 1950, Dunkin’ Donuts still uses the original proprietary coffee blend recipe created by its founder William Rosenburg, but what started as a small donut shop in Quincy, Massachusetts, has grown into a global business generating more than $800 million in revenue in 2015. And as the restaurant chain has grown, its business operations have become increasingly sophisticated.

Today, Dunkin’ Donuts franchises are backed up by a complex supply chain managed by National DCP (NDCP)— the exclusive supply chain management cooperative for more than 8,900 Dunkin’ Donuts stores in the United States and 51 other countries. Founded as a membership cooperative in 2012 with the merger of five regional food and beverage operating companies, NDCP’s mission is to support the daily operations of Dunkin’ Donuts franchisees and facilitate their growth and expansion plans. The company employs 1,700 people and maintains seven regional distribution centers along with another 32 logistics hubs.

Recently, NDCP began a massive multiyear project, dubbed “Project Freshstart,” to consolidate and upgrade its systems and transform its business processes throughout every area of the company—from accounting to customer service to warehousing and distribution. The goals of the project are to improve customer service, lower costs, and create supply chain efficiencies through inventory- and order-management improvements. According to Darrell Riekena, CIO at NDCP, the company began the process by asking “what capabilities and corresponding systems were needed to drive business process changes using leading-edge technologies, without a lot of customization.”

NDCP spent considerable time researching and evaluating implementation consulting partners and technology providers before opting to implement SAP’s Business Suite in partnership with Deloitte Consulting. NDCP selected the SAP system as the underlying technology for its business transformation because of SAP’s track record and experience with wholesale distribution. SAP’s software also offered NDCP the analytics and reporting tools the company felt were critical to supporting their plans for growth. According to Riekena, it was essential for the company to choose a technology platform that was flexible and could serve as the foundation for the company’s future expansion. Deloitte was chosen as NDCP’s implementation partner because it offered an extensive background in process redesign and a proven project methodology developed through years of experience in the wholesale distribution industry.

One of the first things Deloitte did during the implementation was to work with NDCP executives to define a business case for the project, which was used to establish a set of objectives and success criteria. Then, according to Deloitte Consulting’s Jerry Hoberman, they defined the scope of the project to meet those business objectives. Once the

scope was set, the project team members worked together to set an aggressive but realistic two-year project plan.

According to Riekena, an important contribution from Deloitte—outside of its technical expertise—was its framework for change management and communication, which helped ensure that NDCP was effectively reaching out to all of its stakeholders throughout the project. “We recognized right off the bat that effective change management was critical for the success of the project,” Riekena says. “Leveraging multiple channels to reach all of the stakeholders, we took advantage of Dunkin’ Brands training programs, launched a comprehensive communications effort, and promoted face-to-face interactions with franchise store managers and field operations teams whenever possible.”

Unlike many companies that undertake a major system upgrade, NDCP was willing to change many of its business processes in order to truly transform its business, but Deloitte and NDCP also placed a priority on working within NDCP’s culture—a balanced approach the recently led to the successful deployment of the new SAP system in the first of the company’s four regions. As the system is rolled out across the remaining regions, more franchisees will see the benefits of NDCP’s careful planning and implementation efforts— from better demand forecasting and inventory management tools to improvements in NDCP’s customer service delivered by a centralized staff who will have immediate access to customer histories and will be able to provide real-time updates on order status and issue resolution.

Critical Thinking Questions 1. Because NDCP is a membership cooperative, Dunkin’

Donuts franchisees are both owners and customers. What might be some advantages to such an ownership structure in terms of getting the support of all stake- holders for a massive project like the one NDCP undertook? What might be some disadvantages?

2. How important do you think the communication and change management aspects of this project were? Why do you think so many companies underestimate the importance of those facets of an enterprise-level project?

3. What are some of the risks for a company that chooses to make changes to so many parts of its business and underlying technology at once? What are some of the things a company could do to mitigate those risks?

SOURCES: “About Us,” Dunkin’ Donuts, news.dunkindonuts.com/about, accessed March 7, 2016; “Revenue of Dunkin’ Brands Worldwide from 2007 to 2015 (in Million U.S. Dollars),” Statista, ’www.statista.com /statistics/291392/annual-revenue-dunkin–brands, accessed March 10, 2016; “About Us,” National DCP, http://nationaldcp.com/node/893, accessed March 8, 2016; Murphy, Ken, “Rise and Shine: “Project Freshstart” Energizes Distributor,” SAPinsider, April 1, 2015, http:// sapinsider.wispubs.com/Assets/Case-Studies/2015/April/IP-Project-Fresh start-energizes-National-DCP; “National DCP: Serving Up the Best Customer Service for Dunkin’ Donuts Franchisees,” SAP video, http://go .sap.com/assetdetail/2015/11/324168ae-4e7c-0010-82c7-eda71af511fa .html, accessed March 9, 2016; “Deloitte Global SAP Practice: National DCP (Dunkin’ Donuts),” ReqCloud video, accessed March 10, 2016.

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Case Two

Kerry Group Is on Your Table In business, sourcing is the set of activities involved in finding, evaluating, and then engaging suppliers of goods or services. Before a business can start to manage its supply chain, as described in this chapter, it must complete a sourcing process.

Ireland’s Kerry Group, a supplier of food ingredients and flavors to the worldwide food industry and of consumer food products to the British Isles, requires a wide range of raw materials from many suppliers. With annual revenue of €5.8 billion (about U.S. $10 billion) in 2013, it needs a lot of those materials. With plants in 24 countries and 40 percent of revenue from outside Europe, it is impossible for the people in one plant to know about all possible suppliers worldwide, but making local sourcing decisions would reduce economies of scale. With the thin profit margins of the food industry, good sourcing decisions are vital to Kerry Group’s profitability. Software to manage the sourcing process is one way to help make those decisions.

Kerry Group was already a SAP customer when it chose SAP Sourcing OnDemand, having used SAP ERP systems since 2009. The advantage of obtaining a new system from its existing ERP supplier is assured compatibility with applications the company already uses. “What we needed was an intuitive sourcing system that would be completely integrated with our SAP back-office for an end-to-end procurement process,” said Peter Fotios, Kerry Group’s director of e-procurement services.

SAP Sourcing OnDemand uses the cloud computing concept. As its OnDemand name suggests, customers do not have to dedicate computing resources to the software. They use SAP resources on demand as their needs require, paying on a per-user, per-month subscription basis. Meanwhile, SAP is responsible for administrative tasks such as data backup and, if necessary, restoration.

Kerry Group implemented SAP Sourcing OnDemand by beginning with a pilot plant. “We rolled it out smoothly in Ireland first, then England and then throughout our global operations in 23 countries,” explains Fotios. If any problems appeared in Ireland, the pilot site, Kerry Group could have focused all its problem-solving resources on that location. Fortunately, no major issues arose.

Another thing that Kerry Group did right at implementation time was training. Recognizing that it had competent in-house trainers and competent technical professionals, but few if any who were both, the firm engaged SAP’s Irish training partner Olas to assist with that end of the project. Olas brought SAP expertise to the training team, completing the required set of capabilities.

Moving forward, Kerry Group has project plans extending into 2016 for the full roll-out of all its planned SAP ERP capabilities. The smoothness of its Sourcing OnDemand implementation, which took a total of four weeks elapsed time because the software was already running in the cloud when they began, is a good indication that the rest of the project (which is in many ways more complex) will probably go well. If Kerry Group is to carry out its mission statement, which includes being “the world leader in food ingredients and flavors serving the food and beverage industry,” the roll- out will have to be smooth.

Critical Thinking Questions 1. Kerry Group is taking a slow and methodical approach

to implementing the parts of SAP ERP software. What does the company gain and what does it lose by taking its time in this way?

2. Why should Kerry Group standardize on one ERP package? Wouldn’t it be simpler and less expensive to let each plant and sales operation choose its own soft- ware, as long as it can report its financial results to headquarters in a standard form?

3. What are the advantages and disadvantages to using a third-party vendor like Olas to deploy a new ERP system? What steps can companies take to overcome the disadvantages of relying on third-party vendors when deploying enterprise-wide systems?

SOURCES: Kerry Group Web site, www.kerrygroup.com, accessed April 11, 2014; Staff, “Kerry’s SAP Transformation Measures Up to Their L&D Beliefs,” Olas, www.olas.ie, May 18, 2011; Staff, “Kerry Group Transforms Its Global Procurement Group in Weeks With SAP Sourcing OnDemand Solution,” SAP, www.sap.com/news-reader/index.epx? pressid=18809, May 1, 2012.

Notes

1. “Revere Electric Supply,” Conexiom, https://conexiom .com/case_studies/revere-electric-supply, accessed March 4, 2016.

2. “About” Helen Ross McNabb Center, www.mcnabbcenter .org/content/about, accessed March 4, 2016.

3. “Helen Ross McNabb Center,” DATIS, www.datis.com /why-datis/customer-success-stories/helen-ross-mcnabb -center-2/, accessed March 4, 2016.

4. “Who We Are ADP,” www.adp.com/about-us.aspx, accessed March 4, 2016.

5. “Asset Brokerage Firm Reduces Batch Processing Time by 15%,” Sumerian, www.sumerian.com/resources /customer-stories/15-batch-time-saved, accessed March 4, 2016.

6. “Form 10-K: Paypal Holdings, Inc,” Paypal Holdings, Inc., February 11, 2016, https://investor.paypal-corp .com/secfiling.cfm?filingID=1633917-16-113&CIK =1633917.

7. “Ciber Case Study: Wisconsin Department of Health Services—WIC,” www.ciber.com/tasks/render/file/?white paper=wisconsin-department-of-health-services-wic -program&fileID=2BEF3900-A42E-F37F-92DD52E2C5 F22E4A, accessed March 3, 2014.

8. “About Us,” Lukas Nursery, www.lukasnursery.com /about.php, accessed March 6, 2016.

9. “Lukas Nursery Chooses Epicor Eagle N Series to Refresh 100 Year-Old Business,” Epicor, January 20, 2016, www .epicor.com/Press-Room/News-Releases/Lukas-Nursery

380 PART 3 • Business Information Systems

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35. “About Water Pik, Inc.,” Water Pik, Inc., www.waterpik .com/about-us, accessed March 9, 2016.

36. “Water Pik Improves Its Flow with ProductCenter PLM,” SofTech, www.softech.com/success/customer-success /Water_Pik_Improves_Its_Flow_with_ProductCenter _PLM/28.

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