Session 13 Ch 12 Electronic Commerce Systems

This lecture is
based on
Chapter 12
Electronic
Commerce
Systems
James A. Hall, Accounting Information Systems, 10th Edition. © 2019

Cengage. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives
• Understand the business benefits associated with Internet
commerce and be aware of several Internet business
models.
• Be familiar with the risks associated with intranet and
Internet electronic commerce.
• Understand issues of security, assurance, and trust
pertaining to electronic commerce.
• Be familiar with the electronic commerce implications for
the accounting profession.
James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2
Businesses deliver value at a profit to
customers, creating value for employees,
owners, suppliers and other stakeholders.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Creative Destruction is the Norm
(Schumpeter [1939] 2017)
“Most new firms are founded with an idea and for a definite
purpose. The life goes out of them when that idea or purpose
has been fulfilled or has become obsolete or even if, without
having become obsolete, it has ceased to be new. That is the
fundamental reason why firms do not exist forever. Many of
them are, of course, failures from the start. Like human beings,
firms are constantly being born that cannot live. Others may
meet…death from accident or illness. Still others die a "natural"
death, as men die of old age. And the "natural" cause, in the case
of firms, is precisely their inability to keep up the pace in
innovating which they themselves had been instrumental in
setting in the time of their vigor.”
Schumpeter, Joseph A. (1939), Business Cycles: A Theoretical, Historical, and
Statistical Analysis of the Capitalist Process (New York: McGraw-Hill), 94–95.
Internet Commerce
• Internet commerce has enabled thousands of business
enterprises of all sizes, as well as millions of consumers,
to congregate and interact in a worldwide virtual shopping
mall.
• A significant part of all B2C commerce is now transacted
electronically, digitally.
• A very large part (80%++) of all B2B trading is digital.
• Ryanair’s Boeing 737 MAX order
• Ryanair is expecting to take delivery of 210 firm aircraft
orders. Following the type’s ungrounding,
the airline placed its latest order for MAX jets in early D
ecember
2020. This boosted the firm number by 75, increasing
the order’s total value to over $22 billion.
• Boeing will not
James A. Hall, Accounting accept
Information a10th
Systems, cheque for
Edition. © 2019 thatAll Rights
Cengage. amount!Reserved.
E-business opportunities
• Reach:
• Over 2 billion users globally, pre-Covid
• Connect to millions of products
• Richness
• Detailed product information on 20 billion + pages indexed by Google.
Blogs, videos, feeds…
• Personalised messages for users
• Huge new businesses: Amazon, Alibaba, Asos…
• Affiliation
• Partnerships are key in the networked economy
Figure 1.1 The distinction between buy-side and sell-side e-commerce. (Chaffey,
Edmundson-Bird, and Hemphill 2019)
Business is easy!
• Just
• Increase revenue (profitably)
• Or reduce costs
• Voila!
James A. Hall, Accounting Information Systems, 10th Edition. © 2019 Cengage. All Rights Reserved. 8
Reducing Transaction Costs
• The Internet (potentially) reduces transaction costs

• Finding buyers: no mass-mailing of expensive brochures, or expensive TV
and radio ads
• Fully automatic collection of payments
• (In some cases:) Delivering product or service online
• Support: email, FAQ, user forums instead of person-to-person
Business Models - 1
• The term business model

describes the rationale of how an
organisation creates, delivers, and
captures value (economic, social,
or other forms of value)
• The process of business model
construction is part of business
strategy
10
Business Models - 2
• Used for a broad range of informal
and formal descriptions to
represent core aspects of a
business, including purpose,
offerings, strategies, infrastructure,
organisational structures, trading
practices, and operational
processes and policies
11
Common Revenue Models
Source: Turban, E. et al., Electronic Commerce 2006: A Managerial Perspective, Prentice Hall, 2006, p.21
Now: (Turban et al. 2015)
A Classification of Business Models
• Brokerage Model • Infomediary Model
• Net marketplace
• Auction broker • Merchant Model
• Transaction broker
• ... • Manufacturer
• Advertising Model (Direct) Model
• Portal • Affiliate Model
• Search-based advertising
• … • Community Model
• Subscription Model
• Utility Model
(Rappa 2000)
Things to bear in mind about e-business
• Not necessarily with the consumer

B2B: much larger share of overall revenue
“The dollar value of B2B comprises at least 85 percent of
the total transaction value of e-commerce”
(Source: 2003 eMarketer report, quoted in Turban 2006, p.195)
• Not necessarily using Internet & WWW

Majority of B2B still uses older EDI technology,
although this is changing, especially as SMEs
begin to become more active players
What is e-business management?
• Electronicbusiness (e-business) is aimed at

enhancing the competitiveness of an organisation
by deploying innovative information and
communication technology throughout an
organisation and beyond, through links to
partners and customers.
What is e-commerce ?
• Electroniccommerce (e-commerce) is often taken

simply to refer to buying and selling using the
Internet: people immediately think of consumer
retail purchases from companies such as
Amazon.
B2B and B2C characteristics
Characteristic B2C B2B
Proportion of adopters Low to medium High to very high
with access
Complexity of buying Relatively simple – More complex – buying
decisions individual and influencers process involves users,
specifiers, buyers, etc.
Channel Relatively simple – direct More complex, direct or
or from retailer via wholesaler, agent or
distributor
Purchasing characteristics Low value, high volume or Similar volume/value. May
high value, low volume. be high Involvement.
May be high involvement Repeat orders (rebuys)
more common
Product characteristic Often standardised items Standardised items or
bespoke for sale
(Chaffey, Edmundson-Bird, and Hemphill 2019)

Key Areas of E-Business: Example
Setting
Build-to-order
Suppliers (e.g. Ryanair) or
(e.g. computer Ship-to-order Consumers
components, book
(e.g. Amazon)
publishers)
(B2B) (B2C)
SCM world Enterprise CRM world
ERP, EAI, …
Internal Integration
(does Marketing talk to Operations?)
External Integration
(does the firm talk to the outside world?)
Types of Companies in the “New Economy”
• Bricks-and-mortar (or “old-economy”): traditional

companies based in the physical world only.
• Pure-play (or virtual) organisations are companies
that are engaged only in electronic commerce.
• Clicks-and-mortar organisations are those that
conduct some e-commerce activities, yet their
primary business is done in the physical world.
Potential Advantages of B2C E-Commerce
• May eliminate need for maintaining physical shop front

• Reduced transaction costs; increased transaction speed
• Ease of crossing geographical boundaries
• Web sites available 24/7
• Ease of updating existing and distributing new information
• Internet: universal, easy-to-use set of technologies and
standards
• Empowers smaller companies
• How would you add to this list?
Cost/efficiency and competitiveness
drivers
• Cost/efficiency drivers
• Increasing speed with which supplies can be obtained
• Increasing speed with which goods can be dispatched
• Reduced sales and purchasing costs
• Reduced operating costs
• Competitiveness drivers
• Customer demand
• Improving the range and quality of services offered
• Avoid losing market share to businesses already using e-
commerce
Where does technology fit into all
this?
THAT’S THE BUSINESS-
TECHNOLOGY CHALLENGE
Technology is not a Business Strategy
Gianvito Lanzolla, professor in strategy at London's Cass

Business School. "It is not the technology that is the
problem," he said. "It is the capability of companies to
implement it.“
Mr. Lanzolla has written a paper looking at 30,000

companies that bought eProcurement software. "After
two years of observation, only 12% of the companies
had used the technology.“
- Wall Street Journal, 30 May 2012
Business & ICT Must Work Together to Integrate
Technology with Processes
Key Business Translating Business Creating and
Describing
Processes Requirements into Operating the
the Process
Computer Logic Application
Business Unified
• Order to Cash Process Modeling • Process online payment
• Procure to Pay • Verify credit history
• Plan to Produce Modelling Language* • Check hotel availability
• Design to Release • Find local weather
• Financial close to Reports
• Claims to Settlement
• Recruit to Hire
* Note that Unified Modeling Language (IBM) is only one tool used
by businesses – many others exist and work successfully.
Speed, speed, speed: Cycle Time Reduction
Customer Satisfaction
Cycle Time
Cost
• Lower (zero) inventory
• Eliminate 'bullwhip' effects
• Only positive cashflow (produce after being paid, cf. Dell)
• “You can have your cake and eat it, too”
Speed, quality and customer satisfaction are only
achieved by relentless concentration and continuous
improvement of how your company serves its
customers. In other words, by improving your business
processes.
Drivers of business Internet adoption
The two main ways in which increased
profitability can be achieved are:
1. Potential for increased revenue arising from
increased reach and richness to a larger
customer base and encouraging loyalty and
repeat purchases among existing
customers.
2. Cost reduction achieved through delivering
services electronically. Reductions include
staff costs, transport costs and costs of
material such as paper.
Overview of EDI for B2B
Traditional B2B Technologies: EDI
– Electronic Data Interchange (EDI):
• Transfer of electronic data from one organisation's computer

system to another's in a commonly agreed format
• To be processed by the receiver's computer system without the
need for human interpretation
• Set of hardware and software that accommodate the EDI
process; often involves third-party service provider (‘value-
added networks’)
• International standards bodies and proposed standards
Europe: UN/EDIFACT (EDI for Administration, Commerce and Transport); US: X12
• Used since 1980s to automate routine transactions between
established trading partners
• Long-term, point-to-point, and tightly coupled relationships
• Still widely used in B2B integration practice
B2B Technologies: EDI
• Examples of EDI relationships

• Manufacturer(s) working together with supplier(s)
• Large EDI groups (e.g. SWIFT: international financial

transfers)
Value-added network and EDI
B2B and B2C Interactions
after (Chaffey, Edmundson-Bird, and Hemphill 2019)
Channel partner Channel partner

(supplier) (organisation)
Supplier Consumer
customers
Organisation
Business
customers
Disintermediation
• Disintermediation: removal of intermediary steps in a
value chain, e.g., selling directly to consumers
 lower purchase transaction costs
 potential price advantages
(Laudon and Laudon 2017)

Reintermediation
• Reintermediation: shifting of the intermediary function in

a value chain to a new source
• Example: Delivery becomes a critical part of overall customer
satisfaction (DHL, UPS, …)
• New intermediaries: information brokers, net marketplaces,
intelligent agents, …
Channel Conflict
• Channel conflict: tension among different distribution
chains for the same product or service
• Channel member perceives another channel to be engaged in
behaviour that prevents or impedes it from achieving its own
goals
• Web-based direct sales channel
 Risk of alienating traditional sales reps (internal conflicts),
distributors (external conflicts), …
 Threats may include lockouts or even lawsuits by
distributors
• Disintermediation is usually not instantaneous: how to placate
partners in the distribution channel while taking steps toward
the eventual demise of these relationships?
• Channel cooperation
Internet Technologies - 1
• World Wide Web
• A web page is a fundamental format for the World Wide Web.
• Text documents called web pages have embedded Hypertext
Markup Language (HTML) codes that provide the formatting
for the page as well as hypertext links to other pages.
• The embedded HyperText Markup Language (HTML)
provides the formatting for a web page as well as hypertext
links to other web pages. The linked pages may be stored on
the same server or anywhere in the world.
• Websites are computer servers that support Hypertext–
Transfer Protocol (HTTP). The pages are accessed and read
via a web browser such as Internet Explorer.
• HyperText Transfer Protocol (HTTP) is the communications
protocol used to transfer or convey information on the World
Wide Web.
• World Wide Web (continued)
• A Uniform Resource Locator (URL) is a human-readable
address of the target site in the web browser to access the
website. It’s translated into an IP address – 32-bit or 64-bit.
• An IP broadcast address is a 32-bit number that identifies
each sender or receiver of information sent in packets across
the Internet.
• A home page is a typical point of entry for an Internet website.
• Internet Addresses
• E-MAIL ADDRESS
• URL ADDRESS: Protocol prefix is the general format for a
URL; e.g., http:// is a protocol prefix. A domain name is an
organisation’s unique name combined with a top-level domain
(TLD) name. A subdirectory name is the general format for a
URL. A document name is a component of the URL that
indicates the name of the file/document.
• IP ADDRESS
• Packet Switching
• Packet switching is the division of messages into small
packets for transmission.
• Virtual Private Networks
• A virtual private network (VPN) is a private network within a
public network.
• Extranets
• An extranet is a password-controlled network for private users
rather than the general public.
• A ping is an Internet maintenance tool used to test the
state of network congestion and determine whether a
particular host computer is connected and available on the
network.
Cloud Computing
• Software-as-a-Service (SaaS) is a software distribution
model in which service providers host applications for
client organisations over a private network or the Internet.
• Infrastructure-as-a-Service (IaaS) is the provision of
computing power and disk space to client firms who
access it from desktop PCs. The client firm can configure
the infrastructure for storage, networks, and other
computing needs, including running operating systems
and data processing applications.
• Platform-as-a-Service (PaaS) enables client firms to
develop and deploy onto the cloud infrastructure
consumer-generated applications using facilities provided
by the PaaS vendor.
Cloud Computing (continued)
• Virtualisation
• Virtualisation is a technology that multiplies the effectiveness of
the physical system by creating virtual (software) versions of the
computer with separate operating systems that reside in the same
physical equipment. In other words, virtualisation is the concept of
running more than one “virtual computer” on a single physical
computer.
• Network virtualisation increases effective network bandwidth by
dividing it into independent channels, which are then assigned to
separate virtual computers. It optimises network speed, flexibility,
and reliability; most importantly, it improves network scalability. It
is especially effective in networks that experience sudden, large,
and unforeseen surges in usage.
• Storage virtualisation is the pooling of physical storage from
multiple network storage devices into what appears to be a single
virtual storage device. This pool is then managed from a central
server.
Challenge
• You may also prepare to undertake a Self-
Development Challenge. You should describe and
perhaps model this Challenge in an essay of about
150-300 words.
• The extra component will incentivise each student to

set themselves a personal learning challenge
associated with the subject matter of this module.
They should set out a plan by means of which they
will aim to become more competent or expert in the
area of the challenge. Each student will be graded on
the realisable ambitiousness of the challenge which
they are setting themselves, which does not need to
be realised or fully implemented within the timescales
of the module itself.
Challenge continued
• Examples:
• Database use
• Database design
• ERP use
• Small reward: up to 10 bonus marks.
Risks Associated with Electronic Commerce
• Reliance on electronic commerce poses concern about

unauthorised access to confidential information.
• A risk is the possibility of loss or injury that can reduce or
eliminate an organisation’s ability to achieve its objectives.
In terms of electronic commerce, risk relates to the loss,
theft, or destruction of data as well as the use of computer
programs that financially or physically harm an
organisation.
Intranet risks
• Interception of Network Messages
• Privileged Employees with Access to Corporate
Databases
• Reluctance to Prosecute
Internet risks: consumers
• Risks to Consumers
• THEFT OF CREDIT CARD NUMBERS
• THEFT OF PASSWORDS
• CONSUMER PRIVACY: Cookies are files containing user
information that are created by the web server of the site being
visited and are then stored on the visitor’s own computer hard
drive.
Internet risks: businesses
• Risks to Businesses
• IP spoofing is a form of masquerading to gain unauthorised
access to a web server and/or to perpetrate an unlawful act
without revealing one’s identity.
• A denial of service attack (DoS) is an assault on a web
server to prevent it from servicing its legitimate users.
• A SYNchronise-ACKnowledge (SYN-ACK) is what is
returned when a receiving server acknowledges the request.
SYN flood attack is a server that keeps signalling for
acknowledgement until the server times out.
• A smurf attack is a DoS attack that involves three parties: the
perpetrator, the intermediary, and the victim.
Internet Risks (continued)
• Risks to Businesses (continued)
• A distributed denial of service (DDoS) attack may take the
form of a SYN flood or smurf attack. The distinguishing feature
of the DDoS is the sheer scope of the event.
• MOTIVATION BEHIND DOoS ATTACKS
• OTHER MALICIOUS PROGRAMS
Distributed denial of service attack
Security, Assurance, and Trust
• Trust is the catalyst for sustaining electronic commerce.
• Both consumers and businesses are drawn to
organisations that are perceived to have integrity.
• Organisations must convey a sense that they are
competent and conduct business fairly with their
customers, trading partners, and employees.
Encryption
• Caesar cipher was the earliest encryption method; Julius
Caesar is said to have used it to send coded messages to
his generals in the field.
• WW2 Enigma machine and Bletchley.
• The key is a mathematical value that the sender selects
for the purpose of encrypting or decoding data.
• The algorithm here is the procedure of shifting each letter
in the cleartext message by the number of positions that
the key value indicates.
• Advanced encryption standard (AES), also known as
Rijndael, is a private key encryption technique.
Encryption (continued)
• Private key, also called symmetric key, is a single key
used in an encryption algorithm to both code and decode
a message.
• Public key encryption is a technique that uses two
encryption keys: one for encoding the message, the other
for decoding it.
• Rivest-Shamir-Adleman (RSA) is one of the most
trusted public key encryption methods. This method,
however, is computationally intensive and much slower
than private key encryption.
• A digital envelope is an encryption method in which both
DES and RSA are used together.
• All encryption is ultimately “crackable”…
Digital authentication
• A digital signature is an electronic authentication
technique that ensures the transmitted message
originated with the authorised sender and that it was not
tampered with after the signature was applied.
• A digital certificate is a sender’s public key that has been
digitally signed by trusted third parties.
• Certification authorities (CAs) are trusted third parties
that issue digital certificates.
• Public key infrastructure (PKI) constitutes the policies
and procedures for administering public key management
for digital authentication.
Firewalls
• A firewall is software and hardware that provide a focal
point for security by channelling all network connections
through a control gateway.
• The network-level firewall is the system that provides
basic screening of low-security messages (for example, e-
mail) and routes them to their destinations based on the
source and destination addresses attached.
• An application-level firewall provides high-level network
security.
Seals of assurance
• Better Business Bureau
• TRUSTe
• Verisign, Inc.
• International Computer Security Association
• AICPA/CICA WebTrust
• AICPA/CICA SysTrust
Implications for the Accounting Profession
• As mission-critical functions—such as inventory

procurement, sales processing, shipping notification, and
cash disbursements—are performed automatically,
digitally, and in real time, auditors are faced with the
challenge of developing new techniques for assessing
control adequacy and verifying the occurrence and
accuracy of economic events.
Privacy violation
• Privacy is full control of what and how much information
about an individual is available to others and to whom it is
available.
• The Safe Harbor Agreement implemented in 1995 is a
two-way agreement between the United States and the
European Union establishing standards for information
transmittal.
• NOTICE
• CHOICE
• ONWARD TRANSFER
• SECURITY AND DATA INTEGRITY
• ACCESS
• ENFORCEMENT
Continuous auditing
• Continuous auditing techniques need to be developed that
will enable the auditor to review transactions at frequent
intervals or as they occur.
• Intelligent control agents are computer programs that
embody auditor-defined heuristics that search electronic
transactions for anomalies.
Confidentiality of data
• Accountants need to assess the quality of encryption tools
used and the effectiveness of key management
procedures that CAs use.
• The term mission-critical defines a set of information that
extends beyond the traditional financial concerns of
accountants.
Authentication
• In electronic commerce systems, determining the identity
of the customer is not a simple task.
• Accountants must develop the skill set needed to
understand digital signatures and digital certificates to
perform the assurance function.
Nonrepudiation
• Accountants are responsible for assessing the accuracy,
completeness, and validity of transactions that constitute
client sales, accounts receivable, purchases, and
liabilities.
Data integrity
• To assess data integrity, accountants must become
familiar with the concept of computing a digest of a
document and the role of digital signatures in data
transmissions.
Access controls
• Controls need to be in place that prevent or detect
unauthorised access to an organisation’s information
system.
A changing legal environment
• Legal issues relating to taxes, privacy, security, intellectual
property rights, and libel create new challenges for the
accounting profession, which must provide its clients with
rapid and accurate advice on a wide range of legal
questions.
Summary - 1
• Explosion of ways of doing business
• Made possible by innovative use of web-based
business information systems
• Likechopping down a tree: no visible effects for
quite a while, then the tree crashes to the
ground…
• Topshop
• Dorothy Perkins
• Miss Selfridge
• Debenhams has moved online
• John Lewis has closed 16 stores – including its
flagship Birmingham Bullring outlet.
Summary - 2
Accountants need to know about:
• Technology
• Systems
• Models of systems
• Business models (which are not models!)
• Regulatory frameworks
• Cybercriminality
They need to give value!
Structuring your reports and essays
• You really must do this! My way is a bit complex, but works well.
• Both Microsoft Word and PowerPoint have a very powerful built-in
hierarchical approach based on marking text as Header 1 (for
chapters), Header 2 (for sections) and Header 3 (for sub-headings).
• Look at the helpful article by Shauna Kelly at
https://shaunakelly.com/word/numbering/numbering20072010.html for
more information concerning Word.
• I have a favourite template for reports, which I have uploaded to
Canvas. It’s a bit fiddly to use, so I’ll show it to you in class. I’ve
uploaded the template to Canvas as MGYSTD.dotx in Canvas at
https://canvas.hull.ac.uk/files/3382286/
• A long explanatory document is at
https://canvas.hull.ac.uk/files/3382287/ as How to use Microsoft Word
to improve your personal information management.docx
Zotero: storing references
• You can set up Zotero to work in conjunction with browser
• Let’s look:
References
• Chaffey, Dave, David Edmundson-Bird, and Tanya Hemphill. 2019.
Digital Business and E-Commerce Management. Pearson UK.
• Hall, James A. 2019. Accounting Information Systems. Cengage
Learning.
• Laudon, Kenneth C., and Jane P. Laudon. 2017. Essentials of MIS.
12th ed. Pearson Education.
• Schumpeter, Joseph A. (1939) 2017. Business Cycles [Volume One]:
A Theoretical, Historical, and Statistical Analysis of the Capitalist
Process. Martino Fine Books.
• Turban, Efraim, David King, Jae Kyu Lee, Ting-Peng Liang, and
Deborrah C. Turban. 2015. Electronic Commerce: A Managerial and
Social Networks Perspective. 8th ed. Springer Texts in Business and
Economics. Springer International Publishing.
https://doi.org/10.1007/978-3-319-10091-3

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This lecture is

James A. Hall, Accounting Information Systems, 10th Edition. © 2019

• The Internet (potentially) reduces transaction costs

• The term business model

• Not necessarily with the consumer

• Not necessarily using Internet & WWW

• Electronicbusiness (e-business) is aimed at

• Electroniccommerce (e-commerce) is often taken

(Chaffey, Edmundson-Bird, and Hemphill 2019)

• Bricks-and-mortar (or “old-economy”): traditional

• May eliminate need for maintaining physical shop front

Gianvito Lanzolla, professor in strategy at London's Cass

Mr. Lanzolla has written a paper looking at 30,000

• Transfer of electronic data from one organisation's computer

• Examples of EDI relationships

• Large EDI groups (e.g. SWIFT: international financial

Channel partner Channel partner

(Laudon and Laudon 2017)

• Reintermediation: shifting of the intermediary function in

• The extra component will incentivise each student to

• Small reward: up to 10 bonus marks.

• Reliance on electronic commerce poses concern about

• As mission-critical functions—such as inventory

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