Literature review on the history and development of electronic business

“The Internet has been the most fundamental change during my lifetime and for hundreds of years.” Rupert Murdoch

The above quote from Rupert Murdoch is similar to many of the comments made by authors, academics and scientists over the last 15 years. In the first chapter of his book Xu (2009) discussed how the web has changed the way we conduct business and how we see the world and ourselves in it. He discussed how it has rewritten the rules of business and has transformed many industries (i.e. books, travel, music, accommodation, internet phone, real estate, among others), how it has brought profound changes (including both negative and positive) to individuals, organisations, governments and societies.

There is no doubting the pervasiveness of the internet and the affect it has on our lives. But one must ask oneself how did the internet go from being the play thing of scientists to the biggest inventions of our life time while changing our business and social landscape forever?

In this literature review I will firstly define electronic business; after that I will speak about the history of electronic business and the internet. From there I will speak about how the internet changed business to business commerce and the resulting change from EDI (Electronic data interchange) to electronic hubs. Next I will speak about business to consumer electronic business and how the original internet hysteria led to the dot.com crash; this will be followed by the new focus on business models. Finally, I will conclude with a discussion on open innovation and give my opinion on its place in the future of electronic business.

Since the internet redefined our world electronic business has come to the forefront of the thoughts of academics and business consultants. Many of these have tried to define electronic business. Beynon- Davies (2004) defined it as follows “Electronic business or e-business might be defined as the utilisation of information and communication technologies to support all the activities of business”. Compared to other definitions of electronic business this is very conservative. It fails to address the new businesses that have been created by the internet. Another definition that comes from Cunningham and Froschl(1999) is as follows “Electronic business is the integration of IT and particularly the internet into business processes to change organisations and create new ones. It particularly affects the interfaces between and among organisational entities and units”. This definition mentions both the creation of new businesses and the improvement of existing businesses. Laudon and Traver (2004) argue that electronic business is difficult to define and speak about the ongoing debates between academics and consultants trying to accurately define it. They write about how there is a lot of confusion about where exactly e-commerce ends and e-business begins. Likewise they mention how many academics are unable to agree on how exactly one should define electronic business and electronic commerce. This opinion is echoed in the work of Li(2007) and Tassabehji(2003).

Many people automatically associate electronic business with the internet but in actual fact electronic business predates the internet as (Bocij at al, 2006) outline, “Transactional e-commerce predated PCs and the world wide web by some margin. In the 1960’s EDI and EFT (electronic funds transfer) over secure private networks became established modes of intra and inter-company transaction.”

The Berlin airlift in 1948 is what many academics see as being the first step towards the development of electronic business and EDI. Chaffey(2004) discusses how this pivotal moment in history was when the idea of standardized document came to fruition. A standard form was needed to ensure the efficient management of items flown to Berlin from many locations around the world. The next stage in its development came in the form of EDI and EFT. While the internet was in its early stages of development in the DARPA(Defence Advanced Research Projects Agency) labs EDI and EFT systems were being put in place in large companies throughout the United States. These communication systems were used to generate efficiency between large companies. (Kalakota et al,1996) discuss how EDI developed in the 1960’s as a means of accelerating the movement of documents pertaining to shipments and transportation. Another precursor to internet electronic business was the French mintel system. It was the first business to consumer electronic commerce. This system was a videotext system developed by the French government; it allowed consumers buy products and services through an electronic terminal that was widely available throughout France. Although it remained popular for some time it was never expanded to the rest of the world (Jelassi et al,2005 ). Although it is certain that electronic business existed prior to the world wide web both Laudon and Traver(2009) and Timmers(2001) agree that electronic business really exploded when the internet became accessible to everyone, therefore one cannot ignore its history and the role it played in the development of electronic business.

In his book Davies(2004) outlined how the internet was for a long time used as a means to exchange research data and was unavailable to the public. Resnick (1995) agrees with this, he speaks about how for years commercial traffic was forbidden on the internet. He mentions how companies were banned by   “acceptable use policies” from using a network funded by the government to sell or advertise their products and services. The original purpose of the internet was to connect various government and related computers, and in the event of a disaster or war to ensure information passing between important government organisations did not fall into the wrong hands (Jackson et al,2003).   From these beginnings the internet developed into a modern day phenomenon. In 1984 the domain name system (DNS) was put in place which meant the beginning of the term dot.com, the com part of the domain name was used to signify commercial entity. Other early domain name endings were .gov, .mil, .edu,.org. America Online (AOL) launched in 1989 and was soon to become one of the giants of the internet world. In 1991 Tim Berners Lee developed the hypertext link code (Lythcott-Haims,2006).A few months later students in the University of Illinois took this code and modified it to create Mosaic the first user friendly internet browser (Berners-Lee,Unknown).

As outlined above EDI was an integral part of electronic business before the internet. However (Swatman et al, 2001) argued that although there was a significant comparative advantage to be gained from implementing an EDI system it was tied with longer term strategic planning. As they so elegantly put it “implementation of EDI without due consideration for the longer term strategic implications will result in little more benefit than could have been obtained from the purchase of a fax machine” (Swatman el al, 2001). As Kalakota and Whinston(1996) discuss the EDI systems that were in place at the time were usually based around large companies; they used the systems to communicate with its smaller suppliers, these situations were inefficient and unhealthy. They used the term “hub and spoke relationships” (Kalakota and Whinston,1996) to describe how one large business had many connections to smaller businesses. When the internet was made available to the public the old form of EDI was replaced by what is called internet EDI. As Chaffey (2004) outlined “internet EDI enables EDI to be implemented at lower costs rather than using proprietary value added networks (VAN), it uses the same standard EDI documents, but using lower-cost transmission techniques through virtual private networks (VPNs) or the internet”. This meant that the old “hub-and-spoke arrangements” discussed by Kalakota and Whinston(1996) were replaced by a much fairer and cheaper system that is now known as internet EDI systems.

As the internet became more accessible entrepreneurs were creating businesses that sought to capitalize on this new technology. Professor James Teboul described the times well when he wrote the foreword to Peter Morath’s book “We are at the dawn of an internet era. It’s a time of excitement and confusion, opportunities and risks. No one is certain of what is happening now or what is coming next” (Teboul, 2000) cited in Morath(2000). As Evans and Wurster(1997) described, many traditional business models were being deconstructed, for example classified advertising, a traditional money maker for newspapers was being cannibalized by websites. They also argued that the traditional laws that governed the economics of information were now defunct. Traditionally companies had to make a trade off between “richness and reach”, they could either have “rich” content that was specific to the individual or reach a lot of people. This was the one of the laws that governed communication; because of technology and more specifically the internet the trade off between richness and reach no longer applied. Companies could now reach large numbers of people with content that was specific to them. Evans and Wurster described it as “freeing information from the channels that have been required to exchange it” (Evans and Wurster, 1997).

These changes in traditional trading presented opportunities for entrepreneurs. In late October 1994 the first banner advertisement was placed by ATT, Volvo, Sprint and others on Hotwired(Laudon and Traver,2009), this was to be the start of the era of “business to consumer” electronic business. Prior to this electronic business was mainly confined to business to business trading (Bohlin et al,2004). Although the revenue created by business to business electronic business is ten times more than that of business to consumer electronic business one cannot ignore its importance in the development of the web (Laudon and Travers,2009).  Evans and Wurster (1997) discussed how it was becoming much easier to switch from one shop to another and the idea of established relationships was disappearing. Steinfield (2002) speaks about how many established firms were using “clicks and mortar” strategies, this was a term coined by academics at the time to describe the combination of physical retail outlets with online electronic business channels. However, he also discusses how the addition of an electronic channel to their existing channels was challenging and times consuming and how marketing theorists saw the potential for channel conflict (Stern and Ansary 1992) cited in Steinfield (2002).  Ghosh(1998) focuses on the opportunities that were available for start-ups. He mentions how the internet created “direct, ubiquitous links to anyone anywhere” (Ghosh,1998) and how many of the established businesses with strong brands were unable to adapt to this, while start-ups such as Amazon(www.amazon.com) and Yahoo(www.yahoo.com) were able to take full advantage of it. He outlines how Amazon in particular was able to create a competitive advantage by having peer reviews available to potential buyers to help them when making their decision (Ghosh,1998). Evans and Wurster(1997) agree with Ghosh and outline how there were many opportunities available to start ups. They argue that new companies were “unconstrained by management traditions, organisational structure, customer relationships or by fixed assets.”(Evans and Wurster, 1997)

As mentioned above business to business electronic commerce generates significantly more revenue than business to consumer electronic commerce (Laudon and Travers, 2009). Therefore there was a significant amount of attention placed on business to business electronic commerce during the early years of the internet.   A new business entity came into play that was a natural reaction to the rigid business to business communication systems that preceded the internet, these new entities were coined “electronic hubs, or e-hubs” (Kaplan and Sawhney, 2000). 0’Reilly and Finnegan (2007) outline how there is much debate about how to properly define electronic hubs or e-hubs. However, Kaplan and Sawhney describe what they do as follows;“by bringing together huge numbers of buyers and sellers and by automating transactions, web markets expand the choices available to buyers, give sellers access to new customers and reduce transaction costs for all players”(Kaplan and Sawhney,2000). They were many e-hubs built around the concept of introducing many buyers to many sellers. As O’Reilly and Finnegan (2007) outline by the year 2000 there were 1,500 e-hubs operational but their failure rate was high. Two of the electronic hubs that O’Reilly and Finnegan(2007) studied in their paper were dealcotton and eutlilia. Dealcotton was a company that connected cotton growers cotton buyers. Whereas eutilia dealt in utilities, they were backed by 8 of the biggest utility suppliers in the world. Both of these companies were major underachievers. There were many reasons for their failures, ranging from failing to recognise that cotton growers are not internet savvy, to finding out that the large companies that were willing to invest in you were unwilling to use the service you offered (O’Reilly and Finnegan, 2010). However there were a number of moderate successes as was reported by (White el al, 2007) “A number of specific marketplaces are thriving, however: for example, SupplyOn, an e-marketplace in the automotive sector, became profitable in 2003 with revenues of 18 million Euros; and in early 2005, Exostar, an e-marketplace in the aerospace industry, was supporting over 20,000 companies and conducting over 700,000 transactions every month, after making its first operating profit in 2003” (White el al, 2007). It is clear from the work of O’Reilly and Finnegan (2010) and (White et al,2007) that many of the e-hub start-ups believed that the same business model could be applied to numerous different markets. The owners of the electronic markets were business people or technologists with little background in the hubs specific area. Therefore they failed to take into account the many complexities that each individual market had and that needed to be addressed before a profitable business model could be created.

The hysteria that the internet created among investors in the late 90’s and early 00’s was to have a resounding affect on the stock market. Howcroft(2001) described how venture capitalists competed amongst themselves to be allowed to invest vast sums of money in internet companies. This resulted in an “80 percent rise in the NASDAQ in a period slightly more than a year” (Coltman et al, 2001). Subsequently billions of dollars were lost by start-ups such as Boo.com, Clickmango, Etoy and Boxman in what was to become known as the dot.com crash. This was followed by a significant change in sentiments among investors who were no longer willing to put so much money into technology (Howcroft,2001). So what was wrong with these companies and why did they lose so much money? Porter (2001) argued that many dot.coms had forsaken strategy instead placing an unhealthy self cannibalizing focus on price.  He wrote that they “must pursue their own distinctive strategies, rather than emulate one another or the positioning of established companies” (Porter, 2001). Howcroft(2001) outlined how there were seven high profile myths associated with the internet that resulted in bad investment decisions. One of these myths was the creation of the “new economy”. Many people believed that we were about to begin an era of a new economy where everything would be digitalized and weightless, investors wanted to capitalize on this digitalized world. (Coltman et al,2001) argued that electronic business is not a “silver bullet” that can be applied to any business. Like Porter, (Coltman et al,2001) argued that we would see a return to traditional business values such as identifying customer proposition and putting the right people together. He proposed that established companies ask fundamental questions about whether or not their business model or product is conducive to the internet instead of jumping on unproven strategies. Rayport and Sviokla suggested a similar strategy ,they proposed that companies “evaluate their business, its strengths and weaknesses, its opportunities and risks, along the value chains of both worlds, virtual and physical”(Rayport and Sviokla,1995). Many companies failed to ask these questions and as a result lost out; this resulted in the stock market crash and a loss in confidence in the internet as a place to do business. As Laudon and Traver(2009) outline this was the “Wild West” period of the internet, when laws or courts were unable to control internet activity and young, hungry entrepreneurs dictated the pace of development. When the smoke had settled a new era commenced with a focus on business models.

After the dot.com crash it was realised that many firms were able to spend other peoples capital much faster than they could get customers to pay for their products or services, many companies realised that their business models were faulty whilst others were able to leverage the technology offered by the internet and create real value for customers (Laudon and Travers, 2009). This resulted in a new emphasis being placed on the definition and the creation of successful electronic commerce business models by academics. Business models were and still are considered a vital part of the success of any business, academics discussed them at length in numerous different contexts but were unable to understand them (Osterwalder et al,2005).  Timmers(1998) was one of the first academics to address the issue of electronic commerce business models. He proposed that there were 11 different types of electronic business models. These included e-shops, e-auctions and e-malls. He outlined the fact that many of the business models found online at the time were merely re-implementations of traditional businesses whereas others went beyond the traditional value chain and created something new and innovative. Similarly Stabell and Fjeldstad(1998) argued that the traditional business models were out of date and that a new more sophisticated business model was needed. (Osterwalder et al,2005) disagreed with Timmers(1998) idea that an online auction, online shop or e-mall could be classified as a business model. In the case of e-auctions he described them as being merely a pricing mechanism. He proposed that the idea of a business model be approached from a new more holistic point of view. He outlined nine business model building blocks that need to come together to create a successful business model. These building blocks are value proposition, target customer, distribution channel, relationship, value configuration, core competency, partner network, cost structure and revenue model and are accepted today as being a vital part of any organisation. These building blocks have been further subdivided and discussed. Most recently Anderson (2008) discussed how the “Free” revenue model was proving quite successful for both online and offline companies, examples of such companies are Ryanair(www.ryanair.com) and Google(www.google.com). Both offer services virtually free of charge and earn money through “extras”. In the case of Google they earn through advertising to their users, whereas Ryanair charge for extras such as luggage and in flight meals. Both have revolutionised their industries.

In 1965 Gordon Moore made a prediction that the number of transistors on a microchip would double every two years for the foreseeable future. This prediction has held true and has come to be known as Moore’s law and is the driving force behind the ever increasing array of technology at our finger tips (Intel, 2005). New trends and ideas are constantly deriving from this ever changing technology. In recent years we have seen the internet come from our computer terminals to our phones and the development of life changing trends such as social networking. One of the most exciting new concepts that have come to the attention of academics in recent years is that of crowd sourcing; this is the opening up of processes to anyone who wants to get involved or contribute. It is about enabling people to become involved, a good example of this is Wikipedia which uses the crowd to build an online encyclopaedia that is constantly updating. The concept of crowd sourcing has been further sub divided  to focus specifically on innovation, in a process we now call “Open Innovation”.

Henry Chesbrough(2003) who coined the term Open Innovation describes it as the use of inflows and outflows of knowledge to accelerate internal innovation. He assumes that firms can and should use external ideas as well as internal ideas. Just like electronic business open innovation existed long before the internet. One of the first recorded instances of it in use was when the British government offered a prize to the first person who could come up with a new way to measure the longitude of a ship. Another more pre-internet example of open innovation is the suggestion box; this was put in place in restaurants and hotels to help them improve their service. However, in recent years the suggestion box has disappeared as online feedback techniques have become more sophisticated (Koch,2010). With communication technology becoming ever more available the concept of using the “crowd” to source new ideas has become both feasible and logical. Chesbrough(2003) in his book describes how in today’s information rich world companies are unable to rely solely on their own in house ideas for new products. Therefore, a new paradigm has emerged that attempts to replace the old research and development department, this paradigm seeks to leverage the internet and its power to communicate with vast amounts of people to source complex solutions from the “crowd”.  In recent years we have seen this idea of using the crowd to develop products being applied to create a new ultra efficient business model. Companies like Zazzle(www.zazzle.com), cafepress(www.cafepress.com) and threadless(www.threadless.com) allow designers to upload images to be placed on t-shirts, these are then bought by other users. This is a clever business model for a number of reasons. Firstly, they get top quality designs as they have a large selection of talented designers working for them, none of whom they have to pay. Secondly, they have the consumer voting for their favourite t-shirts, this mechanism ensures that they are always listening to what the consumer has to say. The eventual consumers are choosing which range of t-shirts to bring out. This creates a direct link between the design process and the eventual buyer. Website’s like innocentive(www.innocentive.com) and innovationexchange(www.innovationexchange.com) specialize in posting problems or as they call them “Challenges” with big cash prizes for the individuals who can solve the challenge. Research has shown that solutions in areas of technical difficulty often come from people who come from outside that field of study (Howe, 2006).  Governments are also using open innovation, Ireland was at the forefront of this movement when they introduced the “your country, your call” competition to find a solution to Ireland’s economic problems (Koch,2010).

Although the majority of material written about open innovation is positive there are some notable exceptions. Woods (2009) spoke about some of the unnoticed or unthought-of failures that go with open innovation. He mentioned how companies put misplaced faith in the crowd.  He believes that “We need to nurture and fund inventors and give them time to explore, play and fail.  A false idea of the crowd reduces the motivation for this investment, with the supposition that companies can tap the minds of investors on the cheap.”(Woods,2009). I think that Woods makes a very good point. In recent years too much faith has been put in open innovation and crowd sourcing. Many academics have even implied that the old research and development department maybe a thing of the past.  Although it can’t be denied that open innovation is a very powerful tool it cannot be left to stand alone. The majority of people who take part in these challenges are amateurs with other day jobs. Innovation is not only a very important part of business but it is a very important part of our society. We as a society need our most talented minds working full time in innovation. Otherwise they maybe too busy working in days jobs and trying to pay bills to invent the next big thing. Another reason for the importance of research and development in large companies is that it brings great minds together. Creativity and innovation usually comes from groups of people working together not a single person working alone. I believe that open innovation is a great compliment to research and development but it is not and should not be used as a substitute.

Books

1) Beynon-Davies, Paul (2004). E-business. New York: Palgrave MacMillan.

2) Bocij, Paul.Chaffey, David.Greasley,Andrew.Hickie,Simon (2006). Business information systems: technology, development and management for the E-Business. Essex: Pearson.

3) Chaffey, Dave (2004). E-Business and E-Commerce Management. Harlow: Prentice Hall.

4) Chesbrough,Henry (2008). Open Innovation: Researching a new paradigm. USA: Oxford.

5) Cunningham,Peter. Froschl, Frederick (1999). Electronic business revolution: opportunities and challenges in the 21st century. Washington: Springer.

6) Gillies,James .R. Cailliau (2000). How the Web was born: the story of the World Wide Web By James Gillies, R. Cailliau. Oxford: Oxford.

7) Jackson,Paul. J.Harris,Lisa.Eckersley,Peter M. (2003). E-business fundamentals . New York: Routledge.

8) Kalakota, Ravi.Whinston, Andrew B. (1996). Frontiers of electronic commerce. London: Addison-Wesley.

9) Kenneth C. Laudon. Traver, Carol Guercio (2009). E-Commerce Business. Technology. Society. 5th ed. New Jersey: Pearson.

10) Li,Feng (2007). What is e-business?: how the Internet transforms organizations. London: Blackwell Publishing.

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Articles

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2) Evans,Philip B.Wurster,Thomas S. (1997). Strategy and the new economics of Information. Harvard Business Review.

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6) Howcroft,Debra. (2001). After the goldrush: deconstructing the myths of the dot.com market. Journal of Information Technology. 16.

7) Kaplan,Steven. Mohanbir, Sawhney. (2000). E-Hubs:The New B2B Marketplaces. Harvard Business Review. 97-103

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10) O'Reilly,Philip.Finnegan,Patrick. (2010). Intermediaries in Inter Organizational networks:Building a theory of electronic marketplace performance.

11) Osterwalder,Alexander.Yves,Pigneur. Tucci, Christopher L. (2005). Clarifying business models:Origins,present, and future and the concept. Communications of the association for Information systems. 15 (1),

12) Porter,Michael E. (2001). Strategy and the Internet. Harvard Business Review. March.

13) Rayport,Jeffrey F.Sviokla,John J.. (1995). Exploiting the virtual value chain. Harvard Business Review. Nov/Dec

14) Stabell,Charles B. Oystein D,Fjeldstad. (1998). Configuring value for competitive advantage:On chains,shops, and networks. Strategic Management Journal. 19, 413-437.

15) Steinfield,Charles . (2002). Understanding Click and Mortar E-Commerce Approaches: A Conceptual Framework and Research Agenda. Journal of Interactive Advertising. 2 (2)

16) Timmers,Paul. (1998). Business Models for Electronic Markets. European Commission. 8 (2), 3-8.

17) White, Andrew. Daniel, Elizabeth. Ward, John and Wilson, Hugh (2007). The adoption of consortium,B2B e-marketplaces: An exploratory study. The Journal of Strategic Information Systems, 16(1), pp. 71–103.

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