Electronic Commerce on the Web: Digital Drivers for 1999

By Friel, Daniel | Business Economics, January 1999 | Go to article overview
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Electronic Commerce on the Web: Digital Drivers for 1999


Friel, Daniel, Business Economics


The Web is changing the way firms do business. From a consumer behavior standpoint, we have seen mounting evidence of consumer readiness for electronic commerce (e-commerce). Rising numbers of consumers and businesses are equipped with PCs and Internet access, poised to bypass paper transactions in favor of electronic information interchange. In the past four years alone, the proportion of households owning PCs equipped with modems rose from 12 percent to 30 percent, and the ratio is projected to rise to 47 percent by the year 2000. Consumers are migrating to electronic space for payments. In 1990, consumers used checks for 86 percent of household payments, compared to 79 percent today. Similarly, 4 percent of payments in 1990 were by electronic debit, compared to 9 percent today.

There is still a great deal of debate over the value of e-commerce. Looking at the same market data, experts have disagreed strongly about its impact. Some see exponential growth in the sale of goods over the Internet continuing. Eventually, they expect e-commerce will become the standard for a substantial portion of commerce. Others argue that, in absolute terms, e-commerce represents a tiny fraction of all commerce. They see immature applications and an unsophisticated customer base. They predict that e-commerce is at best a limited application with questionable long-term value.

Which "experts" are right? E-commerce projection is fraught with uncertainties. No one can truly predict the path that e-commerce will take. While the fundamental laws of economics have not changed, the economics of the physical world must be reassessed in the bits-based electronic commerce world. The web browser was the fundamental innovation that opened the door to the PC to the masses and enabled the early growth of e-commerce. The emergence of webcapable appliances is likely to displace the requirement of PC-based access and has a high potential to push the next major wave of e-commerce innovations. The demographic imbalances on web usage are clearly tilted towards the under 50 crowd. Nonetheless, the most rapidly growing demographic group on the Internet currently is retirees.

In spite of upbeat predictions for consumer-driven e-commerce, business readiness far exceeds that of the consumer (see Alice Rivlin's comments on "The Federal Reserve's Roles in the Payments System" at http://www.bog.frb.fed.us/boarddocs/speeches/19980928.htm). A growing readiness for e-commerce is apparent in the business community, with the largest change in the small business community. In 1995, 41 percent of small business treasury personnel were equipped with a PC and a modem, and just 2 percent were using the equipment for online banking functions. In 1997, 60 percent were equipped with a computer and modem and 18 percent were either using online banking functions or plan to this year. A report from the National Association of Purchasing Management noted that 93 percent of purchasing managers had Internet access at the end of 1997 and another 5 percent plan to get it soon. Business-to-business currently accounts for 80 percent of e-commerce. The OECD estimates that e-commerce reached $26 billion in 1998 and will rise to $1 trillion by 2005.

Business-to-business applications dominate e-commerce today. Supply chain management tools dominate business e-commerce applications. Product information delivery, payment terms, and instructions are sent electronically. This interface can be highly integrated into each party's operations. When a product is purchased off the shelf, a retailer can reorder new inventory automatically as it is scanned at the checkout. The supplier then can deliver daily with whatever is required by the customer. In turn, the supplier can readily model parts inventory for itself so that it holds as little finished goods as possible, and so on down the value chain.

Supply chain management has changed the complexion of industry.

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