Book Cover ArtDesigning Systems for Internet Commerce, Second Edition

    G. Winfield Treese
    Lawrence C. Stewart



For I dipped into the future, far as human eye could see, Saw the Vision of the world, and all the wonders that would be; Saw the heavens fill with commerce, argosies of magic sails, Pilots of the purple twilight dropping down with costly bales;
--Alfred, Lord Tennyson

Internet commerce has become the new frontier for businesses around the world. Although what is now the Internet began more than 30 years ago, only in the past few years have we seen significant use of the Internet for commerce. The explosive growth of the Internet has been accompanied by claims of business revolution, ways to "make money fast working out of your home," and even the end of the nation-state. In the late 1990s, many overhyped startups spent huge amounts of venture capital, promised to change the rules of their industries, and then went bankrupt on failed business models. Despite the collapse of many so-called dot-com companies, we believe that the convergence of the global Internet with commerce will fundamentally change the way business is done. This book is about how to create the systems that will make Internet commerce successful. Internet commerce brings new technologies and new capabilities to business, but the fundamental business problems are those that merchants have faced for hundreds or even thousands of years: you must have something to sell, make it known to potential buyers, accept payment, deliver the goods or services, and provide appropriate service after the sale. Most of the time, you want to build a relationship with the customer that will bring repeat business.

Why the Internet and Why Now?

In the short term, there are two reasons for a company to get involved in Internet commerce.
  • The top line: the ability to reach new customers and create more intimate relationships with all customers

    On the Internet, every business has a global presence. Even small and medium-sized companies can now easily reach customers around the world. The technology of computing and communications enables a business to know more about its customers, share more of its information with customers, and apply that information to improving relationships and creating sales.

  • The bottom line: dramatic cost reductions for distribution and customer service

    The Internet dramatically lowers the distribution costs for information and dramatically improves the ability to keep information current. Today’s customers are demanding more information about the products and services they purchase, and the ability to deliver that information (and do it cheaply) becomes an important part of making the sale. Furthermore, on the Internet, information may be the product. Over the long term, the Internet may well change the structure of the competitive landscape. Instant communications has already started to transform the relationship between businesses and their customers, and the conversion from physical to digital will change the sources of business value. In many cases we are still learning the nature of these changes. For example, will the network lead to great consolidation of suppliers or to a flowering of thousands of small merchants, each newly capable of global distribution? There are powerful arguments for both scenarios, and the past few years have seen successful examples of both. Even more fundamentally, businesses will face competition from companies that started in completely different industries, requiring fundamental reassessment of their value propositions for the customer. These considerations follow almost naturally from the technical and economic nature of the Internet. Following are some of the key properties of the Internet.

    Access to a Global Market

    Globalization is a common word these days, as advances in communication and transportation make it possible for businesses to operate worldwide. Suppliers and customers may be located anywhere. In many cases, countries are lowering or removing barriers to trade, encouraging more and more international commerce.

    The Internet is accelerating this trend. By providing worldwide, high-bandwidth communications, the Internet makes it possible to work more effectively with customers, partners, and suppliers around the world--but it does more than that. Because the cost of the communication is essentially the same whether the parties are down the street or halfway around the world, the Internet makes such collaboration and commerce much more efficient. In effect, everyone on the Internet can have a global presence. More to the point, everyone on the Internet actually does have a global presence, whether he or she thinks of it that way or not. Anyone on the Internet can view your Web page, for example, and you don't have to do anything special to enable him or her to do so.

    This is not to say that the Internet makes international trade easy. As we shall see, there are still issues of language, payment, currencies, taxation, and shipping, as well as differing national, regional, and local regulations. For many businesses, however, the experience may well be like those of any number of small bookstores who put up Web sites and suddenly received orders from Indonesia or Nepal. That the Internet is already making the world smaller is not an overstatement--it's the daily experience of millions of Internet users.

    Dramatic Reduction in Distribution Costs

    In the United States, sending a printed brochure or catalog in bulk through the postal service can cost several dollars for each recipient. Sending the equivalent in electronic mail, or simply providing the same brochureware on a Web site, requires some up-front investment to be on the network, but the per-recipient cost is nearly zero.

    One of the most intriguing possibilities of the low distribution costs is the ability to provide even more information at lower cost and to have that information be always accurate, up-to-date, and searchable. Customers of all kinds are demanding more, and more accurate, information about what they buy. Electronics engineers are interested in detailed specifications, sample schematics, and design notes for components that they might use for a new product. Consumers want to know how the product works, how it compares with others, even its environmental impact. The low cost of providing such information over the Internet makes it possible to do so: any other way would be prohibitively expensive.

    Of course, the same ideas hold for selling information products online. These "digital goods" can be delivered over the network cheaply and efficiently. For some products, this can mean eliminating expensive packaging, such as CD-ROMs and packing materials. For others, it is a new distribution channel that complements those already in place. The cost, low to begin with, is the same for customers all over the world.

    Strategic Issues

    We believe the advent of the Internet brings with it two strategic issues: concentration versus empowerment, and new competitive challenges.

    Concentration Versus Empowerment

    The Internet permits direct access from creators of value to consumers and greatly reduces the costs associated with distribution. This could lead to a great concentration of suppliers or to the opposite--the creation of tens of thousands of small and medium-sized suppliers to global niche markets. It seems likely that both will happen. On the one hand, there may be a handful of music supersites combining excellent prices, great customer service, and worldwide distribution, but there won’t be hundreds. On the other hand, easy access to a global community can enable marginal niche markets to reach a critical size capable of supporting a profitable business. For example, an electronic store serving the global market for antique buggy whips could be a viable business.

    New Competitive Challenges

    The Internet short-circuits traditional distribution chains in a way that can change the nature of competition. The most obvious are changes in geography and cost structure. Because it is not necessary to create an expensive distribution channel to enter a new territory, the Internet can bring formerly disjoint enterprises into direct competition. For the consumer, these lowered barriers of entry can create advantages, but for the producer, costs and efficiencies must become competitive worldwide.

    More interesting things start to happen when previously separate industries begin to compete. Consider the example of selling financial instruments. Traditionally, banks and brokerages have provided trading services, whereas publishers have provided comparative information. On the Internet, these lines become blurred and may disappear entirely. Because content can be linked directly to transactions, a user who links to a financial information site could place an order on the spot. Is the publisher in the trading business, or is the brokerage now a publisher? Sometimes the situation defies analysis, but thinking through who owns the customer relationship is a good place to start. As always, keep a very clear view of the value provided by your business to your customers.

    What Do We Mean by "Internet Commerce"?

    So far, we have used the term Internet commerce generally, without being specific about what it means. Because it means different things to different people, we want to be precise about what it means in this book. By Internet commerce , we mean the use of the global Internet for purchase and sale of goods and services, including service and support after the sale. The Internet may be an efficient mechanism for advertising and distributing product information (sometimes called brochureware in the trade), but our focus is on enabling complete business transactions.

    Other Types of Electronic Commerce

    Internet commerce is but one type of the more general electronic commerce. Electronic commerce has a much longer history, although much of it was behind the scenes, typically linking suppliers to large manufacturers or service organizations. Speaking broadly, electronic commerce includes the use of computing and communication technologies in the financial business, online airline reservation systems, order processing, inventory management, and so on.

    Historically speaking, the best-known idea in electronic commerce has been Electronic Data Interchange (EDI). Originally created for linking together the participants in the transportation industry, EDI has become a common tool for many organizations working with their suppliers and partners. EDI is really an umbrella term for many different kinds of activities, each specialized for a particular trading relationship. Creating an EDI relationship is often a long process, requiring detailed negotiation over message types and data formats (unless, of course, one party is powerful enough to dictate the terms to the other). EDI has been tremendously useful for many organizations that have created EDI systems and that could afford to invest in them.

    It is worth noting that EDI and the Internet do not exclude one another. Indeed, EDI, which specifies certain kinds of messages, can be used with the Internet, which is a way of moving data. Many companies are already using the Internet as the communications substrate for EDI applications, and there are specialized products on the market for creating EDI-Internet applications.

    Internet commerce, in contrast, transcends many of the restrictions of EDI. Companies can communicate over a shared public network, rather than building specialized networks or contracting for expensive Value-Added Network (VAN) services. EDI formats themselves are being replaced by Extensible Markup Language (XML) formats that are more general, more extensible, and easier to use. More importantly, the Web allows spontaneous business transactions between buyers and sellers with no prior relationships. That first step may be the beginning of a long-term relationship, and in some cases it will make sense for the trading partners to negotiate specialized messages, EDI or otherwise, to enable them to work together more effectively.

    Business Issues in Internet Commerce

    First and foremost, Internet commerce is about business: using the network effectively to achieve business goals. Current technology, including changes in both computing and communication, provides many tools that can be used in reaching those goals. If we do not have a clear idea of our business goals in using the network, then technology cannot help us achieve them.

    This is not to say that business goals cannot be changed to take advantage of current technology. Often the technology allows new kinds of operations that were previously too expensive. It is entirely appropriate, for example, to choose a new focus on closer customer relationships using the Internet to communicate with customers. Without the network, such a goal might have been too expensive or difficult to achieve. The Internet might enable a company to achieve that goal in a way that it could not have achieved it before. However, the business goal, including how to measure success, is the key, not just an idea such as, "Hey, we could send e-mail to our customers!" Indeed, a common problem with simplistic ideas such as this has been :What happens when they send back?"

    Business issues for Internet commerce cross the entire range of business activities, from attracting customers to fulfilling their orders, and from sales to accounting. They include questions that businesses ask about any new idea.

    Every company has many other questions used in evaluating new activities, and the Internet should not be exempted from such thinking.

    One thing to watch for in Internet commerce is that although the costs of getting started may seem very low, a project may grow to significant size over time. There is always something new to add--some new technology twist to throw in or a seemingly small extension to a Web site to incorporate. Setting up a Web site used to seem easy: a few HTML pages, hosting on a local Internet service provider (ISP), and maybe handling of some electronic mail. Contrast such a system with one that allows real-time catalog updates, keeps and uses customer profiles, takes payment in various ways, links to inventory and fulfillment systems, and provides customer support. One approach is to allow such functions to accrete willy-nilly onto an initial Web site over time; a second approach is to plan an evolving site, learning from each step and modifying the plan as appropriate. Although a company might succeed with the first approach, it probably will not have an accurate idea of what it cost, and it may not have any way to figure out whether or not it has succeeded. The second approach may not provide the instant gratification of getting a Web site running as soon as possible (although delivering a site quickly might be a goal of the more careful process), but it does allow a company to focus on what it is doing and what it is getting for its investment. We don't recommend a third alternative of designing and building the perfect system all at once. That takes a long time, and whatever is done will need to be changed as circumstances and technologies change, as they inevitably will.

    In large part, this book is about the issues involved in following the second approach (that is, the evolving Web site). Different companies will, of course, have different business issues and goals. In this book, we have set out to explore many that are common across businesses. Even when the issues are not directly on target for a particular business, we hope they will inspire other questions that are, leading to a successful plan for Internet commerce.

    Technology Issues in Internet Commerce

    Technology is, of course, what makes Internet commerce possible. The invention and subsequent spread of the World Wide Web, in particular, provided the technical foundation for many different applications, including those for business. Since its introduction, the Web has changed rapidly, with both rapid growth in usage and dramatic evolution in protocols, systems, and applications. For commerce systems, there are two key technology issues: which technology to use, and how to deal with the fast pace of technological change.

    This book is mostly about the first issue: how to apply Internet technology to business problems. Commerce applications bring together many technology components: the Web, databases, high-speed networking, cryptographic algorithms, multimedia, and others. Putting them together to form a secure, high-performance, integrated system can be challenging, but the principles and ideas presented here should provide some useful guidance. The earliest Internet commerce systems were custom software. Over the past few years, it has become possible to assemble a commerce system by using toolkits to integrate software modules and applications from different suppliers. Mature packaged application software for Internet commerce is available as well, in which a complete or nearly complete system is available from a single supplier, perhaps needing integration only to connect it to existing business systems.

    The second technology issue, the pace of change, is a fact of life on the Internet today, and there is no end in sight. To be successful, therefore, any commerce system must be prepared to accommodate and incorporate new technologies as they become available. The key to such adaptability is a coherent system architecture that lays out what is to be accomplished and why. By focusing on the ends and the fundamental principles, we can adopt new technologies that help us achieve those ends, while avoiding new technologies that may seem exciting but in reality do not fit in with our goals or the system. The rise of toolkits, modules, and application software help a great deal in coping with technological change, because the costs of adapting and using new technologies can be amortized over many customers .

    Who Owns Internet Commerce in an Organization?

    Who owns Internet commerce in an organization? Who operates the system? Is it sales and marketing, or the information technology (IT) group, or, if transactions are involved, the accounts receivable department? At first glance, this may seem an odd question to ask, especially because for any particular group the answer may appear obvious. In fact, the experiences of many companies suggest that a clear understanding of the answer is a critical factor in success. The problem is that it is far too easy to have more than one group think that it is driving Internet commerce for an organization, leading to confusion within the organization, as well as for customers. To compound the problem, fragmented attempts at Internet commerce will often result in money being spent on the same or similar basics: hardware, core software components, network connections, and so on. Such fragmentation can also confuse customers, who tend to think of a company as a single coherent entity, not a collection of divisions or business units that reflect internal organization.

    In reality, successful Internet commerce is almost always a combined effort, drawing on the strengths of many different groups within a company: sales and marketing for effectively presenting products or services on the Net, IT for operating or outsourcing the round-the-clock commerce systems, links to the accounting systems for transactions, and so on. In the past, many companies have begun their Internet presence as a fringe operation--often appropriately so, thereby avoiding the slowness and stodginess of a corporate bureaucracy. Today, however, using the Internet is not a luxury or an experiment for most businesses. Effective Internet commerce is an extension of a company’s business, and so should draw on the resources of the company. Internal bickering over ownership can easily lead a project (or projects) to failure, leaving a company unable to move quickly enough to adapt to the rapid pace of change in commerce applications. In our experience, successful Internet commerce demands the attention of senior management.

    Structure of the Book

    This book is divided into three parts. In the first part, we analyze the business requirements for Internet commerce and identify several fundamental design issues for commerce systems in business-to-business applications, retail, and the information industry. In the second part, we describe some of the fundamental technologies used for Internet commerce. We pay special attention to Internet and Web technologies, system design, cryptography and security, payment systems, and transaction processing. Finally, in the third part, we "put it all together" into hypothetical examples that show a complete system, and conclude with an assessment of the challenges ahead.

    Part One: The Business of Internet Commerce

    Chapter 2 examines the commerce value chain. Part of the design of any business system is to develop a clear and accurate view of all the elements necessary for the system to be successful. An engine does not make an automobile, and an entire car is useless without roads, gas stations, and passengers. The commerce value chain helps us identify all the elements necessary for success.

    Chapter 3 is devoted to Internet business strategy. The degree of change that the Internet makes in the economic landscape has not been seen since the development of the railroads 150 years ago. The consequent changes in economies of scale and scope require new strategic thinking.

    In Chapter 4, we introduce business requirements and issues for Internet commerce systems by looking at examples aimed at consumer retail, business-to-business cataloging, and the publishing and sale of information goods. A successful commerce system requires alignment among many constituencies, including consumers, merchants, financial processors, governments, and technologists. These groups have different priorities, and social, legal, and technological constraints can affect the viability of the business. Chapter 5 examines some of these issues in the context of Internet commerce. Many of the difficulties and problems with Internet commerce arise when these different groups are (or appear to be) in conflict. Successful businesses must navigate these shoals in working effectively with customers, partners, and suppliers.

    In Chapter 6 we discuss the components and roles of, and architectural approaches to, Internet commerce, and we introduce the concept of decomposition of functions and the notion of trust models. Approaching the design of a system using a high-level architecture can allow the creation of a system that evolves and adapts over the long term as technologies and business requirements change.

    There are many ways to design, develop, install, and operate information technology systems, from in-house development to packaged software operated by a service bureau. Chapter 7 addresses the planning and project management issues that go far beyond the features and functionality of software.

    Part Two: The Technology of Internet Commerce

    The second part of the book focuses on technology issues, with an eye toward understanding the key ideas underlying the technology.

    As an introduction, Chapter 8 surveys the technological underpinnings of the Internet and the World Wide Web. In Chapter 9, we go beyond the basics to look at how the technology can be applied to systems for Internet commerce.

    In Chapter 10, we discuss a philosophy of design, architectural principles, and the making of design decisions. These decisions are often independent of implementation technology, which enables an implementation to swap in new technological components as they are developed.

    The Extensible Markup Language (XML) was just emerging when the first edition of this book was published. Chapter 11 examines XML in detail, and discusses how XML can be used in many different ways for e-commerce systems. In particular, XML is a core technology of the emerging area of Web services.

    Chapter 12 discusses the creation and management of content for Internet commerce. Loosely speaking, content is whatever people look at, or listen to, on the Net, including documents, video, music, and so on. We survey the means of creation, management, and commerce-enabling of content.

    One of the biggest issues for Internet commerce systems is security. Modern cryptography is the foundation of security systems for commerce, and Chapter 13 provides a quick overview of the field. Simply using cryptography (in some unspecified way) rarely creates a secure system, so we discuss how to think about the use of cryptography in applications. In Chapter 14, we go beyond the foundation of cryptography to the design of secure systems. We advocate a systemic design approach to the security of Internet commerce systems. Proper use of cryptography is a key factor, but careful design of security policies, mechanisms, characteristics of the application, and containment procedures all play important roles.

    Payment systems have often been touted as the core of Internet commerce systems, and they clearly play an important role. In Chapter 15 , we discuss a variety of payment systems and their application to Internet commerce. Beyond the technical aspects of payment systems, we discuss their trust models and cost structures.

    In the early days of Internet commerce, shopping carts were relatively simple. This is no longer the case, and we examine shopping carts and order management in detail in Chapter 16.

    Commerce is an exchange of goods for value received. Transaction processing is the part of the system that ensures that a business transaction is completed once the parties agree to it. In computer systems, especially those distributed across a network, this is often not as easy as it seems, especially when something goes wrong. Chapter 17 introduces this complex topic, including a discussion of issues such as scaling, performance, reliability, and business record keeping.

    Enterprises require complete business solutions, and Chapter 18 examines the challenges of integrating Internet commerce systems with other enterprise computer systems. It also details some of the auxiliary systems necessary for dealing with taxes, shipping, and inventory.

    As Internet commerce has grown in importance, so has the importance of building systems for high performance and high reliability. In Chapter 19, we look at some of the architectural approaches for building large-scale e-commerce systems.

    The final chapter on Internet commerce technology, Chapter 20 looks at the emerging area of mobile and wireless systems and the role they play in e-commerce systems.

    Part Three: Systems for Internet Commerce

    Now that we have created a plan and surveyed available technology components, how can we assemble a working system? Chapter 21 describes hypothetical examples of comprehensive systems for Internet commerce, tying together many of the technologies and design issues explored in the previous chapters. The examples cover business-to-business, business-to-consumer, and information commerce systems.

    Over time, Internet commerce will change rapidly. Once your system is up and running, how do you keep up-to-date in this rapidly changing world? We discuss how to stay on track when buffeted by the evolution of technology, and Chapter 22 lays out some paths for the future. Alfred, Lord Tennyson, Locksley Hall (1 842). Like many technologies, the Internet comes in layers. The base layer of the Internet includes the fundamental naming, addressing, routing, and communications machinery. Above that, the World Wide Web is a particular, extremely popular application that uses the Internet for communications. In turn, business applications can run layered on top of Web technologies. We explore the details more fully in .

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