Book Cover ArtDesigning Systems for Internet Commerce

    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
--Alfred, Lord Tennyson

Internet commerce has become the new frontier for businesses around the world. Though what is now the Internet began over 25 years ago, only in the past few years have we seen significant use of the Internet for commerce. The explosion 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. But what is the substance behind the sizzle?

We believe that the convergence of the global Internet with commerce will fundamentally change the way business is done, and this book is about making Internet commerce successful. Internet commerce brings some new technology and new capabilities to business, but the fundamental business problems are those that merchants have faced for hundreds--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:

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 Internet dramatically lowers the distribution costs for information, and dramatically improves the ability to keep information current. In a world where customers of all kinds are demanding more information about the products and services they purchase, the ability to deliver that information (and do it cheaply) becomes an important part of making the sale. And 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 will transform the relationship between businesses and their customers and the conversion from physical to digital will displace the source of business value. In many cases we cannot yet see the nature of the 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. Even more fundamentally, businesses will face competition from companies 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.

Almost by definition, a computer is connected to the Internet if it can communicate with any other computer connected to the Internet. There are two factors that make this possible: the use of standardized protocols and the availability of universal naming, addressing, and routing. The standards of the Internet make this communication possible, without requiring prearranged agreements about how computers will communicate.

Because the Internet structure is based on standardized and universal connectivity, it has rapidly become a global network. Since the network itself is used to distribute software, there is a readily available worldwide base of users with a common set of software, forming a foundation for business systems with a broad base of potential users.

The World Wide Web has made highly functional multimedia content easily available to users worldwide. People with little or no computer experience can get connected to the Internet and use Web browsers very successfully.

Most businesses and consumers connected to the Internet pay for their own connections, and they are then free to use the network for any number of purposes. In consequence, a provider of information does not need to pay for a distribution system, other than its own connection to the network. The users of the service pay for the distribution. Because the network is shared among many users, the cost of this essential infrastructure is amortized across a wide variety of applications.

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 also 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 they think 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 worry free. As we shall see, there are still issues of payment, currencies, shipping, and differing national, regional, and local regulations. But for many businesses, the experience may well be like 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 U.S., 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 up-to-the-minute accurate and searchable. Customers of all kinds are demanding more and 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 to 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 or software online. These ``digital goods'' can be delivered over the network cheaply and efficiently. For some products, that can mean eliminating expensive packaging (boxes, CD-ROMs, packing material, etc.) entirely. For others, it is a new distribution channel that complements the channels 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 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 changes are those of 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 competition crosses between whole industries. 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 transaction, 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. Internet commerce means many things to many different people, so 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, though 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, it has become common 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 who have created EDI systems and could afford to make the investment 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. Already many companies are 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. The communication can take place over a shared public network, rather than building a specialized network or contracting for expensive Value-Added Network (VAN) services. More important, the Web enables spontaneous business transactions between buyers and sellers with no prior relationship. 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. The technology, including changes in both computing and communication, provides many tools to 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 change to take advantage of the technology. 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 may 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 before. But the business goal, including how to measure success, is the key, not just an idea like, ``Hey, we could send e-mail to our customers!''

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 of 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 out for in Internet commerce: the costs of getting started may seem very low, but over time a project may grow to significant size. There is always something new to add: some new technology twist to throw in or a seemingly small extension to a Web site. Setting up a Web site seems easy: a few HTML pages, hosting on a local Internet Service Provider (ISP), and maybe handling 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 functions. One approach is to allow such functions to accrete willy-nilly onto an initial Web site over time; a second approach is to plan the site to evolve, learning from each step and modifying the plan as appropriate. Although a company might succeed with the first approach, it will likely have little idea of what it cost, and may not have any way to figure out if it has succeeded or not. The second approach may not provide the instant gratification of getting a Web site running as soon as possible (though that 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--designing and building the perfect system all at once. This will take a long time, and whatever is done will need to change as circumstances and technologies change, as they inevitably will.

In large part, this book is about the issues involved in following the second strategy. 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 others 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: what technology to use and the fast pace of technological change.

This book is mostly about that 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. More recently, it has become possible to assemble a commerce system by using toolkits to integrate software modules and applications from different suppliers. We are now seeing the emergence of packaged application software for Internet commerce, 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, which 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 technology change, since 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 MIS group? Or, if transactions are involved, the accounts receivable department? At first glance, this may seem an odd question to ask, especially since 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, 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.

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, MIS for operating or outsourcing the round-the-clock commerce systems, links to the accounting systems for transactions, and so on. An Internet presence may begin as a fringe operation--often appropriately so, thereby avoiding the slowness and stodginess of a corporate bureaucracy. But 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. Because of the perceived critical importance of the Internet, an Internet commerce project may attract the attention of, or even be initiated by, senior management.

Structure of the Book

This book is organized into three parts. In the first part, we analyze the business requirements for Internet commerce and raise a number of fundamental design issues in the context of commerce systems for business-to-business applications, retail, and the information industry. In the second part, we describe some of the fundamental technologies used for commerce on open networks. 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 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 business systems 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, roles, and architectural approaches to Internet commerce, and introduce the notions of decomposition of function and of trust models. Approaching the design of a system with a high-level architecture can enable 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 technology 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.

Chapter 11 discusses the creation and management of content for Internet commerce. Loosely speaking, content is whatever people look at on the Net. We survey the means for creating, managing, and commerce-enabling content.

One of the biggest issues for Internet commerce systems is security. Modern cryptography is the foundation of security systems for commerce, and Chapter 12 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 application of cryptography to applications. In Chapter 13, 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 part, but careful design of security policies, mechanisms, characteristics of the application, and containment procedures all play important roles.

Payment systems are often seen as the core of Internet commerce systems, and they clearly play an important role. In Chapter 14, 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.

Enterprises require complete business solutions, and Chapter 15 examines some of the auxiliary systems necessary for dealing with taxes, shipping, and inventory.

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 16 introduces this complex topic, including a discussion of issues such as scaling, performance, reliability, and business record keeping.

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 17 describes one approach to packaged application software for Internet commerce.

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 18 lays out some paths for the future.

Last Modified: 11:33am , April 28, 1998

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