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?B2b In Sme?S: Perspectives And Future Challenges?, Essay, Research Paper

Chapter 1

Introduction

1.1 Purpose and Content

The Forrester report (Feb. 2000) in an article entitled ?eMarketplaces Boost B2B Trade.? Predicts that ?B2B (business to business) e-Commerce will reach $2.7 trillion in 2004. While Internet trade between individual partners will continue to flourish, eMarketplaces will fuel most of the growth reaching 53% of all online business trade in five years.? These figures would suggest that it is imperative that SME?s embrace the e-commerce world that is unfolding around them, to ignore it, could be the business equivalent of hara-kiri.

In this dissertation entitled ?B2B in SME?s: Perspectives and Future Challenges?, The opportunities and challenges faced by SME?s in the B2B environment will be examined in detail. Disruptive technologies and repeating patterns in retailing will be reviewed and the new developing strategies and business models available using the Internet will be discussed and the benefits they bring to both buyers and sellers will be investigated as part of the research study. Primary research will be conducted, analysed, reviewed and presented to illustrate the way in which SME managers? view B2B commerce. The research questions guiding the reported work will be detailed later.

1.2 E-Commerce: An Introduction

Electronic Commerce (e-commerce) is a means of using the power of computers, the Internet and shared software to send and receive product specifications and drawings; bids, purchase orders and invoices; and any other type of data that needs to be communicated to customers, suppliers, employees or the public. (xxx) E-commerce is the new, profitable way to conduct business which goes beyond the simple movement of information and expands electronic transactions from point-of-sale requirements, determination and production scheduling, right through to invoicing, payment and receipt. E-commerce uses key standards and technologies including Electronic Data Interchange, Technical Data Interchange, Hypertext Mark-up Language, eXtensible Mark-up Language, and the Standard for Exchange of Product model data. E-commerce is made possible through the expanded technologies of the Internet, the World Wide Web, and Value-Added Networks.

The Internet is creating unprecedented and seemingly infinite opportunities for both its businesses and customers. Yet it is changing so fast that the speed of change and the sheer number of choices available to companies often overwhelm managers and customers alike. In addition to this the rules of the Web are slightly different to those of traditional businesses. E-commerce is not constrained by the rules that have restricted companies historically in the normal codes of business conduct. Companies can now set new standards in profitability and efficiency. This is turn leads to the consumer, in either the business to business (B2B) sector or business to customer (B2C) sector, getting the right product, in the right time, to the right place for the right price, this will be referred to as the retailers mission. (XXX)

An additional attribute of the Internet is that it lacks a central authority, in other words, there is no ?Internet, Inc.? which controls the Internet. Beyond the various governing boards that work to establish policies and standards, the Internet is bound by few rules and answers to no single organisation.

1.3 Disruptive Technologies

?A disruptive technology enables innovative companies to create new business models that alter the economics of their industry?. (Christensen and Bower 1995)

In retailing the Internet is not the first such disruption that came with the emergence of the department store and was closely followed by the mail order catalogue. Then followed discount department stores and finally, in the early 1990?s came the Internet, the fourth disrupter. Internet companies such as Amazon.com are changing the way things are bought and sold. These Internet companies pose powerful threats to competitors with more conventional business models. ?As with earlier disruptions, Internet retailing has initially focused on simple merchandise. The question is how fast will e-tailers move upmarket?? Evans and Wurster (1999)

1.4 Retailing Patterns

?The Past may not tell us everything about the future of electronic commerce but it reveals more than we expect? Christensen and Tedlow (2000). Retailing since its inception has been all about profitability. Profitability is largely determined by two factors: margins and the frequency at which stocks can be turned over. However, while such disruptions change the economics if an industry they do not necessarily have to effect profitability. Department stores in the early 1900?s were earning a gross margin of 40% this coupled with an average inventory turnover of three times per annum, gave an annual return on capital invested of 120%. The discount department stores then operated with gross margins of 23% with annual inventory turnover of five, giving 115%, a figure quite similar to their predecessors. The fourth retailing disruption is now underway, instituted by the Internet, a company like Amazon.com can turn their inventory over a staggering 25 times a year, a simple multiplication now determines that a gross margin of 5% is only necessary to compete with their traditional rivals. It is clearly visible that the Internet is delivering remarkably well on three out of four points of the retailer?s mission, with the exception being time.

1.5 Implications for SME?s in Ireland

The reported work seeks to examine such changes in an Irish context and evaluate the implications of Internet changes for the SME sector in Ireland. Specifically, the project will examine managerial attitudes and opinions towards B2B commerce and the challenges faced by such companies in the evolving Internet economy. The following research questions are of significance to the study:

Is there an understanding of e-commerce, the Internet and B2B amongst SME managers?

Are they familiar with the ways of fully utilising B2B?

What are the opportunities for involvement in B2B?

What are the benefits for involvement in B2B? Are there effects if not?

What investments are necessary in training and development?

What way will it effect existing business relationships?

Chapter 2

The Evolving E-commerce Economy

2.1 Introduction

This dissertation will examine B2B transactions in an SME context and will seek to determine the nature and extent of B2B among small businesses in the Southeast region. The change the Internet offers, is the improved efficiency in exchanging information. The transaction costs have declined and it is easier and cheaper for a company to exchange information with other companies. Enormous information technology investments are no longer needed to interact with supply chain partners electronically. The solutions should be within reach for all companies independent of size.

2.2 Definitions of E-commerce

?E-commerce is the ability to perform transactions involving the exchange or use of goods or services between two or more parties using electronic tools and techniques?. Treese and Stewart (1998) Some main technologies have made e-commerce viable ? www, Electronic Data Interchange (EDI), Electronic Funds Transfer (EFT) and E-mail.

?EDI is the inter-organisational, computer-to-computer exchange of business documentation in a standard, machine-processable format. EFT was designed to optimise electronic payments with electronically provided remittance information.? Kalakota and Whinston (1997)

E-commerce provides the capability of buying and selling products and information via telephone lines, computer networks, and other electronic means. The Internet, the largest network of computer networks, is the medium usually favoured for electronic commerce because it allows an organisation to cut service costs while increasing the speed of service delivery.

E-commerce is considered a primary means by which organisations may expand rapidly into the high growth emerging markets of the world. This is possible because, firstly as transnational companies become skilled in their use of the Internet, they will be able to pursue global electronic commerce more efficiently, saving important advertising, communication, and administrative costs. Secondly, the Internet can increase responsiveness by notifying individual customers when new products in their areas of interest become available and by creating customised products and services. Thirdly and finally, transnational companies using the Internet can increase their knowledge about consumer habits, be able to define trends, and turn consumer statistics into long-term customer relationships. Boudreau et al (1998)

2.3 B2B E-Commerce

Forrester Research defines business-to-business e-commerce as ?inter-company trade in which the final order is placed over the Internet?. The definition is constricted, since the order is only one of the transactions needed between trading partners.

It is ?Information and telecommunication enabled collaboration across horizontal and vertical value chains?. (Eloranta 2000) E-business creates a platform for co-ordinating demand/supply chains and wider business networks. Another aspect at micro level is that e-business makes it possible to capture a vast number of one-to-one relationships.

E-business models are ?all the business models using the Internet as a means of information delivery? (Huttunen 2000). This definition is encompassing, since it includes all kinds of relationships.

B2B e-commerce was born out of an attempt to solve an administrative problem. It developed a new computer standard to handle these needs, which became known as EDI, Electronic Data Interchange. Today its descendant, XML, a lighter, simpler data interchange standard is used by B2B sites. Simple e-commerce sites first appeared in 1992. The early e-commerce sites were virtual catalogues, simply listing products for sale. Ordering was off-line, through e-mail, phone or fax. By 1996 the technology had advanced greatly to produce virtual stores with shopping carts, client accounts and, with the development of protocols such as Secure Socket Layer, enabled customers to order and pay for their purchase on-line directly by credit card. (www. Shelron.com ?E-commerce: A Brief History?. 2000)

B2B e-commerce quickly became popular with consumers and suppliers. For customers, it was fast, easy and efficient, allowing them to compare products, price and service before purchase. For suppliers, it allowed them to reach an unlimited international audience, 24 hours a day, 7 days a week at reduced costs. Today e-commerce is widely used and growing fast. B2B is the largest, fastest growing and most profitable market. According to the Internet Development Company (IDC), this year, it is expected to account for two thirds of world wide e-commerce. B2C is also expected to grow, boosted by Broadband (high-speed) Internet access to more on-line households. Future advances include digital money and e-wallets, and ‘personal agents’ that help users find what they are looking for and of course WAP phones. Sites can work with fulfilment centres providing customers with excellent service and suppliers with information, and can support the newest trend for human interaction in e-commerce customer service.

2.4 The Importance of the Internet in B2B trade

In an AT Kearney Report (AT Kearney, 1999) possible channel strategies that the Internet offers are outlined as follows:

a) Selling

b) Electronic marketing, advertising and promotion

c) Digital distribution of goods and services

d) After-market products and customer support

In the area of operations, the following uses of the Internet have been listed (AT Kearney, 1999):

a) Online publications and communications

b) Procurement and sourcing

c) Digital co-operatives

d) Transportation and logistics

e) Digital supply chain

f) Digital configuration

g) Global communication and production

h) Integrated enterprise resource planning systems

i) Variable pricing

2.5 Some Impacts of the Internet on Business-to-Business (B2B) E-commerce

It has already been suggested that the Internet will revolutionise the traditional ways of doing business; and it will also bring changes for the B2B sector. These may be detailed as follows: -

a) Access to more partners, customers or suppliers

If within consumer businesses there exists an opportunity to reach a wide group of consumers, in the B2B area there also exists an opportunity to reach more suppliers, even globally. It is not a problem to share sales and inventory information with more suppliers with company benefits through lower purchasing prices.

b) Outsourcing and specialisation

Manufacturers and distributors are in a more difficult situation. While requirements have grown, speed, accuracy, service level and customisation requirements are high. While specialisation is needed, outsourcing has become more attractive as it is more cost-effective than before thanks to more efficient communication. Henriott (1999)

However, not all companies outsource their production. They fear losing control over intellectual property and quality or leaking innovations to competitors. They also want to keep in touch with customers and industry trends. Engardio (1998)

c) The changing role of the customer

Relationships may change in B2B e-commerce. Customer know-how is employed in many e-commerce cases, as the customer has the facility to configure the product required and in some cases the control of the supply chain is also customer controlled. The customer is now more demanding and is pleased to get information about the delivery phases. A more active customer now exists and performs tasks previous carried out by the supplier. The end result, a more satisfied customer. Henriott (1999), Slywotzky (2000)

In integrated supply chains the partners become more loyal, the relationships deeper and the ties between the companies stronger. However, the Internet offers the customer a way to seek out lowest prices and forms a threat for strong loyalty. Slywotzky (2000) Prahalad (2000)

Customers are equipped with more information using e-commerce. They become more demanding and this requires the supply chain to be flexible, quick and accurate. As customers control the supply chain, the power shifts from suppliers to customers.

d) The changing structures

Lancioni et al. (2000) in an article ?The Role of the Internet in Supply Chain Management? Predict that supply chains will shorten as a consequence of B2B e-business. Companies may be in direct communication with customers, industrial or consumers, when it is a question of sales or marketing. But, because outsourcing increases, there will be cases where supply chains become longer and/or more complicated.

e) Better service levels

The article further outlines that ?quality levels of the operations will increase in B2B e-commerce. Trade-offs are no longer needed, goals concerning service levels and inventory levels, for example, are no longer alternatives. However, the requirements and expectations have grown too. What was previously regarded as an excellent service may now be taken as a given.

f) Collaboration

?In the area of supply chain management, the use of the Internet is on a quite low level. A survey of the role of the Internet in supply chain management? (Lancioni et al. 2000) indicated that the Internet seems to be used only in single transactions. The survey did not focus on collaboration or the changes in the structure of a supply chain caused by the Internet. There appears to be vast possibilities that remain unused.

2.6 The Impact of B2B E-commerce for Irish SME?s

Jim Coffey, SoftCo CEO, addressed the Chartered Accountants in Business Conference of the Institute of Chartered Accountants in Ireland, 26 September 2000. He stating that ?B2B ecommerce is all about establishing win-win trading relationships. Astute businesses view the Internet as a ubiquitous network, enabling them to streamline their supply chains, enter lucrative new markets and trade electronically. The New Economy demands that organisations rethink their existing business strategies, as those that do not take an aggressive approach and adopt new and innovative business models could find themselves at a severe competitive disadvantage?

Further McGowan has suggested that ?I see electronic commerce is nothing less than a revolution, which will change the basis of doing business? McGowan (1999)

Electronic Commerce represents as Kieran McGowan rightly pointed out nothing less than a revolution in the way business is carried out. As the reported work has indicated earlier, e-commerce fundamentally changes the business environment. It leads to different intermediaries, new products, new markets and new business consumer relationships as well as new channels for diffusing knowledge and for interaction in the workplace. The potential is huge as Irish B2B ecommerce transactions are predicted to grow from $500million in 1996 to $62 billion by the year-end 2000. McGuinness (1999)

The SME sector is vital to the economic success of the Irish nation, given the contribution of small business to economic growth and job creation. Business with under 50 employees account for 98% of the country’s businesses and more than 90% of Irish businesses employ fewer than 10 people. According to the National Competitiveness Council’s Annual Competitiveness Report 1998, SME’s are an essential element of national competitiveness. A well-developed and vibrant SME sector will be an important source of innovation. Most new firms begin in the SME sector and they can also be a breeding ground for new products and services.

2.7 The Irish Situation

Given the above statistics, it would be fair to say that B2B e-commerce offers numerous opportunities to businesses, but are Irish SME?s taking advantage of the opportunities afforded to them by e-commerce, specifically in the business to business context.

The Annual Competitiveness Report 1998 points out that in general IT applications are used less by SME?s than by larger businesses. The main reasons for this are the high costs associated with the applications, their poor suitability to the needs of the small business and the SME?s own lack of IT knowledge. The report also points out that SME?s are also at a disadvantage with regard to telecommunication costs. Unlike larger enterprises they are not they are not in a position to negotiate bulk discounts. Given these barriers it would appear unlikely that Irish SME?s are seizing the opportunities offered by ecommerce.

A recent report by the Information Society Commission also had some worrying statistics regarding the use of information technology by SME?s. While 62% of large companies in Ireland see new technologies as essential, only 22% of small companies do. A worrying 25% of SME?s feel that new technologies will have little or no impact on their competitiveness. These are issues of importance.

2.8 the Southeast situation

Mary Harney T.D., An T?naiste and Minister for Enterprise, Trade and Employment officially launched the Wales & Ireland e-Commerce (WIRECOM) initiative in Ireland. WIRECOM is an Interreg supported initiative designed to help SMEs in the South East of Ireland and West Wales identify how e-Commerce can assist in the development of their business. It is envisaged that, with the assistance of WIRECOM, Southeast SMEs will be better prepared and resourced to compete in the e-commerce world of the future.

Speaking at the launch the T?naiste said “The global nature of modern communication technologies will shrink the planet and do away with the obstacle of distance. This presents many opportunities for small business. Small business has the quality of flexibility, quickly adapting to a rapidly changing environment and responding to new market conditions and changes arising from such things as economic restructuring, technological change and new production methods. Today’s launch of an innovative new e-Commerce initiative, will facilitate forward-looking SMEs in successfully competing in the global marketplace.”

Initial research by the WIRECOM project team has revealed that the adoption of e-Commerce by SMEs in the South East of Ireland is lagging behind that of the National average.

“We have found that although there is strong general awareness of e-Commerce amongst the business community in the South East, there is still a reluctance or slowness to implement e-Commerce tools such as e-mail and on-line selling which is at variance with National trends. ” said Patrick Munden Project Manger WIRECOM.

“Only 35% of manufacturing companies in the South East use e-mail and an even lower figure (12%) have implemented web sites or electronic catalogues”, he continued.

These statistics when viewed against the recent findings of the Information Society commission, which stated that the National average for e-mail usage is 80% and Website implementation at 55%, indicate that business in the Southeast is lagging behind.

The WIRECOM project will address these issues and is offering free e-Commerce evaluations to selected SMEs in the Southeast which will be undertaken by experienced business consultants from the South East Business Innovation Centre, in association with research assistants from the Waterford Institute of Technology.

Consultants will visit the SME, learn its processes, discuss its business issues and identify how e-Commerce can improve business efficiencies. Research will then establish how e-commerce is impacting on that SME?s particular Industry and identify what suppliers, competitors and customers are doing on-line. A report is then presented to the SME detailing the options available and recommending potential strategies for the best way forward.

If an SME has already implemented e-Commerce tools, such as a Website, the project consultants can give a non-biased view of its effectiveness and will identify marketing techniques to increase the site?s productiveness and the overall benefit of the site to the SME.

The project is open to all small and medium sized companies in manufacturing or Internationally Traded Services in the Southeast region and is being operated in conjunction with several agencies in West Wales where a similar programme for Welsh SMEs is currently in operation.

The project is funded by the EU Interreg II Programme and will be running until March 2001.

Chapter 3

B2B: The Challenges and Potential Benefits for the SME Sector.

3.1 Introduction: B2B E-commerce Potential Benefits and Challenges

A 3 Com technical paper Anon 2000: ?Business to Business Electronic Commerce. Market Landscapes and Solutions? States there is a wide range of potential benefits motivating today?s SME?s to undertake B2B e-commerce initiatives, including the following:



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