e Business

e‐Business

Lecture 4 
19th Feb 10
Feb 10

e‐business, M Umair, Iqra University, 
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 What we have learnt previously
What we have learnt previously
i. Market
ii. Hierarchical organizations
iii Why create company
iii. Why create company
iv. Transaction Cost
v. The Role of Electronic Network
Th R l f El t i N t k
vi. Network Economic Structure
vii. Law of Diminishing Return
viii.Network Effect
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 What we will learn today
What we will learn today
ii. Pre Cursor to e
Pre‐Cursor to e‐business
business
ii. Electronic Data Interchange
iii
iii. Value Added Network
l dd d k
iv. Quiz

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 Pre‐Cursor
Pre Cursor to e
to e‐business
business
• Early examples date back into 1970
Early examples date back into 1970’ss

– Baxter Healthcare
Baxter Healthcare
• Used telephone based modem to record supplies
• 1980
1980’ss used pc based remote order entry system
used pc based remote order entry system

– EDI
• Electronic Data Interchange
• Developed in 1980’s

e‐business, M Umair, Iqra University, 
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 Pre‐Cursor
Pre Cursor to e
to e‐business
business
• Firms can exchange commercial documents digitaly
• used private networks (VAN)

– FFrench Minitel
h Mi i l
• Launched in 1980’s by French postal dept.
• Online purchase
Online purchase
• Stock Price
• Tickets
• Search Telephone Directory

None of them had internet functionality

None of them had internet functionality
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 Electronic Data Interchange
Electronic Data Interchange
• Its
Its computer to computer transfer of business 
computer to computer transfer of business
information.

• Its between two business entities using a 
standard format
d df

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 Electronic Data Interchange
Electronic Data Interchange
• Type of documents exchanged
Type of documents exchanged

– Paper invoice
P i i
– Purchase order 75% of all business documents 
exchanged in USA
– Request for quotation
– Bill of lading 
– Receiving report

e‐business, M Umair, Iqra University, 
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 Electronic Data Interchange
Electronic Data Interchange
• EDI is the first form of electronic commerce
EDI is the first form of electronic commerce
– almost 20 years before e‐business terminology emerged 

• Why learn about EDI ?
– Currently most B2B transaction‐based on EDI principle
y p p
– Still a major method for B2B transaction

EDI transaction amount – 3 times of all other 
transaction amount in US

e‐business, M Umair, Iqra University, 
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 Electronic Data Interchange
Electronic Data Interchange
• Early Information Interchange Efforts
Early Information Interchange Efforts
– Late 1800’s to early 1900’
• emergence
emergence of large business organizations
of large business organizations
• need for formal business transaction record keeping
• 1950’s big companies –
g p use of computer
p

Internally computers were used……
what about information flow between businesses ?

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 Electronic Data Interchange
Electronic Data Interchange
– It was still paper based
It was still paper based
– Its was a slow process

Slow process
• generate a computer form
• mail it to business partner
p
• business partner enter into its system

e‐business, M Umair, Iqra University, 
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 Electronic Data Interchange
Electronic Data Interchange
– Not only it was slow it was
Not only it was slow it was

• inefficient
• expensive
• redundant
• unreliable

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 Electronic Data Interchange
Electronic Data Interchange
• 1960
1960’ss era
era
• Big businesses started using

– punch cards
– magnetic tapes

for business transaction exchange

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 Electronic Data Interchange
Electronic Data Interchange
• Later
Later advancement in communication 
advancement in communication
networks allowed

– business to transfer data over

• Telephone lines Increased efficiency
• Leased lines
Leased lines

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 Electronic Data Interchange
Electronic Data Interchange
• But it was not an ideal situation
But it was not an ideal situation

– Required investment in infrastructure
Required investment in infrastructure
– Data translation program works with one entity
– It was due to different internal file formats
It was due to different internal file formats

• only large organizations could afford this
• requires significant transactions to justify cost
• small business cant think about it

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 Electronic Data Interchange
Electronic Data Interchange
• 1968

– freight and shipping companies sat together
f i ht d hi i i t t th
– wanted to reduce the paper work
– created a standard format

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 Electronic Data Interchange
Electronic Data Interchange
– Instead of paper based system
Instead of paper based system

• use the standard to input data into computer
use the standard to input data into computer
• electronically send it to freight company
• receiving company translate into internal format
• benefits 
– reduced printing / handling
– twice data entry not required
twice data entry not required
– don’t have to worry about error in entry

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 Electronic Data Interchange
Electronic Data Interchange
• The system was great but only for a segment
The system was great but only for a segment
• There was a requirement of

– Universal EDI standard
– A standard which can be used by any industry

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 Electronic Data Interchange
Electronic Data Interchange
• Broader EDI standards 
Broader EDI standards
– Previously it was fragmented effort
– Now industry giants sat together for
yg g
• cross industry standard of EDI

– ANSI (American National Standard Institute)
• 1979 ANSI chartered a committee
– members from 800 business (interested party can join)
members from 800 business (interested party can join)
– X12 for EDI standards
– meet 3 times a year

e‐business, M Umair, Iqra University, 
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Electronic Data Interchange
Electronic Data Interchange
– X12’s standard covers several hundred transaction sets.
– X12’s standard was adopted in USA
– Other regions of world had their own

• UN/EDIFACT
– In mid 1980’s
– European and American experts sat together
– UN/EDIFACT released

e‐business, M Umair, Iqra University, 
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Electronic Data Interchange
Electronic Data Interchange

e‐business, M Umair, Iqra University, 
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 Electronic Data Interchange
Electronic Data Interchange
• How EDI works
How EDI works
– Lets first examine paper based scenario 

• A company requiring  a replacement for one of its 
machine.

e‐business, M Umair, Iqra University, 
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Operating  Manufactur
Unit ‐ing

Purchase 
Request Work Order
PO
Purchase  Purchase 
Order Order
Purchase  Invoice Sales Dept
Dept Mail  Mail 
Invoice
Room Mail  Room

Check
Cloud Invoice
Sales Order
Sales Order

Accounts  Check Check Accounts 

Copy of 
Dept
Dept. Dept
Dept.
PO

Bill of  Copy of Bill 
lading of lading
of lading
Receiving 
Report Copy of 
Receiving  invoice
Dept
Bill of  Bank Shipping 
lading Dept
Check

e‐business, M Umair, Iqra University, 
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 Electronic Data Interchange
Electronic Data Interchange
• EDI equivalent for paper based system
EDI equivalent for paper based system
– Data communication network replacing mail 
service
– EDI message replacing intra business paper 
transfer
– Computer on both ends running EDI translation 
software.

e‐business, M Umair, Iqra University, 
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Electronic Data Interchange
Electronic Data Interchange

e‐business, M Umair, Iqra University, 
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EDI Sample
EDI Sample

e‐business, M Umair, Iqra University, 
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 Value Added Network
Value Added Network
• Two ways to connect trading partners
Two ways to connect trading partners

– Direct connection EDI
Direct connection EDI
• Each business with own EDI translation computer
• Connect directly to other company’s EDI computer

– Use telephone line (What about large amount of data?)
– Use leased line (Expensive ?)
Use leased line (Expensive ?)

Requires mesh network 

e‐business, M Umair, Iqra University, 
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Value Added Network
Value Added Network

e‐business, M Umair, Iqra University, 
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 Value Added Network
Value Added Network
– Indirect connection EDI
Indirect connection EDI
• instead of having one to one connection use VAN
• VAN provides 
– communication equipment
– software
– skill sets required
skill sets required
• install EDI software compatible with VAN
• customer connects to VAN
• forward the EDI message
• VAN logs the message

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 Value Added Network
Value Added Network

• VAN deliver message to receiver mail box on VAN
• receiver dial into VAN
• gets its EDI message

This is know as indirect approach as VAN is used

e‐business, M Umair, Iqra University, 
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Value Added Network
Value Added Network

e‐business, M Umair, Iqra University, 
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 Value Added Network
Value Added Network
• VAN advantages
VAN advantages

– Requires only one communication protocol
R i l i ti t l
– VAN log messages (3rd party audit possible)
– Translate between X12 and UN/EDIFACT
/
– EDI format checking

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 Value Added Network
Value Added Network
• VAN disadvantages
VAN disadvantages

– Cost of installation/monthly fee/transaction fee
Cost of installation/monthly fee/transaction fee
– Communications between VANs?
– Inter VAN audit mechanism ?
I t VAN dit h i ?

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 EDI on internet
EDI on internet

– Small company’s opportunity to use EDI
• more business
more business
– Security issue ? (HTTPS, Encryption)
– Lack of third party audit
Lack of third party audit
• money is involved

e‐business, M Umair, Iqra University, 
33
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