Research Offers Insight Into On-Line Business Practices

March 1999
By Michelle L. Hankins

University of Texas center explores the future of commerce as emerging electronic marketplaces and communities develop.

Professors and students at the Center for Research in Electronic Commerce at the University of Texas at Austin are helping government and industry understand how business practices should adapt to the electronic age. By exploring the dynamics of the digital marketplace, center participants are gathering and providing knowledge about one of the world’s most rapidly growing business arenas. Their goal is to determine where the world of electronic commerce is headed and how best to arrive there.

To measure the various aspects of electronic (e-) commerce, the center has adopted a collaborative, interdisciplinary approach that includes input from experts in computer science, engineering, mathematics, business, economics and law. Together, these professionals delve into issues such as Internet congestion, privacy, security, and effective pricing and marketing. They suggest that the key to success in e-commerce involves creativity. Through their research, they are launching experimental programs that test how industry and government can best use technology and operate in the growing competition of the on-line marketplace. Their analysis is being documented in books and papers printed in multiple languages for an audience that spans the globe.

Dr. Andrew B. Whinston, director for the university’s Center for Research in Electronic Commerce (CREC), believes e-commerce is changing traditional business operation as we know it. He describes a major shift in society, predicting a world in which people no longer deal with tangible banks, but rather conduct trade in electronic money in a more market-oriented environment that is highly interactive. Face-to-face shopping, he says, will be reduced drastically as consumers begin to perform this function on-line. Travel agents will offer prices over the Internet, and magazines will increase their on-line presence. As consumers learn about the convenience of e-commerce, such as 24-hour access to businesses and the ability to shop for the best deal from their homes on a personal computer, Whinston foresees a shift in the way most companies conduct their business and interact with the consumer.

This change in the consumer base will force businesses to adapt. “A market that does not automate and rethink its processes is eventually going to lose out,” Whinston says. “It is in innovation that you will get tremendous rewards.”

Whinston is leading the e-commerce research efforts at the University of Texas at Austin and has established relationships with businesses and universities worldwide to foster CREC’s experiments.

One example of Whinston’s research efforts is the experimental digital economy. The program involves a hands-on, semester-long project for students in which they operate digital companies. Students in several classes create their own businesses and the products they will sell, while students in other classes act as the buyers. Through this project, students learn the fundamentals of e-commerce, discovering how to operate in a digital marketplace.

Whinston describes the project as “a model of education where students in the seller classes really learn about e-commerce first-hand, while students in the buyer classes really learn how to be smart shoppers.” The program, which has been in operation for approximately two years, allows students to acquire experience in their field before entering the workplace, he adds. In all, the experiment usually runs approximately 20 different companies with 300 student customers both inside and outside of the United States, in nations such as Mexico and Australia. “It’s very ambitious. It also has a lot to do with how we’re going to educate people in the future,” Whinston notes of the project.

This experiment is valuable to more than just the students. All student transactions are recorded in a database, and faculty members benefit by studying the effects of various business practices in an electronic setting. Whinston believes the university contributes valuable knowledge gained from the experiment to the business community. Unlike businesses, the center can offer credible research and unbiased findings that  encompass a number of disciplines.

IBM’s Stuart I. Feldman agrees. Feldman is the director for the company’s Institute for Advanced Commerce, Hawthorne, New York. IBM provided grants and hardware to the center to further its research. In the business world, a study conducted by a noncompeting entity is more widely accepted, Feldman says. “A university can actually set up a neutral experiment on a flat playing ground.”

The company is working with the center to understand the shape of electronic marketplaces and to determine future trends. Feldman affirms that the center’s input definitely affects the way IBM does business by helping the company gain better insight into customer needs. Discoveries made early in a process help the firm avoid errors in product development as well.

IBM already has learned about new frameworks for support, human interactions with products and security issues. The company now wants to discover more about information economies. “We’re interested in having our eyes opened,” Feldman says. The center’s research allows the company to obtain an outside view, and the interdisciplinary knowledge within CREC’s research often provides a different perspective for businesses. “It’s very important to have an economist’s view of the subject rather than a pure technologist’s [view],” Feldman points out.

Other businesses, including Intel, Lucent Technologies, Hewlett Packard, Dell, KPMG and Sun Microsystems, are also partnering with the center to learn how e-commerce is affecting their businesses.

Whinston is not only working to provide a commercial perspective of what is happening in the realm of e-commerce. He is also incorporating input from researchers outside of the University of Texas to gather information about other arenas affected by the trend. Ai-Mei Chang, professor of systems management at National Defense University in Washington, D.C., is offering the government perspective. Chang works with Whinston to explore the government’s role in establishing, regulating and operating in the digital marketplace. She has worked with Whinston on two specific projects to increase the understanding of e-commerce.

The first project involved studying the concept and role of various cybermediaries. These entities typically offer incentives in exchange for personal information supplied electronically by consumers. The information is in turn used by marketing departments to target on-line customers.

The research about these cybermediaries led to the discovery of what P. K. Kannan characterizes as a shift in the balance of power to the customer. Kannan is an associate professor in marketing at the University of Maryland–College Park. “The power of the consumer is changing,” Kannan states. He worked with both Whinston and Chang to examine the issues around the existence of these cybermediaries. The growing arena of e-commerce is making fixed prices a thing of the past, he believes, because consumers will have greater negotiating power through a high technology version of bartering.

The trio looked into the importance of determining information accuracy and reliability and determined that consumers want to be compensated for the information they provide. They addressed the issue of pricing the data, noted the importance of privacy when consumers furnish their personal information, and offered contracts as a possible solution for gaining consumer trust. Although the concept of how these cybermediaries operate is still not fully mature, they agree that as the digital world develops so too will the strategies to obtain valuable customer information.

Another project that the team of professors has investigated involves the development of electronic (e-) communities. These virtual communities form on-line and often serve as social groups for people with like interests. Although these e-communities are not new, the way in which they are viewed with the advent of e-commerce is changing, the researchers concluded.

The communities form “a support group for different issues that affect people at different stages in their lives,” Chang notes. This is where marketers enter the scene. Whinston and his colleagues postulate that these communities will play a key role as marketers seek target audiences and as electronic businesses establish prices for advertising. These electronic gatherings increasingly will become intermediaries between marketers and members, allowing businesses to benefit in many ways. With the option of targeting specific customers on-line, departments will see their marketing costs decrease. Businesses will spend their advertising dollars more effectively on-line and will also be able to buy information about community members to increase the effectiveness of their business strategies. At the same time, issues of information reliability and privacy are being explored and continue to be addressed.

Certainly, e-commerce is still developing, but it stands to dramatically change the way business is being done, Kannan suggests. The Internet will become a primary means by which consumers see what products and services are being offered, and he predicts that 10 to 20 years from now, more than half of all U.S. citizens will use e-commerce of some form. More citizens will file their taxes on-line, and government budgets will shift to reflect the savings in resources as digital practices offer cost savings. The issue of equity will be addressed as the people with the financial means to operate in the digital world subsidize the electronic arena for people who cannot afford it, he says.

Chang submits that e-commerce will improve customer relations by offering more personalized service and more customized products. The electronic world will open up more sales opportunities while decreasing sales, marketing and inventory costs. Cycle times for customers to receive products also will decline, improving service.

Building a reputation for customer support along with a reputation for high-quality products will become increasingly important in the digital world, Whinston says. Creative pricing will be widely available, and an effective, highly interactive web site will be a must.

While the future of e-commerce looks promising, many critical issues still remain to be addressed. Network management issues including congestion, and operational risks such as the destruction of electronic resources, are other focuses of CREC research. Center participants are studying the economic issues involved in handling congested thruways for on-line users. Whinston defines one solution being explored as “differential quality of service,” or different prices for different usage types. Internet service providers are an example of this, offering different price options rather than one flat rate for different amounts of Internet usage.

“More and more, companies are realizing that they need the resources to handle all the traffic,” says Chang. She believes that most larger companies have strategies to deal with inherent network problems such as network failures.

CREC is also examining financial markets to determine how trading will move on-line. Whinston believes that financial institutions that do not keep pace with the thrust of e-commerce will fall behind. He sees financial markets becoming 24-hour electronic enterprises.

In addition, the center is studying the culture of e-commerce to determine how to improve consumer trust in the emerging marketplace. Whinston is looking for answers to questions such as how to create a more reliable market and how to increase trust in an international arena with still undefined regulations and legal recourse. CREC is working with the University of Illinois Institute for Internal Auditors to determine how these electronic businesses will be audited.

“With any radical change, there is inertia,” Whinston notes. But what is making e-commerce successful is the dramatic fall in prices of web-oriented computers, he believes. While many senior citizens already are using on-line mechanisms for trading, today’s children, who are growing up with a familiarity of the technology, will embrace the concept of electronic commerce more openly.

“The way we live our lives will vastly transform,” Whinston states, citing that technology will improve the ability of consumers to shop on the web. “I’m an optimist,” says Kannan. “I think the next 20 years are going to be an exciting time for electronic commerce.”