Strategic Management Accounting

1

The mechanism of strategic management accounting techniques.
The Chartered Institute of Management Accountants (CIMA), U.K defines strategic
management accounting as a form of management accounting in which emphasis is placed
on information, which relates to factors external to the firm, as well as non-financial
information and internally generated information. Others, (Bromwich, 1990) had referred to
SMA as a technique that evaluates the enterprises competitive advantage or value-added
relative to its competitors and to evaluate the benefits the firms products yield over their
lifetime to customers and the benefits which this sales yield to the firm over a long decision
horizon.
Strategic management accounting includes the following techniques, which are used
for gaining a sustainable competitive advantage; just-in-time and back flush accounting,
total quality management (TQM) including quality cost, Kaizen costing, Pareto analysis,
target costing, business process re-engineering vs continuous improvement, customer
profitability analysis, activity based management, life cycle costing, and electronic
commerce.
The founder of Just-In-Time concept, Fathers of JIT ,Taiichi Ohno define JIT as in a
flow process, the right parts needed in assembly reach the assembly line at the time they are
needed and only in the amount needed ( 1988, P 4). In other words, "what is needed, when
it is needed, and in the amount needed" according to this production plan can eliminate
waste, inconsistencies, and unreasonable requirements, resulting in improved productivity.
While Cua et al, Fullerton & McWatters, Lawrence & Hottensein define JIT as a
manufacturing programme with the primary goal of continuous improvement in productivity
and reduction and ultimately elimination of all forms of waste through JIT production and
employee involvement. The goal of JIT, therefore, is to minimize the presence of non-value-
adding operations and non-moving inventories in the production line. This will result in
shorter throughtout times, better on-time delivery performance, higher equipment
utilization, lesser space requirement, lower costs, and greater profits.
Just-in-time systems focus on reducing inefficiency and unproductive time in the
production process to improve continuously the process and the quality of the product or
service. Two main components of the JIT system are JIT manufacturing and JIT purchasing.
Strategic Management Accounting

2

Just-in-time systems are known by many different names, including zero inventory,
synchronous manufacturing, lean production, stockless production (Hewlett-Packard),
material as needed (Harley-Davidson), and continuous flow manufacturing (IBM).
JIT manufacturing is based on the demand pull and lean manufacturing philosophy
which prescribes that companies should only produce products when there is demand from
the customer to the production process and there should be continuous efforts for
improvement in the manufacturing process. To achieve this, constant evaluation of changes
in quality, setup times, defects, rework, and throughput time is imperative. While JIT
purchasing is plays a crucial role to ensure inventories are delivered by reliable suppliers on
time for the manufacturing process and inventories held on hand are at a minimum level.
The characteristics of JIT are pull method of materials flow, consistently high quality,
close supplier ties, small lot sizes, line flow strategy, automated production, and preventive
maintenance. Just-in-time systems utilize the pull method of materials flow. However,
another popular method is the push method. Push system is when the material is pushed
downstream and inventory builds regardless of resource availability. Its strong emphasis is
on production first. But in this system, the stock point and additional inventory can overflow
with parts and raw materials. Whereas, pull system is when the customer starts the
production process by pulling production when it is needed. Material is moved to
workstation as it is needed, and stock points are kept at minimum level. To illustrate these
two systems, consider the production system for a Quarter Pounder at a McDonalds
restaurant. Firms that tend to have highly repetitive manufacturing processes and well-
defined material flows use just-in-time systems because the pull method allows closer
control of inventory and production at the workstations.
A second characteristic is consistently high quality. Efficient JIT operations require
conformance to product or service specifications and implementation of the behavioral and
statistical methods of total quality management (TQM). JIT systems control quality at the
source, with workers acting as their own quality inspectors. Rather than building up a
cushion of inventory, users of JIT systems maintain inventory with lot sizes that are as small
as possible, which is the third characteristic of the JIT. Small lot sizes have three benefits.
First, small lot sizes reduce cycle inventory, the inventory in excess of the safety stock carried
Strategic Management Accounting

3

between orders. The average cycle inventory equals one-half the lot sizes, as the lot size gets
smaller, so does cycle inventory. Reducing cycle inventory also reduces the time and space
involved in manufacturing and holding inventory. Second, small lot sizes help cut lead times.
A decline in lead-time in turn cuts pipeline (WIP) inventory because the total processing time
at each workstation is greater for large lots than for small lots. Finally, small lots help achieve
a uniform operating system workload. Large lots consume large chunks of processing time
on workstations and therefore complicate scheduling. Small lots can be juggled more
effectively, enabling schedulers to utilize capacities more efficiently.
Because JIT systems operate with very low levels of inventory, close relationships
with suppliers are necessary, which is the forth characteristic of JIT. Stock shipments must be
frequent, have short lead times, arrive on schedule, and be of high quality. A contract might
require a supplier to deliver goods to a factory as often as several times per day. Close
cooperation between companies and their suppliers can be a win-win situation for everyone.
Better communication of component requirements, for example, enables more efficient
inventory planning and delivery scheduling by suppliers, thereby improving supplier profit
margins. Customers can then negotiate lower component prices. Suppliers also should be
included in the design of new products so that inefficient component designs can be avoided
before production begins. Close supplier relations can't be established and maintained if
companies view their suppliers as adversaries whenever contracts are negotiated. Rather,
they should consider suppliers to be partners in a venture wherein both parties have an
interest in maintaining a long-term, profitable relationship. The fifth characteristic of JIT is
line flow strategy which can reduce the frequency of setups. If volumes of specific products
are large enough, groups of machines and workers can be organized into a product layout to
eliminate setups entirely. If volume is insufficient to keep a line of similar products busy,
group technology can be used to design small production lines that manufacture, in volume,
families of components with common attributes. Another tactic used to reduce or eliminate
setups is the one-worker, multiple machines (OWMM) approach, which essentially is a one-
person line. One worker operates several machines, with each machine advancing the
process a step at a time. Because the same product is made repeatedly, setups are
eliminated. For example, in a McDonald's restaurant the person preparing fish sandwiches
uses the OWMM approach.
Strategic Management Accounting

4

The sixth characteristic is automated production which plays a big role in JIT systems
and is a key to low-cost production. Sakichi Toyoda, the founder of Toyota, once said
Whenever there is money, invest it into machinery. Money freed up because of JIT
inventory reductions can be invested in automation to reduce costs. The benefits, of course,
are greater profits, greater market share because prices can be cut, or both. Last but not
least, JIT is preventive maintenance because JIT emphasizes finely tuned mows of materials
and little buffer inventory between workstations, unplanned machine downtime can be
disruptive. Preventive maintenance also can reduce the frequency and duration of machine
downtime. Maintenance can be done on a schedule that balances the cost of the preventive
maintenance program against the risks and costs of machine failure. In addition,
replacement during regularly scheduled maintenance periods is easier and quicker than
dealing with machine failures during production. After performing routine maintenance
activities, the technician can test other parts that might need to be replaced. Another tactic
is to make workers responsible for routinely maintaining their own equipment and develop
employee pride in keeping their machines in top condition.
Back flush accounting which is a cost accounting system which focuses on the output
of an organization and then work backwards to attributed costs to stock and cost of sales.
This system records the transaction only at the termination of the production and sales
cycles. The emphasis is to measure cost at the beginning and at the end with greater
emphasis on the end or outputs. Since back flushing is usually employed in parallel with JIT,
there is no work-in-progress to consider nor, does work in-progress materially fluctuate.
Another technique used in strategic management accounting is Total Quality
Management (TQM). There are many definitions of TQM. Youssef et al. (1996), defined TQM
as An overall philosophy whose objective is to meet or exceed the needs of the internal and
the external customer by creating an organizational culture in which everyone at every stage
of creating the product as well as every level of management is committed to quality and
clearly understands its strategic importance. Christoffi et al. (2008) on the other hand,
defined TQM as A supply-chain-wide quality commitment from the supplier, to the
producer, to the comsumer of an organization, in order to achieve excellence in production
and service management. There are several definitions given by different authors but the
essence of these definitions share many common elements. First, they share the customer
as the centre of attention and driving force in the TQM philosophy. Second, they consider
Strategic Management Accounting

5

management commitment as an essential componenet for succes of TQM. Lastly, they
consider cultural and organizational changes as necessary conditions for TQM success. To
summarize, TQM is a management philosophy that helps managing organizations to improve
its overall performance and effectiveness in achieveing quality status at global level (Zhang
et al., 2000; Yousof and Aspinwall, 2000,2001; Arumugam et al., 2008). Total Quality
Management is not a mere technique, it is a broad management approach or methodology
and more than a philosophy, dealing with processes and attitude. It is concerned with
technical aspects of quality in every aspects of quality as well as the involvement of people
in quality, such as customers, company employees, and suppliers.
TQM is a Proactive Systematic Approach. This means that preventation and
immediate detection of errors and problems at root source is preferred over of correction
for problems after its occurrence. The essence of TQM is the simple but extremely powerful
belief that it is better and hence cheaper to do every process right at first time, rather than
not to do it right and then corrects it afterwards. Doing things right at first time requires no
money. Doing things wrong is what only costs money, as allowing defective products to get
produced wastes time and resources. Thus, longer it takes to identify problems, more will be
the cost incurred to correct it. TQM is systematic way of guaranteeing that all activities
within an organization happen as planned. It is the management attitude that concerns with
preventing problems at source, rather than allowing problems to occur and then correcting
them afeterwards. The success of TQM mainly depends on the achievement of internal as
well as external customer satisfaction. Internal customer satisfaction is a prerequisite to
achieve external customer satisfaction.
Quality is a journey starting from design, to conformance, and ends at better
performance. This process considers quality as a never ending improvement (Gitlow, 1989).
Product quality has become a precondition to compete in the market. Quality has many
other costs, which can be divided into two categories. First category consists of costs
necessary for achieving high quality, which are called quality control costs. These are of two
types which is preventation costs and appraisal costs. The second category consists of the
cost consequences of poor quality, which are called quality failure costs. These include
external failure costs and internal failure costs. This technique classifies and monitors costs
as deriving from quality preventation, appraisal and internal and external failures (Heagy,
Strategic Management Accounting

6

1991). In a strategic perspective, the technique must support the pursuit of quality (Simpson
and Muthler, 1987; Carr and Tyson, 1992)
Preventation cost are all costs incurred in the process of preventing poor quality from
occuring. They include quality planning costs, such as the costs of developing and
implementing a quality plan. Also included are the costs of product and process design, from
collecting customer information to designing processes that achieve conformance to
specifications. Also included in this costs is employees training inquality measurement, as
well as the costs of maintaining records of information and data related to quality. Another
cost in quality control cost is appraisal cost, which incurred in the process of uncovering
defects. They include the cost of quality inspections, product testing, and performing audits
to make sure that quality standards are being met. Also included in this category are the
costs of worker time spent measuring quality and the cost of equipment used for quality
appraisal.
The next two costs under quality failure costs are the internal failure costs which
associated with discovering poor product quality before the product reaches the customer
site. Types of internal failure cost is rework, which is the cost of correcting the defective
item. Sometimes the item is so defective that it cannot be corrected and must be throw
away. This is called scrap, and its costs include all the material, labour, and machine cost
spent in producing the defective product. Other types of internal failure costs include the
cost of machine downtime due to failures in the process and the costs of discounting
defective items for salvage value. Lastly, the external failure costs which associated with
quality problems that occur at the customer sites. These costs can be particularly damaging
because customer faith and loyalty can be difficult to regain. They include everything from
customer complaints, product returns, and repairs, to warranty claims, recalls, and even
litigation costs resulting from product liability issues. A final component of this cost is lost
sales and lost customers.
There are seven characteristics of TQM which are quality chains, company policy and
accountability, control, monitoring the process, teamwork, consumer views, and zero
defects. Firstly, TQM emphasizes quality chains inside and outtside the business, including
producers. If any part of the chain has problem, then the next stage will delayed. TQM also
Strategic Management Accounting

7

stress the role of everyone from the top to the bottom of management and aims to make
everyone accountable for his/her own performance. In addition, TQM stress on systematic
control approach, which is controlling all the factors that may affect the quality of a product.
Aside from that, TQM also stresses on the monitoring the process to find improvement
through statistical process control such as charts and diagrams. In TQM, teamwork is an
effective way of solving the problems in all aspects. TQM focuses also stress on the feedback
or information from consumers and response to the changes in customers needs and
expectations. Lastly, TQM emphasizes a zero defect policy that every product is free from
defects.
Pareto Analysis is a statistical technique in decision making that is used for the
selection of a limited number of tasks that produce significant overall effect. It uses the
Pareto Principle (also known as the 80/20 rule). Pareto analysis is a relatively simple
methodology that is used when trying to determine which tasks or factors in an organization
will have the most impact (Cervone, 2009). This technique used to identify quality problems
based on their degree of importance. It ranks the data or factors in the descending order
from the highest frequency of occurrences to the lowest frequency of occurrences. The total
frequency is summed to 100 percent. The vital view items occupy a substantial amount (80
percent) of cumulative percentage of occurrences and the useful many occupy only the
remaining 20 percent of occurrences, which is also known as the 80-20 rule developed by
the Italian Economist Vilfredo Pareto (Karuppusami G. and Gandhinathan, 2006).
The result of Pareto analysis will be presented through a Pareto chart. The chart
represents the various factors under consideration in ranked order. The presentation of this
chart is in the form of a bar graph in descending order and helps to predict easily which
factors are vital few by providing a clear indicator through superimposing a line graph that
cuts an 80 percent cumulative percentage and also helps in determining those factors which
have least amount of benefits and vice-versa. From the quality point of view, this diagram
was introduced by the Professor J.M.Juran, as an instrument for the classification of the
problems of quality such as major problem, they are only a few but their results are quite
important, and secondary problems, there are also a great deal of minor problems, but their
results are limited. Joseph Juran extended this concept and found it to be applicable in a
broad array of aspects in everyday life (Cervone, 2009). For example it can be applied in a
Strategic Management Accounting

8

number of contents such as searching for books on-line in digital library catalog, determining
which tasks in a project will have the most impact, assessing major causes of customer
complaints from products or services, identifying those products or services that account 80
percent of the profit and many more.
Target costing is the system to support the cost reduction process in the developing
and designing phase of an entirely new model, a full model change or a minor model change.
Target costing is called Genkakikaku in Japanese (Hamada, 1991). Target costing is actually
working backwards to find out the target cost, which a firm should be able to achieve. In this
technique, the first stage is to determine the target price, which the product will fetch in the
market. In the second stage, target profit margin is determined and in the third and final
stage the target profit margin is deducted from the target-selling price to arrive at the target
cost. If the estimated actual cost exceeds the target cost, investigate the ways and means of
cost reduction. Through an accurate product design, the costs must be contained to achieve
the target cost (Hamada, 1991)
Target costing has three main components. A target cost is set for a product based on
the companys strategic policy. Second, design-to-cost responsibility is then assigned to
cross-functional teams with extremely broad authority. This authority includes, of course,
product features, and can also extend to all upstream and downstream support activities
and their method of delivery. Lastly, cost-reduction activity continues until the target cost is
achieved or all parties realizes it is not possible.
Target costing can be characterized into 6 characteristic. First, target costing is used
in the planning and design stages. Second, target costing is a tool for cost reduction.
Conceptually, cost management can be divided into two parts: cost reduction (or cost
planning) and cost control. Target costing is clearly focused on cost reduction. Third, target
costing is a market-driven technique. Forth, target costing is usually part of strategic profit
planning for multiple years. In fact, target costing is often used as a bottom-up tool for
attaining the profit goal set by top management when it determines middle-range corporate
strategy. Thus, the cost-reduction program is more strategic than operational. Fifth, target
costing is an engineering-oriented technique which a management tool for directing and
focusing the decision process for design specifications and production engineering. Financial
Strategic Management Accounting

9

accounting measurements are not emphasized, and the method has more of a management
engineering characteristic. Hence, it coincides with other Japanese management engineering
techniques such as VE, TQC and JIT. Last but least, target costing depends on and enforces
extremely high levels of cooperation between departments. In target costing, the accounting
department acts as the coordinator and information provider while the marketing,
engineering (planning and design) and production departments determine success or failure.
(Sakurai, 1995)
The concept of Kaizen, meaning improvements in small steps, was developed
within quality assurance technology. Based on this concept, Yashuhiro Monden, from Japan,
developed Kaizen costing, which can be translated as enhancement estimation. In other
words, Kaizen costing is the system to support the cost reduction process in the
manufacturing phase of the existing model of product. Kaizen costing is called
Genkakaizen on Japanese. The Japanese word Kaizen in kaizen costing may be a
somewhat different concept from the English word improvement. Kaizen refers to
continuous accumulations of small betterment activities rather than innovative
improvement. Therefore, Kaizen costing includes cost reduction in the manufacturing stage
of existing products. According to Yasuhiro Monden, Innovative improvement based on new
technologies innovations is usually introduced in the developing and designing stage
(Hamada, 1991). Kaizen costing is applied to a product that is already under production. The
time prior to Kaizen costing is called Target Costing, which involves searching for a target
cost for a product before it reaches the market. Together, these two concepts make up
lifecycle costing.
Monden describes two types of Kaizen costing which are asset and organization, and
product-model. Asset and organization specific Kaizen costing activities planned according to
the exigencies of each deal, while product-model specific costing activities carried out in
special projects with added emphasis on value analysis. In the Kaizen system, the procedure
sets new cost reduction targets each month by which the existing gap between the target
and current costs is to be closed, activities be carries out during the entire operational year
in order to achieve cost targets, analyzes deviations between targets and current costs, and
makes investigations and corrections when cost reduction targets have not been reached.
Strategic Management Accounting

10

Activity-Based Management (ABM) manages activities to improve the value of
products or services to customers and increase the firms competitiveness and profitability.
ABM draws on ABC as its major source of information and focuses on the efficiency and
effectiveness of key business processes and activities. By using ABM, management can
pinpoint avenues for improving operations, reducing costs, or increasing values to
customers. By identifying resources spent on customers, products, and activities, ABM
improves managements focus on the firms critical success factors and enhances its
competitive advantage.
ABM application can be classified into two categories which are operational ABM and
strategic ABM. Operational ABM enhances operation efficiency and asset utilization and
lower costs, its main focuses are on doing things right and performing activities more
efficiently. Operational ABM applications use management techniques such as activity
management, business process reengineering, total quality management, and performance
measurement.
Strategic ABM attempts to alter the demand for activities and increase profitability
through improved activity efficiency. Strategic ABM focuses on choosing appropriate
activities for the operation, eliminating nonessential activities and selecting the most
profitable customers. Strategic ABM applications use management techniques such as
process design, customer profitability analysis, and value chain analysis.
Next SMA technique is customer profitability analysis. Customer Profitability Analysis
identifies customer service activities and cost drivers and determines profitability of each
customer or group of customer. Therefore, customer profitability includes all activities to
complete the sale and satisfy the customer, including advertising, sales calls, delivery, billing,
collections, service calls, inquiries, and other forms of customer service. A good
understanding of the profitability of a firms current and potential customers can help firms
to improve overall profits and to become more competitive. In addition, customer cost
analyses are used to identify activities and cost drivers to service customers before and after
sale, not including product cost. Different activities can have different cost drivers. Based on
the activities and cost drivers involved in services performed to acquire and complete a
transaction, customer costs can be classified into five categories which are customer unit-
Strategic Management Accounting

11

level cost, customer batch-level cost, customer-sustaining cost, distribution-channel cost and
sales-sustaining cost.
Under customer-unit level cost, resources are consumed for each unit sold to a
customer. For examples include sales commissions based on the number of unit sold or sales
dollars, shipping cost when the freight charge is based on the number or unit shipped, and
cost of restocking each of the returned units. Customer batch-level cost then resources are
consumed for each sales transaction. For examples include order-processing costs, invoicing
costs, and recording of sales returns or allowances every time a return or allowance is
granted. For customer-sustaining cost, resources are consumed to service a customer
regardless of the number of units or batches sold. For examples are salespersons travel
costs to visit customers, monthly statement processing costs, and collection costs for late
payments. Distribution-channel cost consumed resources in each distribution channel the
firm uses to service customers. Examples are operating costs of regional warehouses that
serve major customers and centralized distribution centers that serve small retail outlets.
Lastly, sales-sustaining cost, where resources consumed to sustain sales and services
activities that cannot be traced to an individual unit, batch, customer, or distribution
channel. For examples, the general corporate expenditure for sales activities, salary, fringe
benefits, and bonus of the general sales manager.
Customer profitability analysis combines customer revenues and customer cost
analyses to assess customer profitability and helps identify actions to improve customer
profitability. Customer profitability analysis also provides valuable information to the
assessment of customer value. In addition, firms must weigh other relevant factors before
determining the action appropriate for each customer. Those factors are growth potential of
the customer, the customers industry, and its cross-selling potential. Second, the possible
reactions of the customer to changes in sales terms or service, and lastly the importance of
having the firm as a customer for future sales references, especially when the customer
could play a pivotal role in bringing in additional business.
Life cycle costing is the process of economic analysis that assesses the total cost of
investment in and ownership and operation of the system or product to which the life cycle
costing analysis is being applied (Flanagan, 1989). This process takes the functional
Strategic Management Accounting

12

requirements and operational constraints that apply to the system or product and translates
these into a common cost measurement known as life cycle cost. Life cycle cost in turn is
defined as the total cost of the system or product under study over its complete life or the
duration of the period of study, whichever is the shorter Product life cycle costs are incurred
for products and services right from their design stage through development to product
launch, production and sales and the eventual withdrawal of the product from the market
(Kishor).
Another technique under SMA is Business process re-engineering which involves
examining business processes and making substantial changes to how the organization
currently operates. According to Hammer, Michael and James Champy (1993),
Reengineering is the fundamental rethinking and radical redesign of business processes to
achieve dramatic improvements in critical, contemporary measures of performance such as
cost, quality, service, and speed. The aim of business process re-engineering is to improve
the key business processes in an organization by simplification, cost reduction, improved
quality and enhanced customer satisfaction. As a result of the BPR, it is possible that existing
processes and practices may be abandoned and completely new methods of performing
business processes are used.
Life cycle costing consists of four stages of product life cycle. The stages are inclusive
of research and development stage, design stage, production stage, marketing and
distribution stage, as well as customer service stage.
Life cycle costing begins with research and development. This is the most critical stage
in life cycle costing. After done with the research, the organization begins with development
of a plan, which addresses the purpose of the product (NSW Tressury 2004), and looks into
the new product opportunities (Smit, 2012) in which they will take into consideration factors
of the product to be produced. For example, in the information technology business, many
people love buying phones that have multi functions. Therefore, the organizations involved
should produce mobile phones that can satisfy their target markets. After taking into
consideration of nowadays trends, the organizations should make decisions on how to get
the products by way of manufacturing those products themselves or by butting from other
manufacturers.
At the design stage, decision making is critical as it commits an organization to a
production, marketing, and service plan although it accounts for a very small percentage of
Strategic Management Accounting

13

total costs over the entire product life cycle. (Edward, Kung, Thomas, 1999). Product design
consists of prototyping, templating, and concurrent engineering. (Edward et al, 1999).
Prototyping is a method in which functional models of the product are developed and tested
(Edward et al, 1999) whereby the example could be the antivirus software. Customers will be
given a trial pack to run the antivirus software within a given period of time. Prototyping is
important to improve the product based on customers feedback. During this stage,
organizations may determine the costs incurred in the future, meaning the costs that are
foreseen to be incurred at each stage of its life cycle. Therefore, organizations and managers
can manage costs smoothly.
In the production stage, product is being produced or manufactured and supporting
system is produced as needed (Smit, 2012). This stage will decide on what the packaging of
the product would look like. During this stage, all costs incurred are taken into account and
known as costing. Costs are inclusive of direct labour cost, direct material cost, indirect
material cost, indirect labour cost and all costs associated in the production stage. (Smit,
2012)
The next stage of life cycle costing is marketing and distribution. This stage involves
packaging, shipping, samples, promotion and advertising. (Edward et al, 1999). Costing
takes into accounts all costs that are associated with packaging, shipping, samples,
promotion, and also advertising of products.
Customer service is also one of the stages of life cycle costing. During this stage, the
costs involved refer to sales of the products to customers. It is the amount paid by customers
who bought the product. This stage determined what is going to be experienced by the
product next, as it focuses onto customers feedback. (Norman, 1990).
In addition, the life cycle costing of a particular product does not end here. Since there
is product improvement from time to time, the product would experience research and
development phase again, followed with design phase, production phase, marketing and
distribution phase, and customer service and back to square ones. Managers are interested
in the total costs incurred over the entire life of a product.

Last technique under SMA is E-commerce. According to Frederick J. Riggins and
Hyeun-Suk Rhee, E-Commerce is buying and selling goods and products over internet. Zwass
define E-commerce as sharing business information, maintaining business relationships and
conducting business transactions using computers connected to a telecommunication
Strategic Management Accounting

14

network called E-Commerce. He pointed out that e-commerce includes not only buying and
selling goods over internet, but also various business processes within individual
organizations that support the goal. By internet commerce, its mean the use of the global
internet for purchase and sale of goods, services, including service and support after sale.
The tools are electronic but the application is commerce. Therefore, commerce is not
accounting or decision support or any other internally focuses function, commerce is
externally focused on those with whom you do business, and also commerce is doing
business, not reporting on it or sending messages about it. Some special characteristics of
electronic commerce and web commerce are information exchanged and processed by a
communications network and computers, as well as e-commerce software. In addition, most
of the transactions are processed automatically, and its pull together a gamut of business
support services such as inter-organizational e-mail, on-line directories, trading support
systems for commodities, product and customized products.
E-commerce can be classified into three categories which are business-to-business,
business-to-customer, and customer-to-customer. Electronic commerce will automates the
conduct of business among enterprises, their customers, suppliers and employees anytime,
anywhere. It also creates interdependencies between the companys value chain and the
companys supplier and customers. The company can create competitive advantage by
optimizing and re-engineering those value-chain links to the outside.