Volume22

Journal of E-Business, Volume IV, No 1, June 2004

i

Journal of E-Business

Volume IV, No.1 ISSN: 1542-0846 www.jourrnalofe-business.org

TABLE OF CONTENTS

Editorial Note

E-Business: A Framework For Examining Creation and Appropriation of Value Fabrizio Noboa, IDE Business School

Impact of Information Technology and E-Commerce on Supply Chain Management: Survey Evidence From

Manufacturing Companies in Michigan

Shanthakumar Palaniswami, David Lopez, David Sprague, Patrick Okonokwo, and Segum Odeydele, Central Michigan

University

Internet Fraud: A Global Perspective

Phillip Balsmeier, Blaise J. Bergiel, and R. Charles Viosca, Jr., Nicholls State University

Information Technology And E-Commerce Strategy Of Entrepreneurial Ventures: A Contingency Approach

Based On Information-Processing Theory

Jay Hyuk Rhee, Korea University

Testing An E-Loyalty Conceptual Framework Anis Allagui, State University of New York; Potsdam Azza Temessek, Universite de Savoie

____________________ The Journal of E-Business is a refereed journal. It is published online by the International Academy of E-Business (www.iaeb.org)

periodically, typically twice a year. Its contact e-mail: [email protected]. All rights reserved.

Journal of E-Business, Volume IV, No 1, June 2004

ii

EDITORIAL NOTE

Welcome to the Journal of E-Business (www.journalofe-business.org ), the online publication of the International

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This peer-reviewed Journal is published periodically, typically twice a year, to encourage and disseminate research

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Annual

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authors.

Editor-in-Chief

Journal of E-Business, Vol. 4, Issue 1, June 2004

Copyrights: Journal of E-Business (International Academy of E-Business). All rights reserved.

1

E–BUSINESS: A FRAMEWORK FOR EXAMINING CREATION AND APPROPRATION OF VALUE

Fabrizio Noboa IDE Business School

ABSTRACT

Strategy is basically about the creation, appropriation, and sustainability of value. The Internet has witnessed a huge amount of ventures willing to create, appropriate, and sustain value in this new competitive setting. However, competitiveness in e–commerce has been highly tough and the web has experienced high mortality rates. The Internet has made it more difficult for firms to appropriate value, even though it has also made it easier to create value. For this reason, there is an enormous academic interest in examining whether the value that is created through the Internet may be captured by firms or may flow entirely to customers. Based on an exploratory study of two Spanish online travel agencies, the present paper offers a framework that may serve to analyze the potential of a site to create and appropriate value.

INTRODUCTION

Success in e–commerce has proved to be a difficult task. Many supposedly smart businesses

in cyberspace have collapsed and investors are becoming more cautious when a new e-business venture is set. This disappointment is not without reason. Web sites are hardly showing any profit and the few that are not in the red are certainly not achieving superior performance. While there may be numerous explanations as to why some online firms have survived and others died, this paper wants to explore a traditionally accepted statement within the economics and strategy literature. Scholars coming from both traditions claim that firms that do not appropriate value would hardly survive in the marketplace and, by extension, would not achieve a competitive advantage. Therefore, many firms may not have survived in cyberspace simply because they were unable to capture part of the value created through the site, letting it flow entirely to other agents of the market (e.g., customers).

The purpose of this paper, then, is to develop a framework to analyze the potential of an e-

business venture to create and appropriate value. We start by defending why it may be reasonable to differentiate between creation and appropriation of value, and how this may be done; followed by a discussion on the adequate unit of analysis for examining these issues; then, two Spanish virtual travel agencies are examined through the lenses of the framework suggested, which is firmly anchored in accepted constructs in the literature. Finally, conclusions are given.

CREATION AND APPROPRIATION OF VALUE

Value has been one of the main interests among finance scholarship. Concretely, it has been

interested in measuring firms performance, i.e. profitability, and in the development of adequate proxies for that purpose. On the other hand, strategists and economists have been also interested in value, but their research has been more concerned with the variables that affect firms’ performance than with adequate mechanisms to measure it. Moreover, strategists in general suggest managers trying to affect the variables that influence firm’s performance in order to outperform the market. Therefore, unlike finance scholars, strategists are interested in finding what managers can do in order



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to increase their profitability, i.e. the value they appropriate, and, by extension, in finding what they can do in order to increase the value they create.

Empirical research on strategy has not made an explicit separation between creation and

appropriation of value, implicitly assuming it as a simultaneous process. Even though this may be true, it might be desirable to differentiate between how firms create and appropriate value for many reasons. First of all, it is not evident that firms that create value would capture all or part of it. In almost perfect competitive markets, for example, most of the value created by firms may be captured by consumers and firms might only expect normal returns. Secondly, while certain conditions external to firms may improve their ability to create value, they can threaten firms’ ability to appropriate it. This is exactly the case, for example, with the advent of the Internet and related technologies. On the one hand, firms may develop innovative ways of doing business through the Internet and may create value by bringing to the market transactions that would not have been performed offline. On the other hand, many benefits of the Internet (e.g. making information widely available, reducing the difficulty of purchasing), threaten firms’ ability to extract price premiums from buyers, making it hard for them to capture the benefits of the Internet as profits. Finally, maximal value appropriation, and not maximal value creation, may be the adequate objective of the firm (Brandenburger and Stuart Jr., 1996).

Brandenburger and Stuart Jr. (1996) distinguish between the concepts of creation and

appropriation of value. They start analyzing how different players along a market chain create value, and define value creation as the difference between the value of the product and the cost of the inputs used to make that product. As the value of the product depends upon buyers’ perception, they expressed value creation as the difference between buyer’s willingness–to–pay and suppliers’ opportunity costs. Consequently, value creation is an outcome of the efforts carried on by all the agents involved in a transaction. By contrast, value appropriation depends on each of the players involved in the production of a particular good or service, particularly in each player’s bargaining power. According to this interpretation, the players with high added value are the ones who may appropriate value since their bargaining power is high; on the contrary, the players with low added value will not capture any and may be substituted by others without threatening the value created in the market chain. By extension, if the bargaining power of a player changes, her ability to capture value changes as well.

The claim of Brandenburger and Stuart Jr. (1996) that value is created by all the agents

involved in a particular ‘vertical market chain’ is consistent with traditional strategic network theory which states that the locus of value creation may be the network rather than the firm (Gulati, Nohria et al., 2000). This assertion may be more evident in cyberspace where firms’ limits are more difficult to draw since many agents have to join together their interests and efforts in order to enable a particular transaction. This is the case of an online travel agency, which could be thought as a network that creates value for the final customer based on a joint effort of many agents. For example, in order to help the traveler to find the best fares of a domestic flight, (and, therefore, creating value through ‘efficiency’ 1) a start–up needs to have access to airfare databases, and may want to sign a contract with the owners of those databases (e.g., Sabre). Similarly, if the virtual travel agency wants to create value through ‘complementarities’, it may need to sign contract wit h car rental firms (e.g. AVIS). Clearly, taking advantage of the value creation potential of the Internet implies broadening

1 ‘Efficiency’ is one of the four e–commerce value drivers suggested in Amit R, Zott C. (2001). The others are ‘Complementarities’, ‘Lock–in’ and ‘Novelty’.



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firms’ boundaries by signing alliances with parties needed to provide the service, which might not necessarily be the case for physical firms.

However, even though value creation in cyberspace is an outcome of the efforts of the agents

that enable an online transaction, each agent looks for its own benefit as regards value appropriation. Since one of the effects of the Internet and related technologies in the overall business landscape is that it changes the bargaining power of the agents (Porter, 2001), it is particularly important to analyze online value appropriation because, as previously explained, when the bargaining power of a player changes, its ability to capture value changes as well. For example, as customers have more access to relevant information about prices, delivery and brands, they can search for and find the cheapest alternatives in the market, thus increasing their bargaining power in detriment of firms (Sinha, 2000). Similar reasoning can be applied to the agents that belong to the network that make a concrete site. Using again the example of a virtual travel agency, the owner of the database that allow travelers to search for better fares may capture some of the value created in the network whereas the travel agency itself might hardly capture any if it acts solely as an aggregator of content and did not bring added–value to the network.

Overall, it is arguable to study creation and appropriation of value as a simultaneous process

for physical and virtual firms; in fact, one would call into question such methodology nowadays where firms’ limits are more and more difficult to draw (Sampler, 1998), being virtual markets a particular example of this phenomenon. What seems reasonable is to analyze value not only as divided among the many parties that conform a network but also as created by parties as diverse as customers. Under this setting, it could be easily the case of some agents creating value and others appropriating it.

As e–commerce firms may be thought of as a collection of agents that work together to

deliver a product to the final user, the role played by each of the components of the network is not trivial. For example, some agents that belong to the network that allow a virtual travel agency to enable online transactions might bring low added–value to the system and then, may run the risk of being substituted by anyone able to provide the same service without the travel agency running the risk of collapse; however, if a player with high added–value decides not to be part of the network, then, the whole virtual travel agency may collapse. Consequently, the relationships between the agents that form an e–commerce firm may be a good starting point to think about possibilities of examining value appropriation, and the unit of analysis used to investigate this issue, must allow researchers to deepen the characteristics of those relationships. UNIT OF ANALYSIS TO EXAMINE CREATION AND APPROPRIATION OF VALUE

One of the topics that has received greater attention from strategy researchers has been the

determination of the ultimate sources of superior performance (McGahan, 1999; McGahan and Porter, 1997; Rumelt, 1991; Schmalensee, 1985). Empirical findings suggest that industry and firm specific effects are both important when explaining performance, but they are no conclusive statements as regards how much of the differences in performance are explained by each factor (Bowman and Helfat, 2001) . Research, then, has looked for specific determinants of superior performance and different sources of value creation can be associated with a particular theoretical framework. For example, within the theoretical framework developed by Porter (1985) , the adequate unit of analysis for measuring value creation would be activities, while for Resource–Based View’s scholars would be re sources (Barney, 1991), networks for strategic network theorists (Gulati, Nohria et al., 2000), and capabilities for other scholars (Teece, Pisano et al., 1997). This diversity in unit of



4

analysis proposed in the literature is an important obstacle when measuring online value creation. As stated by Amit and Zott (2001), e–commerce may have numerous potential sources of value creation that might be difficult to capture through a unique particular paradigm. Trying to solve this problem, they proposed the ‘business model’ as a unit of analysis in order to unify existing theoretical frameworks.

The business model ‘depicts the design of transaction content, structure and governance so

as to crea te value through the exploitation of business opportunities’ (Amit and Zott, 2001:511). Although the main reference point of the business model is a particular firm, it spans firm boundaries because it includes all the agents involved in the delivery of a particular transaction. As such, it can also span industry boundaries including agents that are needed to perform a particular transaction even if they do not belong to the same industry. These characteristics are important to be captured when analyzing virtual firms, where industry boundaries are certainly difficult to draw. For example, the presence of ‘Secure Socket Layers’ in cyberspace, i.e. firms that encrypt customers’ information in order to guarantee security in the transaction, ha s become standard. They exist in businesses as diverse as travel agencies, bookstores, or auctions. Therefore, the business model may include all the agents that enable an online transaction, being a reasonable unit of analysis for exploring how e–commerce firms create value.

As regards value appropriation, Amit and Zott suggest the revenue model as the appropriate

unit of analysis: ‘a revenue model refers to the specific modes in which a business model enables revenue generation’ (2001:515). The business model and the revenue model are complementary, yet different concepts. For their authors, while the business model refers primarily to value creation, the revenue model is primarily concerned with value appropriation. However, the definition of the revenue model makes no reference to costs and, therefore, it will hardly be a good mechanism to measure how value is appropriated since rents may dissipate if the costs of providing the product exceed the revenues generated. On the contrary, as the business model is centered on the analysis of transactions, it emphasizes the role played by the parties involved in the delivery of value, and therefore, it may be the adequate unit of analysis to examine value appropriation under the framework delineated in previous sections, where the role played by each of the parties involved in the creation of value matters.

By focusing the analysis on transactions, the business model differs with ‘activity system

maps’ (Porter, 1996) and ‘the va lue system’ (Porter, 1985; Porter and Millar, 1985). The basic purpose of activity system maps is to examine strategic fit through the way in which the activities of a company complement one another. According to Porter, if activities complement and reinforce one another, the company may be able to create more value than companies with over or under designed activities that do not complement themselves. In this sense, activity system maps are a graphical extension of the value chain which main purpose is to highlight existing linkages within the value chain, with suppliers and channels. This exercise allows an identification of how a particular company is linked with external agents through activities and how this relationship may affect the ability of a particular firm to create value; however, it would need a great deal of effort to span firm’s boundaries, and include the role played by important agents such as customers or parties that belong to different industries, issues that matter in an examination of online value appropriation. By the same token, even if the value chain is extended to include the downstream value (Porter, 1985; Porter and Millar, 1985) , i.e. the value associated with customers, the ‘value system’ is still an incomplete instrument for analyzing online value appropriation since it would not span a particular industry



5

boundary. On the contrary, the business model solves the limitations of both constructs building the value chain in such a way as to include all the relevant parties that create and appropriate value.

In sum, the main difference between the business model and activity system maps or the value

system, is that the first does not follow the flow of a product from creation to sale, but describes the steps that are performed in order to complete transactions. To a certain extent, Porter’s framework needs an election of the boundaries of the firm, and he seems to suggest it to be the firm. Naturally, this would lead to a discussion about what is exactly a firm. The business model extends Porter’s framework in order to impose less artificial barriers as regards the boundaries of the firm. Therefore, using the business model as a unit of analysis for examining online value appropriation may help to identify all the relevant parties involved in the creation and division of value, the way they are connected, the sequencing of transactions and the adopted mechanisms for enabling transactions (Amit and Zott, 2001). Each of these elements may be necessary if we take appropriation of value as a function of the bargaining power of the agents.

Figure 1

Online Travel Agencies’ Business Model

ONLINE TRAVEL AGENCIES: PROPOSED BUSINESS MODEL

Following the framework suggested in Amit and Zott (2001) , we have constructed a virtual

travel agency business model in order to see how it may enable online bookings (See Figure 1). It allows the identification of the parties that make it possible to enable transactions, the way they are connected, the sequencing of transactions, and the specific object that is being transacted.

CUSTOMER TOUR OPERATORS

OTHER TRAVEL AGENCIES

GLOBAL DISTRIBUTION

SYSTEMS

CREDIT CARD

SECURE LAYER ADVERTISERS

VIRTUAL TRAVEL AGENCY

SUPPLIERS

AFFILIATES

(1)

(2)

(4)

(3)

(5,8)

(5)

(6)

(7)

(7)

(3)

(9)

(2)



6

Appendix 1 shows an extended graphic that includes all the agents that may enable online bookings and the main way they are connected; however, as some agents do not play a significant role in the provision of services sold by an online travel agency, they were eliminated in the proposed business model without running the risk of misinterpreted the business. Similarly, Figure 1 does not try to identify all the possible connections that are possible between the different parties that conform the network, but how do they have to be linked for the virtual travel agency to provide online bookings. For example, the fact that the customer can reach directly the airlines to make an online flight reservation, is not included in a business model which objective is to show the transactions that are needed to satisfy the customer that book a flight through a virtual travel agency. (Appendix 2 describes the transactions included in the proposed business model).

Figure 1 helps to identify the object that is being interchanged in each of the transactions, what is received by the parties, and what do they deliver. In so doing, it is possible to identify the parties that are transforming the input received, the ones that are mere intermediaries as they deliver just the received product, and the parties that offer access to complementary products. Some of them may clearly create value while others arguably do. As regards their potential to do so, it is necessary to analyze how they do in terms of accepted constructs in the literature. THE STUDY

We have selected two Spanish online travel agencies to be analyzed. As none of the existing

Spanish firms shows a profit so far (i.e., none appropriate value), the selection was based on the two that were most visited by Spanish users during 2002.2 Potentially, the sites that are most visited by users are the ones with greater possibilities of perform a selling and, by extension, make a profit. We interviewed top managers of both companies in order to understand how the site perform transactions, to identify the object that is being interchanged in each of the transactions, what is received by the parties, what do they deliver, and how the company is linked with other parties of the value system. This process allowed us to propose a business model for the firms and realize how they do in terms of the creation and appropriation of value constructs.

We asses value creation potential of the sites based on the constructs proposed by Amit and

Zott (2001):

Variable Definition Measures

Efficiency To perform a particular

economic interchange at a lower cost.

•Transaction Speed • Degree of Automation • Breadth and depth of information provided

• Ease of access to potential transaction participants

Complementarities

When customers value your product more when they have other products/services than when they have your product

alone.

• Bundling of resources and capabilities

• Bundling of products and services

Lock–In The extent to which customers

are motivated to engage in repeat transactions.

• Direct Incentives • Trust and reliability

• Network Effects • Irreversible up -front

investments

2 According to a study of Baquía (2002) with data of NetValue Spain.



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Novelty

Innovation in products, services, new methods of production, distribution or marketing,

markets served, structuring of transactions.

•New combination of products, services, and information •New participants brought

together •New structuring of transactions

As regards value appropriation, we use bargaining theory and the constructs synthesised in

Coff (1999) and Zott and Amit (2002) :

Variable Definition

Access to information Knowledge about necessary information to perform transactions.

Cost of replacing exiting stakeholder

The cost focal firm would bear if a stakeholder were to leave.

Switching cost for exiting The cost that stakeholders would bear if the focal firm were to leave.

Case 1: www.Rumbo.es

This is the favorite site for Spanish users based on data of NetValue Spain. It is a join–venture between a recognized Spanish Internet portal (Terra), and Amadeus (one of the biggest global distribution systems). It claims that the organization, fulfillment, technical support, and formalization of any online booking are responsibility of a traditional and well–known local travel agency (Barceló Viajes), which may imply that while Terra and Amadeus have developed the site jointly, their offerings are basically those of Barceló Viajes. The suggested business model for Rumbo is shown in Figure 2.

Figure 2

Rumbo’s Business Model

(11)

(4)

(3)

SUPPLIERS

(1)

TOUROPERATORS

GLOBAL DISTRIBUTION

SYSTEMS

(2) (5)

(8)

(8)

SECURE LAYER

CREDIT CARD

CUSTOMER (6)

(7)

BARCELÓ VIAJES

(9)

10

ADVERTISERS

EUROP ASSISTANCE

TERRA



8

The value creation potential of Rumbo is rather small. As regards market access, different sources give the site different number of visitors, but always small related with other Spanish sites. Its capacity of improving the match between the buyer and the product she purchases is small as well, since it basically aggregates the offerings of Barceló Viajes, covering a quite small spectrum. However, Rumbo actually creates value by allowing customers to contract an insurance for a purchased travel, by allowing customers to book a room in many small local resorts (most of them do not have a web site), and by allowing them to buy theme parks tickets (which may be thought as complementary to a weekend–package near a theme park).

As regards value appropriation, the position of Rumbo may be classified as low. It not only

faces the uncomfortable environment of the industry already described, but lack of a favorable position with the toughest player in the network (tour operators). Rumbo depends on the tour operators that provide Barceló Viajes’ offerings, which seem to be only a few as they cover only a small range of travels. In this sense, Rumbo, through Barceló Viajes, has to negotiate with a small number of tour operators, increasing the bargaining power of them in detriment on its own: if one of the contracted tour operators fails, Rumbo may have to go to one of the few already contracted to provide the service and, therefore, would be in a bad position to achieve a favorable deal.

However, it is important to mention that Rumbo also owns an important link, i.e. direct

access to a global distribution system (Amadeus), which may enhance its bargaining power related with tour operators. The final effect on the value Rumbo appropriates of a favorable and unfavorable position with tour operators may need empirical verification. Case 2: www. eDreams

Even though NetValue Spa in gives this site the second place among Spanish online travel agencies, eDreams has received numerous awards, both local and internationally. It claims to have signed alliances with most of the best European tour operators, which may explain it broad spe ctrum of offerings. The suggested business model for eDream is shown in Figure 3.



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Figure 3 eDreams’ Business Model

Contrary to Rumbo, eDreams have made an enormous effort to create value through the site.

It has sold advertisement spaces to companies that provide complementary products such as suitcases and news and advices about cars (if the travel is done by car, it has sense to offer such a complementary). It has built a virtual community made by the DreamGuides, real people with experience in traveling and local knowledge about specific places; even though the practical knowledge of some DreamGuides may be placed into question, they are prompt to answer all kind of questions that travelers usually have before deciding where to go. With this community, the site is certainly creating value through novelty. Finally, eDreams tries to personalize it offerings to its clients with it service named “Viajes a la Carta”. Apparently, travelers can ask for the specific travel they want to make and the company replies with the closest offering that its partners (the tour operators) have.

As regards value appropriation, the position of eDreams may be classified as medium. Even

though it faces the tough environment that als o faces Rumbo, it is in a better position to negotiate with the tour operators it has contracted. The fact that eDreams negotiates with a higher number of tour operators, places it in a better position to achieve favorable deals: it one contract fails to be signed; eDreams can turn to another tour operator without placing in danger its site. By aggregating many tour operators, eDreams is in position to achieve a huge variety of offerings and perform more efficient deals. It can bundle the information in many dimensions (as actually is the case) such as seasons, budget or destinations, practicing a sophisticated price discriminating strategy. As bundling

CUSTOMER TOUROPERATOR

GLOBAL DISTRIBUTION

SYSTEMS

CREDIT CARD

SECURE LAYER

SUPPLIERS

1

(2)

(4) (6,11)

(9)

(10)

(10)

(3)

(12)

DREAMGUIDES

TIENDA PC

TODOMALETAS

ING DIRECT

PERFUMAI L

MOVENDUS

ADVERTISER

(5)

(7)

(8)



10

extracts more customers’ willingness to pay than fixed pricing, having many tour operators may allow eDreams to appropriate value.

A summary and the details of the findings are shown in Appendix 3.

CONCLUSION

This paper proposes a methodology to analyze creation and appropriation of value in e–commerce. Although empirical research on strategy has not made a distinction between the two processes, many reasons exist to differentiate between the two. E–commerce firms may serve as an example of the usefulness of this separation, because web pages can be thought as a collection of agents that join together their efforts in order to enable a particular online transaction. In this setting, it could be perfectly the case of some agents creating value and others appropriating it. Based on the business model as a unit of analysis (Amit and Zott, 2001), the framework proposed in this paper may help to determine whether a firm, and a particular agent of a network, creates or appropriates value.

In this sense, creation of value does not necessarily imply appropriation of it. Similarly, some

agents can appropriate value even if they are not really creating it. For example, Affiliates can appropriate value even if they are not really creating value to the network (arguably they are lowering the costs of advertising, or improving the match between the buyer and her purchases). By extension, if an agent creates value through a particular strategic decision, it may appr opriate value through a completely different one. In the case of eDreams, for example, they are creating value through the community of DreamGuides , but are appropriating value through their favorable position relative to suppliers (tour operators).

This paper is a first step in order to improve our understanding as regards the processes of

creation and appropriation of value in e-commerce. It proves to be useful to understand the way a specific firm is using the Internet to perform transactions and whether or not the specified model may be adequate to create and appropriate value. The proposed framework may serve to assess the sustainability of a pa rticular e-business venture.

REFERENCES

Amit, Raphael and Paul Schoemaker (1993), "Strategic assets and organizational rent,” Strategic Management Journal, 14 (January), 33-46

Amit, Raphael and Christoph Zott (2001), "Value Creation in e-Business," Strategic Management Journal, 22 (June/July), 493-520

Barney, Jay B. (1991), "Firm Resources and Sustained Competitive Advantage," Journal of Management, 17 (March), 99-120

Bowman, Edward and Constance E. Helfat (2001), "Does corporate strategy matter?," Strategic Management Journal, 22 (January), 1-23

Brandenburger, Adam and Harborne W. Stuart Jr. (1996), "Value-Based Business Strategy," Journal of Economics and Management Strategy, 5(1), 5-24

Coff, Rusell (1999), "When competitive advantage doesn't lead to performance: the resource-based view and stakeholder bargaining power," Organization Science, 10 (March/April), 119-133



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Gulati, Ranjay, and Nitin Nohria (2000), "Strategic networks," Strategic Management Journal, 21 (March), 203-215

McGahan, Anita (1999), "The Performance of US Corporations: 1981-1994," Journal of Industrial Economics, XLVII(April), 373-398

McGahan, Anita and Michael Porter (1997), "How much does industry matter, really?," Strategic Management Journal, 18 (Summer, Special Issue), 15-30

Porter, Michael (1985), Competitive Advantage: Creating and Sustaining Superior Performance. The Free Press: New York

Porter, Michael (1996), "What is Strategy?," Harvard Business Review, 45 (November-December), 61-78

Porter, Michael (2001), "Strategy and the Internet," Harvard Business Review, 79 (March), 63-78

Porter, Michael and Victor E. Millar (1985), "How information gives you competitive advantage," Harvard Business Review 63 (July-August), 149-160

Rumelt, Richard (1991), "H ow Much Industry Matter?," Strategic Management Journal 12 (March), 167-185

Sampler, Jeffrey L. (1998), "Redefining industry structure for the information age," Strategic Management Journal 19 (April), 343-355

Schmalensee, Richard (1985), "Do markets differ much?," American Economic Review 75 (February), 341-351

Sinha, Indrajit (2000), "Cost Transparency: The Net´s Real Threat to Prices and Brands," Harvard Business Review March-April: 43-50

Teece, David, Gary Pisano and Amy Shuen (1997), "Dynamic Capabilities and Strategic Management," Strategic Management Journal 18 (July), 509-533

Zott, Christoph and Raphael Amit (2002), "Measuring the Performance Implications of Business Model Design: Evidence from Emerging Growth Public Firms". Working Paper

About the author: This research was written while the author was doing his PhD at IESE Business School, University of

Navarra. I am grateful to Bruno Cassiman for his insightful comments and suggestions. The author, alone, is responsible for all errors and omissions. Fabrizio Noboa Assistant Professor of Management IDE Business School Nicolas Lopez 518 y Marco Aguirre (Pinar Bajo) Quito-Ecuador Phone: (593-2) 2434043. Ext: 127 e-mail: [email protected]



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APPENDIX 1 PLAYERS THAT MAY ENABLE ONLINE BOOKINGS

TOUROPERATORS

AIRLINES

CHARTERS

RESORTS

HOTELS

CAR RENTAL

GLOBAL DISTRIBUTION

SYSTEMS

VIRTUAL TRAVEL AGENCIES

ADVERTISERS ADDITIONAL PLAYERS

TOUROPERATORS’ TRAVEL AGENCIES

GDS TRAVEL AGENCIES

INDEPENDENT TRAVEL AGENCIES DATABASES

HOTELS

AFFILIATES

CUSTOMER



13

APPENDIX 2 TRANSACTIONS PERFORMED BY THE NETWORK THAT CONFORM A VIRTUAL TRAVEL AGENCY

(1) Car rental companies, airlines, and hotels give, respectively, information of availability of cars for rent, seats on planes, and lodging, to global distribution systems. They are grouped under the name “Suppliers” in Figure 1.

(2) Global distribution systems (such as Amadeus, Sabre, or Galileo), develop software that

allows an easy search of suppliers’ offerings. They sell this software (‘suppliers’ availability software’) to tour operators and travel agencies.

(3) Travel agencies (virtual and physical) built their offerings making agreements with tour

operators. Some of them have direct access to the ‘suppliers’ availability sof tware’. Virtual travel agencies can go directly to suppliers, who are also developing their own databases and software. Finally, some traditional travel agencies have developed their online version, which depends solely on its brick–and–mortar’s offerings.

(4) Tour operators search for existing tours in specific geographic places. They combine this

information with necessary elements of the ‘suppliers’ availability software’ and bundle them in tours or packages; for so doing, they get in touch with charters and resorts. Finally, they sell their tours to customers. In some countries, they cannot reach the customer directly and depends on travel agencies by law (this is the case for countries like Spain and Italy).

(5) The virtual travel agency reaches the customer through affiliates or its specific marketing

campaign. It gives the customer information of existing tours, availability of its suppliers, and may provide her with service through physical placements (call centers, for example).

(6) The customer searches in the virtual travel agency site a desired travel or product (a

specific flight, a particular cruise). If satisfied, she chooses one, and decide to perform and online booking/purchasing.

(7) The virtual travel agency passes this information to the secure socket layer, a service

provided by certain companies that encrypt customer’s information. The encrypted information goes to credit card companies that confirm customer’s financial status and allow the transaction.

(8) The virtual travel agency sends to the customer a booking notification. If desired, a selling

is performed and the customer receives the components of the tour (airline tickets, hotel reservations, etc.).

(9) The virtual travel agency offers access to its customer to advertisers. If agreed, advertisers

place an ad on the virtual travel agency site, allowing it to offer important complementary products (such as suitcases). In general, when the customer clicks on the ad of the advertiser, she abandons the site of the travel agency and goes to the main page of the advertiser.



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APPENDIX 3 RUMBO AND eDREAMS’ CREATION AND APPROPRATION OF VALUE POTENTIAL

DESIRED

VALUE Efficiency HIGH HIGH MEDIUM

CREATION Complementarities HIGH HIGH MEDIUMPOTENTIAL Lock-In HIGH MEDIUM LOW

Novelty HIGH HIGH LOW

Overall HIGH MEDIUM/HIGH LOW/MEDIUM

VALUE Access to information HIGH HIGH MEDIUMAPPROPRIATION Cost of replacing stakeholder LOW LOW HIGH

POTENTIAL Switching cost of exiting focal firm HIGH MEDIUM LOWOverall HIGH MEDIUM/HIGH LOW/MEDIUM

Efficiency Fast loading of pages: the site allows fast transactionsHIGH Reduction in physical travel agencies' marketing cost

Search by destination, budget, season, activityDream Guides and the Traveler's board shares informationThe site allows demand aggregation

Complementarities Call CenterHIGH Booking online, payment offline

Complementarity in technology with tour operatorsCertain complementarities among productsComplementarity in technology with physical travel agencies: eDreams Pro

Lock-In Personal ProfileMEDIUM The community of Dream Guides play an important role to assesing customers

No Affiliate ProgramsNo irreversible up-front investments made by customers

Novelty The community of Dream GuidesHIGH Three patents: DreamGuides, eDreams Pro, eDreams Club

Caravaning rent

eDreams VALUE CREATION POTENTIAL: MEDIUM/HIGH

Access to information Information about 1,000 tour packages (65 tour operators)

HIGH Information about tips and details on destinations and activities (450 DreamGuides)

Information about flights (700 airlines)

Information about villas (20,000)

Information about cruises, caravaning, lodging, car rental.

Cost of replacing If one tour operator leaves (out of 65), low cost for eDreams.

exiting stakeholder If one physical travel agency leaves (out of 255), low cost for eDreams.

LOW If the GDS partner leaves, probably medium cost for eDreams.

If one airlines leaves (out of 700), low cost for eDreams.

If one car rental company leaves (out of at least 10), low cost for eDreams.

Switching cost If eDreams leaves, its partners may have to turn to a different online travel agency;

for exiting for partners not to lose, they would have to turn to an online travel agency with

MEDIUM greater reach than eDreams. In Spain, it would be Rumbo, but many alternatives

internationally.

eDreams VALUE APPROPRIATION POTENTIAL: MEDIUM/HIGH



15

Efficiency Slow loading of pages

MEDIUM Too many steps to perform transactions than standard in the industry

Management inventory costs for physical travel agency are reduced

Easy search for airline tickets. Complex search for other products

The site allows demand aggregation

Complementarities Complementarity in activitites with physical travel agency

MEDIUM Booking online, payment offline

Certain complementarities among products

Lock-In Possibility of receiving last minute offerings by mail

LOW Personal Profile, but low customization

No Affiliate Programs

No irreversible up-front investments made by customers

Novelty Interesting additional services: money conversion, international hour time

LOW No patents

Rumbo VALUE CREATION POTENTIAL: LOW/MEDIUM

Access to information All the information provided by Amadeus

MEDIUM All the information provided by Viajes Barceló

Information about villas (at least 150, but not many more)

Information about additional offering.

Cost of replacing If Viajes Barceló leaves, high cost for Rumbo

exiting stakeholder If Amadeus leaves, high cost for Rumbo (although it's impossible)

HIGH If car rental company leaves, high cost for Rumbo

Switching cost If Rumbo leaves, its partners may have to turn to a different online travel agency

for exiting or go by their own. Viajes Barcelo could do it.

LOW

Rumbo VALUE APPROPRIATION POTENTIAL: LOW/MEDIUM



1

IMPACT OF INFORMATION TECHNOLOGY AND E-COMMERCE ON SUPPLY CHAIN MANAGEMENT: SURVEY EVIDENCE FROM

MANUFACTURING COMPANIES IN MICHIGAN

Shanthakumar Palaniswami, David Lopez, David Sprague, Patrick Okonokwo, and Segum Odeydele,

Central Michigan University

ABSTRACT

Enterprise Resource Planning (ERP) and Supply Chain Management (SCM) have become important corporate buzz words these days. However, there appears to be a good deal of agreement on the potential advantages of developing an integrated Supply Chain Management environment supported by an ERP information system. More so, in the context of the emergence of the E-commerce and the Internet Era.

The role and impact of E-Business in Supply Chain Management has been analyzed and discussed by many academicians and practitioners for sometime now. It is evident that more and more transactions in supply chains involve E-Business that includes the flow of information influencing the production of good and services (Chopra & Meindl, 2003). The first part of this paper addresses some of the above aspects. In the second part of the paper, the authors present the results of a survey of manufacturing companies conducted in Michigan in 2002. In particular, the impact of information technology and E-Commerce from the survey response is analyzed and discussed.

INTRODUCTION

E-Commerce technologies have the potential to provide efficient ways through which companies can gather information quickly about products, services, suppliers and other related information. In the past decade or so, there has been phenomenal growth in E-Commerce activities in all walks of corporate life. Many companies have experienced substantial savings and competitive advantage through the E-Commerce technologies. On the other hand, some companies have also failed while embracing the Internet and the E-Commerce capabilities. Research on the successes and failures of E-Commerce endeavors can be found in several journal articles and other periodicals (Archer and Yuan, 2000).

The definition of “Supply Chain Management (SCM)” has many interpretations depending on whom you talk to. Some of these varying view points are discussed by Kauffman, 2002. In this paper, the authors have taken a much broader view of SCM. Here SCM includes Procurement, Production and Distribution as primary functions along with supporting activities such as Accounting, Finance, Human Resource Management, and Information Technology. ENTERPRISE RESOURCE PLANNING AND SUPPLY CHAIN MANAGEMENT The impact of Enterprise Resource Planning (ERP) on manufacturing is discussed by Palaniswami, 2001. Enterprise Resource Planning systems have two important aspects that are attractive to any organization; namely:



2

• Integration across business functionalities. • Real time information. From isolated ‘legacy’ systems for different organizational units in a company; ERP systems offer

an alternative that enables seamless integration of all functions with a single database. There are several vendors who provide ERP software such as SAP, Baan, Oracle, People soft. Some of the major benefits and drawbacks of ERP systems are shown in Table 1.

Table 1. Benefits and Drawbacks of ERP systems

Benefits Drawbacks

• ERP systems promise one database, one application, and unified real-time interface across the entire Enterprise.

• Streamlines, standardizes, and speeds up business processes.

• Quick reaction to competitive pressures and market opportunities, more flexible product configurations, reduced inventory and tightened supply chain links.

• ERP systems have the capability to integrate far-flung outposts of a company along with the supply-chain activities.

• ERP systems are built on best practices that are followed in the industry.

• Business operations must be modified to fit the generic processes embedded in the ERP system.

• Standardizes processes. • Companies intending to implement an

ERP system must be willing to dedicate some of their best employees to the project for successful implementation.

• Costs of implementing an ERP system are

large. • Training and updating employees on ERP

is a major challenge

Several researchers in both academia and business have analyzed the impact of ERP systems on Supply Chain Management and its impact on the productivity of organizations. Sonia (Suzette, 1999) evaluated the speed of the flow of transactions within and between enterprises using the internet. Rebecca (Sonia, 2000) focused on discovering important trading partner selection criteria relevant in Electronic Data Interchange (EDI) based relationships. She used factor analysis, analyzed six trading partner selection criteria.

Henk and Bogerd (Jennifer, 2002) conducted a Delphi study on the future impact of ERP

systems on the SCM. The Delphi study was conducted with twenty-three Dutch executives in Europe. The executives identified several key SCM future issues such as integration, flexibility, mass customization and the role of independent enterprises.

Sweeney (Weston, 2002) points out that the ERP systems; as they become more and more a part

of an organization’s information system; will look for adding mobility into their ERP applications by extending to the unwired.



3

E-COMMERCE AND SUPPLY CHAIN MANAGEMENT

E-Commerce; especially after the wide spread use of the internet; has become an extremely powerful vehicle for all sorts of business transactions, may it be at the micro level or at the macro level. E-Commerce activities such as, E-marketing and E-Procurement is currently engaged in trillions of dollars of annual transactions globally as shown in Table 2. Applications in the areas of banking, stock trading and even household related services such as groceries have become well established. The impact of E-Commerce on SCM has become very apparent (Ajay, 2003) with corporations developing internet marketing strategies and on the procurement side developing internet based supplier-hubs.

Table 2. Shows the Worldwide E-commerce trade in Dollars.

Year B2B E-Commerce Worldwide Revenues in $ Trillions*

B2C E-Commerce Worldwide Revenues in $ Trillions**

2000 0.23 0.06 2001 0.47 0.10 2002 0.82 0.17 2003 1.41 0.25 2004

(Projected) 2.37 0.43

* B2B worldwide revenues , March 2003, BizReport, Denmark, http://www.bizreport.com/article.php?art_id=4251 ** B2C worldwide revenues , March 2001. http://retailindustry.about.com/library/bl/bl_em0320.htm

Palaniswami points out some of the emerging changes and challenges that E-Commerce will

bring in manufacturing companies. Several researchers have tried to analyze the impact of E-Commerce on the changing buyer-supplier relationships. Some research in this regard can be found in Boer and Harink and Moschuris et.al.

E-Procurement with reverse auctioning is having a tremendous impact on the lower “tier

suppliers”, Covisent being an example. Pearcy et. al. discusses how the reverse auction process has impacted corporate strategy and its governance. THE MICHIGAN SURVEY Methodology

To study the current status of Supply Chain Management in manufacturing companies in Michigan, a survey was designed, pre-tested and validated using five senior manufacturing business executives in Michigan. The Survey was administered by the Center for Supply Chain Management (CSCM) at Central Michigan University (CMU) during the Fall of 2002. The Center decided to focus initially on the manufacturing sector because this sector is a major economic force in Michigan. According to Harris-Info source manufacturing report, the manufacturing sector employs twenty percent of the workers in Michigan, and is also the major contributor to Michigan’s gross domestic product.



4

Survey questionnaires were mailed to 1,014 Michigan manufacturing companies listed on the Harris-Info source 2002 electronic database. The survey samples were generated through random county-by-county search of the database. A total of 112 usable responses were received.

Demographic Profile of Survey Respondents

For the purpose of this survey analysis, companies are categorized as Small (1-100 employees), Mid-size (101-500 employees) and Large (greater than 500 employees). The survey response rate for Small companies is twenty-five percent (52 responses out of 212 questionnaires sent to Small companies), fifteen percent (49 responses of 321 sample size) for Mid-sized companies, and two percent (11 responses of 481 sample size) for large companies. Overall, regardless of company size, the summarized results depict an 11% response rate.

2%

2%

3%

9%

13%

38%

2%

20%

11%

Aerospace

Furniture

Food

others

Paper

Plastics

Castings

General Machinery

Automotive

Figure 1. Response Rate by Industry Sector

As shown in Figure 1, the respondent companies fall under the following industry sectors:

automotive and passenger car bodies (thirty eight percent), general industrial machinery (20%), castings and foundry (13%), plastics (11%) paper manufacturers (9%). All remaining categories represent (9%). Based on the industry sector profile of the respondents, the automotive sector has the largest representation reflecting Michigan’s role as a major center for automotive production. The survey results show that most of the sales of the respondent companies are primarily within Michigan (95%) and the National market (excluding Michigan) (93%). The average percent sales reported for the international market is about 17%. Four percent of respondents sell exclusively within Michigan. When asked to indicate the number of direct competitors operating within the ir product/service domain, fifty one percent of the respondent companies indicated having 10 or less competitors, 20% reported 11-20 competitors. Only 29% of the respondent companies report what could be considered a large number of direct competitors (21 or more). Eighteen percent of the respondents report having fewer than 5 direct competitors.



5

Sixty six percent of the respondent companies have fewer than 21 major customers and 12% have more than 60 major customers. Fifty eight percent of the respondent companies are parts/component or subassembly suppliers. Twenty percent of the respondent companies are original equipment manufacturers, and 9% are raw material suppliers. The remaining 13% did not indicate any specific category. The number of employees of the responding companies varied from 28 to 1400 with an average of 189.

In terms of geographic representation, survey responses were received from all the major

geographic regions within Michigan. Thirty percent of the responses were from the south eastern region of Michigan, 13% south western region, 25% west central region, 10% east central region, 10% northern region and 4% from the Upper Peninsula

. RESULT AND FINDINGS OF THE SURVEY

In this section, the results from the survey of the manufacturing companies within Michigan will be presented. The discussion will primarily focus on the use of current SCM information technology tools and techniques such as Electronic Data Interchange (EDI), Enterprise Resource Planning (ERP) and E-Commerce applications. In addition, a comparative analysis between the automotive and non-automotive sectors will be presented in order to see if there exist any major differences between these two sectors in the application of SCM information technology tools.

Table 3. Deployment of SCM Software

Yes,

custom designed

Yes, commercial off-the-shelf

Total Yes No

% of total respondents

Automotive 10

[9.80]* 11

[10.78] 21

[20.79] 20

[19.61] 41

[40.19]

Non-Automotive. 19

[18.63] 11

[10.78] 30

[29.70] 30

[29.41] 60

[58.82]

Total 29

[28.71]

22

[21.78]

51 [50.49]

50

[49.50]

101

Chi Square Value between Total Yes and No Significance between Total Yes and No * Percent of total responses (i.e. 10/101)

With reference to the use of SCM software, the result of the survey show that about twenty eight percent of the respondents use custom designed SCM software and about 22% use commercial off-the-shelf SCM software. With reference to the automotive sector, ten out of 41 automotive respondent companies reported using custom designed SCM software and 11 out of 41, make use of commercial off-the-shelf SCM software. Nineteen out of 60 in the non-automotive group use custom designed SCM software and 11 out of 60 utilize commercial off-the-shelf SCM software. Statistically there is no significant difference between the automotive and non-automotive respondent companies who use SCM software , as shown by the chi-square test in Table 3. The Chi-Square statistics will help in identifying

0.014 0.904



6

any statistical differences between the two sectors, in relations to the deployment of SCM software. The Chi-Square statistics value is significant if the computed value is less than 0.05.

'

Table 4. Deployment of ERP Software

Yes, custom designed

Yes, commercial off-the-shelf

Total Yes

No % of total respondents

Automotive 6

[5.88]* 10

[9.80] 16

[15.68] 25

[24.51] 41

[40.19]

Non-Automotive. 14

[13.72] 13

[12.75] 27

[26.47] 34

[33.33] 61

[59.80]

Total

20

[19.60]

23

[22.54]

43 [42.15]

59

[57.84]

102

Chi Square Value between Total Yes and No Significance between Total Yes and No * Percent of total responses (i.e. 6/102)

As reported in Table 4, about fifty eight percent of the respondents reported that they do not use ERP software. Approximately Twenty percent reported that they use custom designed ERP software and about 22% use commercial off-the-shelf ERP software. Six out of 41 automotive respondent companies indicated the use of custom designed ERP software and 10 out of 41 make use of commercial off- the-shelf ERP software. Fourteen out of 61 in the non-automotive group use custom designed SCM software and 13 out of 61 utilize commercial off- the-shelf ERP software. The Chi-Square value of 0.276 with a significance of 0.599 indicates that there is no significant difference in the usage of the ERP software between the automotive and non-automotive sectors.

Table 5. CAD Information Exchange with Suppliers

Yes No Program is being planned Total

Automotive 30

[28.85]* 13

[12.50] 0

[0.00] 43

[40.35]

Non-Automotive. 36

[34.62] 22

[21.15] 3

[2.88] 61

[58.65]

Total 66

[63.46]

35 [33.65]

3 [2.88]

104

Chi Square Value between Yes and No Significance between Yes and No * Percent of total responses (i.e. 30/104)

0.276 0.599

0.646 0.421



7

As shown in Table 5, about sixty three percent of respondent companies share Computer Aided Design (CAD) information with their supplier; and about 3% indicated that they are in the process of implementing CAD information exchange with their suppliers. Thirty out of 43 automotive companies and 36 out of 61 non-automotive companies share CAD information with their suppliers. The Chi-Square test indicates that there is no significant difference between the automotive and non-automotive respondents in how they share CAD information with their suppliers.

Table 6. Results of CAD Information Exchange with Customers

Yes No Program is being

planned Total

Automotive 32

[9.80]* 10

[9.71] 1

[0.971] 43

[41.75]

Non-Automotive. 38

[18.63] 20

[19.42] 2

[1.94] 60

[58.25]

Total 70

[67.96]

30 [29.12]

3 [2.91]

103

Chi Square Value between Yes and No Significance between Yes and No

* Percent of total responses (i.e. 32/103)

Table 6 shows about that sixty eight percent of respondent companies exchange CAD information with their customers while about 3% indicated that they are in the process of implementing CAD information exchange with their customers. Thirty two out of 43 automotive respondents share CAD information with their customers’ suppliers while 38 out of 60 respondent companies categorized under the non-automotive sector exchange CAD information with their customers. The Chi-Square value indicates that the two sectors are not significantly different in sharing CAD information with their customers.

Table 7. Automotive Sector Respondents: Results of Current Use of SCM Information Technology Applications

AUTOMOTIVE Current Technology

Yes Program is being planned

No

Total Bar Coding 36

[83.72]* 1

[2.33] 6

[13.95] 43

EDI 32 [74.42]

4 [9.30]

7 [16.28]

43

ERP 16 [37.21]

2 [4.65]

25 [24.27]

43

Internet 41 [95.35]

0 [0.00]

2 [58.14]

43

E-Commerce 26 [60.47]

6 [13.95]

11 [4.65]

43

E-Procurement 15 [35.71]

5 [11.90]

22 [52.38]

42

1.321 0.250



8

E-Marketing 13 [30.95]

5 [11.90]

24 [57.14]

42

* Percent of total responses (i.e. 36/43)

Table 7, summarizes the results of the automotive sector respondents with regards to the use of current SCM information technology applications. The results show that the respondents with this sector significantly utilize some of the major SCM information technology applications such as bar cording and EDI. However, fewer respondents within this sector make use of ERP, E-commerce, E-procurement and E-marketing applications.

Table 8.

Non-Automotive Sector Respondents: Results of Current Use of SCM Information Technology Applications

NON-AUTOMOTIVE

Current Technology

Yes Program is being planned

No Total

Bar Coding 41 [67.21]*

7 [11.48]

13 [21.31]

61

EDI 47 [77.05]

3 [4.92]

11 [18.03]

61

ERP 25 [41.67]

9 [15.00]

26 [43.33]

60

Internet 58 [96.67]

1 [1.67]

1 [1.67]

60


7 [11.67]

18 [30.00]

60


9 [15.00]

25 [41.67]

60


10 [16.67]

27 [45.00]

60

* Percent of total responses (i.e. 41/61) The summary of the results of respondents within the non-automotive sector in term of the use of

current SCM information technology is shown in Table 8. The results suggest that bar coding and EDI are the predominant SCM applications in use amongst respondents within this sector while fewer-number of respondents make use of ERP, e-commerce, e-procurement and e-marketing applications are fewer.



9

Table 9. Automotive and Non-Automotive Sector Respondents: Comparative Table of Current Use of SCM Information

Technology Applications

AUTOMOTIVE AND NON-AUTOMOTIVE

Current Technology

Yes (automotive)

Yes (non-automotive)

Total Chi-Square Significance Value

Bar Coding 36 [46.75]*

41 [53.25]

77

1.426 0.232

EDI 32 [40.50]

47 [59.50]

79

0.016 0.899

ERP 16 [39]

25 [61]

41

0.919 0.338

Internet 41 [41.41]

58 [58.58]

99

0.761 0.383


35 [57.38]

61

0.179 0.672


26 [63.42]

41

0.939 0.332


23 [63.89]

36

1.035 0.309

Note: *Percent of total (i.e. 36/77)

Table 9 depicts a comparative tabulation of the actual numbers and percentages of automotive and non-automotive respondents who indicated ‘YES’ to using the above listed current SCM information technology applications. Overall, the Chi-Square values for each of the current SCM technology applications between the automotive and non-automotive respondents are not significant.

Table 10. Comparison of ISO 9000 Certification for Automotive and Non-Automotive Companies in the survey.

Yes No Planned % of total

respondents

Automotive 34 [33.33]*

6 [5.88]

2 [1.96]

42 [41.18]

Non-Automotive . 35 [34.31]

21 [20.58]

4 [3.92]

60 [58.82]

Total 69 [67.64]

27 [26.47]

6 [5.88]

102

Chi Square Value between Yes and No Significance between Yes and No * Percent of total responses (i.e. 34/102)

Table 10 shows the number and percentage of respondents who have achieved the ISO 9000 certification. In the automotive sector; out of 42 respondents, 34(80.95%) have the certification and in the non automotive sector, 35(58.33%) out of 60 have the certification. The Chi-Square value of 5.823 with a significance of 0.016 indicates that there is a significant difference between the automotive and

5.843 0.016



10

non-automotive sectors. These results are consistent with the fact that automotive suppliers are often required to get ISO 9000 certified though this certification is now modified as QS-9000 for the automotive industry.

CONCLUSION

Customer service, reduced cycle time, maintaining profitability and long-term survival will be the challenge for any company in the 21st century. E-Commerce and its related applications will play a crucial role in meeting the challenge. In this paper, some of the major interrelationships between E-Commerce, ERP and SCM were discussed.

The Michigan survey of manufacturing companies revealed that most of the companies

surveyed have the ability or intention to use E-Commerce applications, be it EDI, ERP, E-Procurement or E-Marketing. The Michigan survey revealed that there was no significant difference between the automotive and non-automotive sectors in their use of the above technique. However, the lower tier-suppliers; while they may not have a choice, find it hard to sustain themselves in a fiercely competitive environment.

REFERENCES

Ajay, D. Evaluating e-commerce applications in supply chain management, 14th Annual North American Research Symposium on Purchasing and Supply Management Proceedings, Tempe, Arizona, March 20 - 22, 2003, pp. 33-55.

Archer, N. and Yuan, Y., Managing Business-To-Business Relationships throughout the E-Commerce Procurement Life Cycle, Internet Research: Electronic Networking Applications and Policy, Vol. 10, No. 5. 2000, pp.385-395. Boer, L. de, J. Harink, and G.Heijboer. A conceptual model for assessing the impact of E- Procurement, European Journal of Purchasing and Supply Management, 2002, 8:1, pp 25-33. Chopra, S. and P. Meindl. Supply Chain Management, Prentice Hall, 2nd edition, May 2003. Davenport, T. H. Putting the Enterprise into the Enterprise System. Harvard Business Review, 76(4), 121 – 131, 1998. Hamilton, S. Maximizing your ERP systems: A practical guide for managers, McGraw-Hill, New York, c2003. Henk, A.A., P. Bogerd. The impact of ERP on supply chain management: Exploratory findings from a European Delphi study, European Journal of Operational Research, Amsterdam; Apr 16, 2003; Vol. 146, Issue 2; pg. 284. Jennifer, B. Today’s supply chain software tools had better be easy to install, easy to manage, and render a quick return on investment – No room for error, EBN, Manhasset; Dec 2, 2002, Issue 1341; pg. 29.



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Kauffman, R.G. Supply Management: What’s in a Name? Or, Do we know who we are?, The Journal of SUPPLY CHAIN MANAGEMENT, A global review of Purchasing and Supply, Volume 38, Number 4, Fall 2002. Michael, J. T. Linking the ERP and SCM systems, International Journal of Manufacturing Technology and Management, Geneva; 2002; Vol. 4, Issue 5; pg. 420. Moschuris, S. J., M. P. Aslani, and L. G. Laios. E-Procurement and Buyers-Suppliers’ Perceptions, 14th

Annual North American Research Symposium on Purchasing and Supply Management Proceedings, Tempe, Arizona, March 20-22, 2003, pp. 315-328.

Palaniswami, S. E-Commerce, ERP and Manufacturing: Emerging Changes and

Challenges. Journal of E-Business, Vol. 1 Issue 1, June 2001.

Pearcy, D. H., L. C. Giunipero, and L. M. Dandeo. Reverse auction implementation and the impact of corporate strategy on governance structure, 14th Annual North American Research Symposium on Purchasing and Supply Management Proceedings, Tempe, Arizona, March 20 - 22, 2003, pp. 393-407.

Rebecca, A. Electronic supply chain partnerships: Reconsidering relationship attributes in customer- supplier dyads, Information Resources Management Journal, Hershey; Jul-Sep 2003; Vol. 16, Issue 3; pg. 59.

Sonia, T. Free flow: Managing the supply chain, CMA Management, Hamilton; May 2000; Vol. 74, Issue 4; pg. 44, 3 pgs. Suzette, H. Supply chain management in the age of e-commerce, Apparel Industry Magazine, Atlanta; Mar 1999; Vol. 60, Issue 3; pg. 60, 4 pgs. Sweeney, T. ERP take on E-Business – The latest enterprise software packs e- business features such as supply chain management, InternetWeek, Manhasset; Oct 30, 2000, Issue. 835; pg. PG.121. Weston, F.C. Jr. Flow manufacturing supports 21st-century themes, IIE Solutions, Norcross; Jan 2002; Vol. 34, Issue. 1; pg. 35, 6 pgs.

About the Authors: David Lopez Center for Supply Chain Management (CSCM) Central Michigan University Mt. Pleasant, MI 48859 Segum Odeydele Center for Supply Chain Management (CSCM) Central Michigan University Mt. Pleasant, MI 48859 Patrick Okonokwo Center for Supply Chain Management (CSCM)



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Central Michigan University Mt. Pleasant, MI 48859 Shanthakumar Palaniswami Center for Supply Chain Management (CSCM) Central Michigan University Mt. Pleasant, MI 48859 David Sprague Center for Supply Chain Management (CSCM) Central Michigan University Mt. Pleasant, MI 48859



1

INTERNET FRAUD: A GLOBAL PERSPECTIVE

Phillip Balsmeier, Blaise J. Bergiel, and R. Charles Viosca, Jr.

Nicholls State University

ABSTRACT

International fraudsters are increasingly using the Internet, instead of mail and telephone, to carry out their schemes promising riches or offering too-good-to-be-true bargains. While much international Net fraud is similar to conventional mail order or telephone scams, cyberspace has opened up a new market place that knows no borders. Fraudsters suddenly have access to the consumers of the whole world, to try their old and new ideas on the unwitting. The purpose of this paper is to discuss various aspects of Internet fraud: what it is, how it can occur, where to turn for help, and what can be done about it.

INTRODUCTION

Cyberspace is a wondrous place, but it can also be a dangerous place for the unwary. Con artists who once relied on telephone boiler rooms and mass mailings can now rip people off through websites and e-mail. While the scams are often very familiar, use of the Internet creates some major new challenges for consumers and consumer protection organizations.

Fraudulent schemes, scams, and con artists have certainly been around long before the

introduction of the Internet. However, with the techno logy and explosive growth of the Internet, especially that of e-commerce, Internet fraud has quickly become a major concern for consumers, merchants, and governments. "Illegal Internet schemes and deceptive spam don't stop at state lines or international borders," said J. Howard Beales III, Director of the FTC's Bureau of Consumer Protection" (International Netforce Launches Law Enforcement Effort, 2002). Internet fraud is defined by the U.S. Department of Justice as, "any type of fraud scheme that uses one or more components of the Internet - such as chat rooms, e-mail, message boards, or Websites- to present fraudulent solicitation to prospective victims, to conduct fraudulent transactions, or to transmit the proceeds of fraud to financial institutions or to others connected with the scheme." (U.S. Department of Justice, 2000).

At times, it is difficult to tell the difference between a reputable retailer and an online criminal.

It is also difficult to come up with accurate figures on the loss due to Internet fraud because of the number of agencies involved. The National Fraud Information Center (NFIC) reported that in the U.S., between January 1 and December 31 of 2002, Internet consumers incurred a loss of $14,647,933 due to Internet fraud; the average loss per consumer was $468.00 (Internet Fraud Statistics, 2003). The Internet Fraud Complaint Center (IFCC) reports that during January 1 and December 31, 2002, that over 75,000 complaints were reported, the total dollar loss from all referred cases of fraud was $54 million, up from $17 million in 2001, with a median dollar loss of $299 per complaint (IFCC 2002 Internet Fraud Report, 2003). Year 2003 was a good year for bad guys on the Web. Fraud complaints surged 60 percent to 120,000 from 75,000 a year ago, according to the Internet Crime Complaint Center (Mello, 2003).



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TYPES OF INTERNET FRAUD

Though the Internet has increased the speed and number of victims a fraudster can reach in one attempt, the actual types and techniques of the Internet scams follow the same patterns as scams previously conducted by mail or telephone. As with pre-cyber scams, the number of scams and the subsequent variations make it impossible to mention them all. The primary intent of the fraudster is to befriend the victim, gain their trust, and then obtain money or enough personal information to access financial accounts. Becoming aware of and informed about some of the different types of Internet scams should make consumers more mindful of their online actions and transactions.

Many Internet scams operate differently but have similar characteristics that can classify them

into related categories. In 2003, the National Fraud Information Center released “The Top 10 Internet Frauds,” which are listed in Table 1 (Internet Fraud Statistics, 2003). TABLE 1 THE TOP 10 INTERNET FRAUDS REPORTED TO THE IFW IN 2002 1 Online Auction 6 Work at Home Plans 2 General Merchandise 7 Information/Adult Services 3 Nigerian Money Offer 8 Travel/Vacations 4 Computer Equipment / Software 9 Advance Fee Loans 5 Internet Access Services 10 Prizes/Sweepstakes

In general, the same types of fraud schemes that have victimized consumers and investors for many years before the creation of the Internet are now appearing online. The following are some of the major types of Internet fraud that law enforcement and regulatory authorities and consumer organizations are seeing.

Online Auction/General Merchandise Fraud: These schemes usually offer high-value, highly sought items, such as Cartier(r) watches, computers, or other electronic devices, that are likely to attract many customers. The fraud victims are told to send the money or pay with a credit card for the sought-after item, but they never receive the merchandise or they receive a counterfeit or altered item of far less value. Nigerian Money Offer: Known to law enforcement as the "Nigerian Advance-Fee Fraud" or "419 Scam" ("419" being the applicable section of the Nigerian criminal code), the secret Service terms the phenomenon a "growing epidemic." There are countless variants, but the opening play is always the same: a "confidential" message purporting to come from a high government official, businessman or other VIP, followed by elaborate "proofs" of legitimacy calculated to gain victims' confidence and part them from their money. Individual losses have ranged from a few hundred dollars to a million dollars (Emery, 2002).

Computer Equipment/Software : When a consumer finds a great price for computer equipment or software on the Internet, it may not be such a great deal. In exchange for their money consumers are receiving low quality or counterfeit merchandise. Although counterfeiting software requires expensive equipment and technical knowledge, counterfeiting licenses is an easy, inexpensive process. Counterfeiters can duplicate the agreement with a photocopy machine or a computer and trick unwitting customers into purchasing the worthless licenses.



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Counterfeiters are realizing that the true value of software is in the license, and that they can easily replicate licenses and pose as legitimate distributors. It is also increasingly easy for customers to be fooled into thinking they are purchasing the real thing, because many counterfeit license manufacturers are able to advertise their worthless licenses over the Internet and sell them sight unseen. Customers who acquire counterfeit equipment or software licenses could find they are missing key elements, and are ineligible for technical support or upgrades.

Work-at-Home Plans : Would you like to work from home and earn $1000's a month? If this business opportunity sounds too good to be true, it is because it probably is. To get more information on this career change, the individual has to pay anywhere from $35 to several hundred dollars. The individuals are scammed because, once they send off the money, they never receive the material or proper information to teach them how to successfully operate a potential business.

Internet Access Services: Although a free trial period for the Internet Service Provider (ISP) is offered, consumers unwittingly bind themselves to a contract with the ISP, with large penalties for cancellation.

Travel/Vacation: The bait is to get a luxurious trip with lots of “extras” at a bargain-basement

price. The problem is that some companies deliver lower-quality accommodations and services than they’ve advertised or no trip at all. Also, some consumers have been hit with hidden charges or additional requirements after they’ve paid.

Advance Fee Loans : When you need money, a promise to give you a loan or help you get one

(even if you have a bad credit report) may seem like the answer to your problems. But beware, it could be a crook trying to steal your money, not lend you money. Advance fee loans scams are run by unscrupulous individuals who target those individuals with a poor credit history and who have been turned down for loans from reputable lenders. Their scam rests on guarantees that you can access a loan or some other type of credit, but only after an initial payment or 'application fee' is received. These fees can range from as low as $100 to several thousands of dollars. Once the 'company' has received your advance fee payment, they disappear. You never see a dime, and they run off with your money in hand.

Prizes/sweepstakes: Congratulations, you’ve won a car, valuable jewelry, cash, or some other

fabulous price! Is this really your lucky day, or is your luck about to take a turn for the worse. Prize and sweepstake fraud take several forms, one typical scenario is that consumers receive an

email from someone claiming to be from a law firm or a government agency. They are told that they have won a large sweepstakes prize but need to pay taxes up front. If they pay, they receive another email a few days later, telling them that another winner refused to pay taxes. As a result, the prize is larger and they need to pay additional taxes. The consumer pays and never collects a prize. Occasionally, consumers receive an official looking check; however, the check is worthless. INTERNET FRAUD STATISTICS

The Internet Fraud Complaint Center (IFCC), which began operation on May 8, 2000, is a partnership between the Federal Bureau of Investigation (FBI) and the National White Collar Crime Center (NW3C) (Internet Fraud Complaint Center, 2002). Their mission is to address fraud committed over the Internet. They track fraudulent Internet activity, work as a network node that gathers claim



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reports, and alert the necessary levels of law enforcement. They also provide timely statistical data of current fraud trends. On September 11, 2001, just hours after the World Trade Center and other terrorist attacks on the United States, the IFCC website, in partnership with the FBI, also became an integral part of the investigation accepting online tips and information regarding the attacks.

In April 2003, the IFCC published its second annual Internet Fraud Report, with data collected

from January 1 - December 31, 2002. During this period, the IFCC reported 75,063 fraud complaints reported to their website, this is a 67% increase over 2001, when 49,957 complaints were received. The total dollar loss from all these reported cases was $54 million, up from $17 million in 2001, with a median dollar loss of $299 per complaint. (National White Collar Crime Center and the Federal Bureau of Investigation, 2003, page 3).

In 2002, one in five complaints (19%) involved a loss between $1,000 and $5,000 and only 3.6%

had a loss of greater than $5,000. The highest dollar loss per incident is found among Nigerian letter fraud median loss of $34,000). (National White Collar Crime Center and the Federal Bureau of Investigation, 2003, page 6).

Another area the IFCC's Internet fraud report focused on was the demographic characteristics of

the Internet fraud victims. The dollar amount loss by complaints appears to be related to a number of factors. Males tend to lose more than females. While there isn't a strong relationship between age and loss, the proportion of individuals losing at least $5,000 is higher for those 60 years and older than it is for any other age category (National White Collar Crime Center and the Federal Bureau of Investigation, 2003, page 3). While most complainants are from the United States, IFCC has received a number of complaints from Canada, Australia, Great Britain, Germany, and Japan. Electronic mail (E-mail) and Web pages are the two primary mechanisms by which the fraudulent contact took place in 2002. In all, 66% of complainants reported they had e-mail contact with the perpetrator and 18.7% had contact through a Web page (National White Collar Crime Center and the Federal Bureau of Investigation, 2003, page 3).

The IFCC does review all the complaints entered on its website and refers valid complaints to the

appropriate authorities. However, because these crimes are committed over the Internet, the perpetrator and victim could be thousands of miles apart, thus making the investigation and prosecution much more difficult. In 2002, only one in four complainants had contacted a law enforcement agency about the incident prior to filing a complaint with IFCC (National White Collar Crime Center and the Federal Bureau of Investigation, 2003, page 3). The jurisdiction issues often require the cooperation of multiple government agencies, many of which will be discussed in detail later, to resolve any given case. INTERNATIONAL FRAUD COMPLAINTS

The U.S. leads the world in Internet use and, it follows, misuse as well. The borderless nature of cyberspace means that spillover effects to other countries is bound to follow quickly as local Net users increasingly do business directly with foreign sites and local operators import the latest scams. During the calendar year 2002, Consumer Sentinel received over 200,000 fraud-related complaints about transactions involving more than $343 million. Consumer Sentinel is a secure automated consumer complaint database developed by the Federal Trade Commission (FTC), in cooperation with its law enforcement partners, to collect and make available investigative information about international consumer fraud and deception (Cross-Border Fraud Trends, 2003, page 2).



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According to the Consumer Sentinel in 2002 there were 30,798 cross-border complaints compared to 16,318 in 2001 (Cross-Border Fraud Trends, 2003, page.4). For their purposes, a fraud complaint is "cross-boarder" if: (1) a U.S. consumer complained about a company located in Canada or another foreign country, (2) a Canadian consumer complained about a company located in the U.S. or another foreign country, or (3) a consumer from a foreign country complained about a company located in the U.S. or Canada. (Cross-Border Fraud Trends, 2003, page2). Table 2, contains the number and percent of cross-border fraud complaints for January 1, 2002 to December 31, 2002, by consumer and company location. (Cross-Border Fraud Trends, 2003, page 8).

Table 2 Cross-Border Fraud Complaints by Consumer and Company Location

Category # Of Complaints Percent U.S. Consumers Against Companies Located in Canada 14,167 46 U.S. Consumers Against Companies Located in Other Foreign Countries

10,163 33

Foreign Consumers Against Companies Located in the U.S. or Canada

3,696 12

Canadian Consumers Against Companies Located in the U.S. 1,848 6 Canadian Consumers Against Companies Located in Other Foreign Countries

924 3

In 2002 complaints from U.S. consumers against companies located in Canada plus other foreign countries was 24,330 compared to 13,905 complaints in 2001 (Cross-Border Fraud Trends, 2003, page 9). The Consumer Sentinel reported in 2003, that fraud scams from outside the U.S. cost U.S. consumers over $72 million with an average amount of $4,695 (Cross-Border Fraud Trends, 2003, page 13). Table 3 contains the number and percentage of the top products or services for complaints from U.S. consumers against companies located in other foreign countries for 2002 (Cross-Border Fraud Trends, 2003, page10).

TABLE 3 Top Products/Services For Complaints From U.S Consumers Against Companies Located in Other Foreign

Countries: Jan. 1 – Dec. 31, 2002 Product/Service # Of Complaints Percentage Foreign Money Offers 5,839 24 Advance-Fee Loans 5,839 24 Prizes/Sweepstakes/Gifts 5,596 23 Internet Auctions 2,433 10 Shop-at-Home/Catalog Sales 1,216 5 Lotteries/Lottery Ticket Buying Clubs 730 3 Business Opportunities/Franchises/Distributorships 487 2 Other 2,190 9 The two top complaints are Foreign Money Offers, which include the Nigerian Letter Fraud and Advance-Fee Loans. Fraud and corruption has become an unfortunate staple in Nigeria's international



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reputation. Outside the country, Nigeria has become synonymous with fraud as some of its citizens use the boom in Internet cafes to send "Spam" e-mails, promising millions in exchange for the gullible recipient's bank details (Nigerian Bank Fraud Up 40%, 2003).

The emerging data suggests that the problem of Internet fraud is becoming uniquely global in scope and impact, as criminals can plan and execute fraudulent schemes from anywhere in the world and victims may be located anywhere in the world. Table 4 contains the Internet related fraud complaints from U.S. consumers against foreign companies by company location. (cross-border fraud trends, 2003, page 17).

TABLE 4 Top Foreign Company Locations For Internet Fraud Complaints by U.S Consumers

Company Country % Of Complaints Company Country % Of Complaints Canada 33 Netherlands 4 Nigeria 20 Germany 3 United Kingdom 9 Ukraine 3 Romania 8 Australia 3 Spain 8 Russia Federation 2 South Africa 5 Italy 2

As the Internet continues to grow and adapt to changing circumstances, Internet fraud will also tend to grow and adapt, as criminals try to circumvent new fraud prevention measures and law enforcement capabilities for combating the problem. PREVENTING INTERNET FRAUD

Despite the growth of online scams, avoiding the swindles usually requires nothing more than the same common sense used in every day life (Harper, 2001). Consumers that use the Internet as a medium to communicate or shop should take time to protect themselves from Internet fraud. Just because something is displayed on an Internet website does not make it truth. Imposters often pretend to be connected with a business or charity, or create a website similar to that of a well-know organization. Harper (2001) and the Internet Fraud Watch (NFIC: Internet Fraud Tips..., 2002) offer the following tips for avoiding online scams, frauds and rip-offs:

• Avoid any business opportunity whose backbone is the recruitment of new investors. • Never send money, even a few dollars, in response to an unsolicited e-mail or a posting spotted on the Web • Just because e-mail includes references, does not make it legitimate. Those "satisfied customers" could well be part of the scheme! • Do not assume that e-mail offering the chance to purchase product inventory is legitimate. Often the product does not exist or is worth far less than one will pay for it. • Be alert for any responses to e-mail that you don't believe you have sent. • Look carefully at message headers for discrepancies between sender and provider. • Know who you are dealing with. • Save all printed matter and print out the Website screen and save that too. • Avoid sending payments to P.O. Boxes. • Look for information about how complaints are handled.



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• Do not believe promises of easy money. • Understand the offer. • Resist pressure. • Be cautious about unsolicited e-mails. • Guard personal information. • Beware of "dangerous downloads." • Do some research. What should be done when receiving an e-mail that is suspected to be a scam? First, and most

important, one should not reply to it. The best course of action is to simply delete the message or, alternatively, contribute it to one of the many data bases designed to gather such information and then delete it. WHERE TO GET HELP!

Fraudsters have been following businesses in embracing e-commerce with variations of old scams and whole new ones, playing on people's naïve belief in what they read online. So, what can be done to protect the public from Internet conmen, when the Internet knows no national boundaries and is accessible everywhere?

The US, UK and other countries are looking at national cyber-crime police units, though none are yet up and running. Financial regulators like the SEC (Securities and Exchange Commission) in the US and the FSA (Financial Services Authority) in the UK are tying to control websites in their own jurisdictions. Under pressure from consumer organizations, international bodies like the OECD (Organization for Economic Cooperation and Development) and EU (European Union) are struggling to get agreement on standards for electronic commerce to be enforced by national governments, but progress is lamentably slow. Business opposes the idea, wanting instead to rely on self-regulation without government intervention (The Economy Internet Fraud to Cost UK Business Billions, 1999). Such is the free and open nature of the Internet that regulation is nearly impossible anyway, and the best advice the regulators have for those who surf the web is to rely on their common sense. The real difference between cyber-crimes and offline crimes lies in investigation and prosecution. The remoteness, potential anonymity and cross-border nature of the Internet vastly increase the difficulties of detection, prosecution and conviction of cyber criminals. Police, regulators and authorities are struggling with the technological and global challenges of the Web. GOVERNMENT AGENCIES

Whether it's an individual or a corporation, it is extremely important to report any Internet-related crime or Internet fraud activity to the appropriate law enforcement authorities to investigate. The Computer Crime and Intellectual Property Section (CCIPS) of the Criminal Division of the U.S. Department of Justice lists the following government offices as proper agencies to report Internet fraud activity: The Internet Fraud Complaint Center, local FBI and U.S. Secret Service offices, Federal Trade Commission, and Securities and Exchange Commission (Computer Crime and Intellectual Property..., 2002). Many of these agencies work together to track, investigate, report, and prosecute fraud.



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The IFCC is the primary website referenced by other Internet fraud websites. As previously mentioned, The Internet Fraud Complaint Center (IFCC) is a partnership between the Federal Bureau of Investigation (FBI) and the National White Collar Crime Center (NW3C). The NW3C is a private, non-governmental, not- for-profit organization, which provides analytical support for white collar crime cases for state and local agencies. The IFCC uses data voluntarily submitted by complaints on its website to help victims of Internet-related fraud. The complaints are maintained and controlled by the NW3C. The IFCC pursues preliminary inquiries and refers the complaint to the appropriate federal, state, or local law enforcement agencies. The IFCC hopes that, by acting as a central agency to which individuals and businesses can report Internet Fraud, it can facilitate the prompt investigation and prosecution of white collar Internet crime. The IFCC also analyze the complaints to quantify fraud patterns and provide timely statistical data of current fraud trends (Internet Fraud Complaint Center, 2002). As online usage continues to climb, consumer education must focus on not only preventive strategies, but also on where an individual can turn for help. IFCC is in a position to handle just such an effort to help victims and assist law enforcement. The U.S. Securities and Exchange Commission (SEC) actively investigate allegations of Internet investment fraud and, in several instances, have taken quick action to stop the scams. Many public companies are required by federal securities law to register with the SEC and file their annual audited financial statements. The SEC provides this information online in its EDGAR database. Companies not having to register with the SEC still have to file a hard copy of their offering circular or Form D with the SEC. Before making an investment, consumers should check the EDGAR database or call the SEC for information on the company. The U.S. Securities and Exchange Commission also suggests that consumers check with their state securities regular and/or The National Association of Securities Dealers (NASD) before investing in online opportunities (U.S. Securities and Exchange Commission, 2001). Econsumer.gov was created in April 2001 as a joint effort involving thirteen countries to gather and share cross-boarder e-commerce complaints in order to respond to the challenges of multinational Internet fraud, and enhance consumer confidence in e-commerce. Seventeen countries and the Organization for Economic Cooperation and Development participate in this project. The multilingual public Website provides general information about consumer protection in all countries that belong to the International Consumer Protection and Enforcement Network, contact information for consumers’ protection authorities in those countries, and an online complaint form (Cross-Border Fraud Trends, 2003, page 3). The International Web Police (IWP) is an internationally recognized Internet Police Authority whose sole purpose is to serve and protect citizens of the Internet community throughout the world (International Web Police, 2003). The agency is comprised of Law Enforcement Agencies, government officials, sworn police officers and civilian volunteers located in 61 countries throughout the world. The cooperation of both government and law enforcement agencies in these nations allow them to address criminal activities anywhere in the world. Their presence on the Internet allows instant communication between victims of crimes and the appropriate agency to assist them. The IWP central database contains records of criminal activities since 1986. These records assist in developing new procedures to prevent crime and protect the Internet community.



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The rise of e-commerce on the Internet and the introduction of the euro could cost UK business billions of pounds, as both provide ample opportunities for fraudsters to take their cut. The Fraud Advisory Panel was set up in 1998 by the Institute of Chartered Accountants to investigate the scale of fraud in the UK and advise on measures to beat the cheats (The Economy Internet Fraud to Cost UK Business Billions, 1999). NON-GOVERNMENT AGENCIES

When the law fails, not uncommon in the sphere of international law, the next best thing may be consumer watchdog organizations or non-government agencies. When you have been the unfortunate victim of Internet fraud, you can approach these organizations. Some of the privately owned organizations that track and report Internet fraud are the Better Business Bureau, BBBOnLine, Internet Fraud Council, Internet Fraud Watch, Internet ScamBusters, National Consumers League, and National Fraud Information Center (U.S. Department of Justice, 2000). These organizations do not have the authority to prosecute any fraud offenders, but work in conjunction with the government agencies to track claims and refer them to the proper authorities. The main agenda for many of these organizations is to educate and protect the consumer.

The Better Business Bureau in the retailer's geographical area or the BBBOnLine are worthy avenues in pursuing past complaint information on a particular merchant. Internet ScamBusters is a free electronic newsletter that informs Internet users of Internet scams, misinformation and hype. They do not have the resource to actively pursue fraudsters or inform the appropriate authorities, but they do attempt to inform consumers about the latest scams and Internet frauds. The National Fraud Information Center (NFIC) was originally established in 1992 by the National Consumers League, the oldest nonprofit consumer organization in the United States, to fight the growing menace of telemarketing fraud by improving prevention and enforcement. In 1996, the Internet Fraud Watch was created, enabling the NFIC to offer consumers advice about promotions in cyberspace and route reports of suspected online and Internet fraud to the appropriate government agencies. Today, their website allows Internet fraud victims the opportunity to report fraudulent activity and it also has Internet fraud tips to educate consumers against becoming the next fraud victim. (NFIC: About The National Fraud Information Center & Internet Fraud Watch, 2002). Organization for Economic Cooperation and Development (OECD): The inherently international nature of the digital networks and computer technologies that comprise the electronic marketplace requires a global approach to consumer protection as part of a transparent and predictable legal and self-regulatory framework for electronic commerce. The global network environment challenges the abilities of each country or jurisdiction to adequately address issues related to consumer protection in the context of electronic commerce. The OECD consists of 30 Member countries sharing a commitment to democratic government and the market economy. Having active relationships with some 70 other countries, Non-Government Organizations, and civil society, it has a global reach (About OECD). OECD Member governments have recognized that internationally coordinated approaches may be needed to exchange information and establish a general understanding about how to address these issues. Many OECD Member countries have begun to review existing consumer protection laws and practices to determine whether changes need to be made to accommodate the unique aspects of electronic commerce. Member countries



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are also examining ways in which self-regulatory efforts can assist in providing effective and fair protection for consumers (Recommendation of the OECD..., 1999). Apart from the above agencies, there are a vast number of information and service providers, for those who are looking to become more knowledgeable in order to protect themselves or their business from Internet fraud. The key is education and organizations have online information about various aspects of Internet fraud: what it is, how it can occur, and what you can do about it.

CONCLUSION

Internet fraud can evidently be defined as an electronic deception and theft. However, as technology advances, the tactics and skills used by fraudsters to commit these crimes will also advance. In 2002, over $14.6 million in losses were reported in the U.S. alone, due to Internet fraud; while it is expected, several million more went unreported. Local, state and federal agencies are actively tracking, investigating, and prosecuting fraud offenders. However, with the limitless capabilities of the Internet, it is often difficult to determine if the con artist is in the next apartment, next state, or in a completely different country. These cyberswindles and dot-cons present new challenges to governments. The Internet enables criminals to cloak themselves in anonymity, making it imperative that governments act more quickly to stop newly emerging schemes before the perpetrators can disappear in the World Wide Web. Online consumers need to execute added precaution when surfing, reading e-mail, making purchases, and considering online opportunities. The great thing about the Internet is it is easy to find other information, and consumers should do crosscheck before they become a victim. Legitimate online retailers and credit card companies will also have to make continued efforts to reassure consumers that their Internet activities will be secure.

The global nature of the Internet, and law enforcement experience in conducting Internet fraud investigations, have made it increasingly clear that law enforcement authorities need to coordinate their efforts to have a substantial effect on all forms of Internet fraud.

REFERENCES

About OECD, Organization for Economic Cooperation and Development, [on-line]. Available HTTP: http://www.oecd/EN/about/0,,EN-about-0-nondirectorate-no-no-0,00.html Computer Crime and Intellectual Property Section (CCIPS) of the Criminal Division of the U.S. Department of Justice (2002), How to report Internet-related crime. September. [online]. Available HTTP: http://www.cybercrime.gov/reporting.htm Cross-border fraud trends: January - December 2002 (2003). Consumer Sentinel, Federal Trade Commission. February 19. [online]. Available HTTP: http://www.ftc.gov/bcp/conline/edcams/crossborder/PDFs/Cross-BorderCY-2002.pdf Emery, David. (2002). The Nigerian e-mail hoax, SFGate.com. March 14. [online] Available HTTP: http://www.sfgate.com/cgi-bin/article.cgi?file=/gate/archive/2002/03/14/nigerscam.dtl) Harper, Doug. (2001), Too good to be true, Industrial Distribution, Vol. 90, I5. May. P.76



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IFCC 2002 Internet Fraud Report. (2003) Prepared by the National White Collar Crime Center and The Federal Bureau of Investigation. [online] Available HTTP: http://www.ifccfbi.gov/strategy/2002_IFCCReport.pdf Internet Fraud Complaint Center (2002). IFCC web site privacy policy. [online]. Available HTTP: http://www1.ifccfbi.gov/privacy.asp Internet Fraud Statistics (2003). National Fraud Information Center. [on-line] Available HTTP://www.fraud.org/2002intstats.htm International Netforce launches law enforcement effort. (2002), Federal Trade Commission. April 2. [online] Available HTTP: http:///www.ftc.gov/opa/2002/04/span.htm). International Web Police, (2003) March 19. [online] Available HTTP: http://www.web-police.org Mello, John P. (2003). “Internet Fraud Complaints Rise 60 percent in 2003.” TechNewsWorld. (December 30) [online] Available HTTP: http://www.technewsworld.com/perl/story/32490.html National Fraud Information Center (2002). About the National Fraud Information Center & Internet Fraud Watch. [online]. Available HTTP: http://www.fraud.org/info/aboutnfic.htm National Fraud Information Center (2002). Internet fraud tips from the National Consumers League's Internet Fraud Watch, general merchandise sales. [online]. Available HTTP: http://www.fraud.org/tips/internet/merchandise.htm National White Collar Crime Center and the Federal Bureau of Investigation. (2002). IFCC 2001 Internet Fraud Report. [online]. Available HTTP: http://www.www1.ifccfbi.gov/strategy/IFCC-2001-AnuallReport.pdf Nigerian Bank Fraud Up 40%. (2003). BBC News: May 22 [online]. Available HTTP: http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/3051247 Recommendation of the OECD council concerning guidelines for consumer protection in the context of electronic commerce, OECD. (1999). [online] Available HTTP: http://www.oecd.org/pdf/m00000000/m00000363.pdf) The economy Internet fraud to Cost UK business billions. (1999). BBC Online Network, May, 13 [online] Available HTTP http://news.bbc.co.uk/1/hi/business/the_economy/342664.htm) U.S. Department of Justice (2000). Internet fraud. May 8 [online]. Available HTTP: http://www.usdoj.gov/criminal/fraud/text/Internet.htm



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About the authors: Phillip Balsmeier Department of Marketing and Management Nicholls State University Thibodaux, Louisiana 70310 Telephone: (985) 449-7024 Email address: [email protected] Blaise J. Bergiel Department of Marketing and Management Nicholls State University Thibodaux, Louisiana 70310 Telephone: (985) 448-4187 Email address: [email protected] R. Charles Viosca, Jr. Department of Marketing and Management Nicholls State University Thibodaux, Louisiana 70310 Telephone: (985) 449-7016 Email address: [email protected]



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INFORMATION TECHNOLOGY AND E-COMMERCE STRATEGY OF ENTREPRENEURIAL VENTURES: A CONTINGENCY APPROACH BASED

ON INFORMATION-PROCESSING THEORY

Jay Hyuk Rhee Korea University

ABSTRACT

Developments in information technology have made it possible to gather and analyze information at a much lower cost. To exploit such benefits, entrepreneurial ventures may be inclined to employ information technology as e-commerce strategy to enhance competitiveness. In this paper, we use information-processing theory and develop a set of propositions to clarify the conditions that may affect the relationship between information technology and competitiveness. We argue that the answer to the question of whether employing information technology can enhance entrepreneurial ventures' competitiveness may depend upon the information-processing requirements and information-processing capabilities of each entrepreneurial venture. Consequently, there is no single best suggestion for all types of entrepreneurial ventures. Only after an entrepreneurial venture analyzes its internal and external environments through the lenses of information-processing requirements and information-processing capabilities can it have a clear idea of how to maximize the potential of information technology. This is critical given that entrepreneurial ventures usually have to assign a very high opportunity cost to employing information technology. Thus, the framework developed in this paper can serve as a foundation upon which guidelines for an optimal degree of information technology investment and usage can be developed for entrepreneurial ventures’ e-commerce strategy.

INTRODUCTION

Probably the most important issue in management today is how to leverage or reap the benefits of the Internet economy (Amit and Zott, 2001; Porter, 2001). One of the critical factors that differentiate the Internet economy from previous economies is the extensive use of information technology for business (Kothari and Kothari, 2001). Consequently, more attention is given to information technology, “all forms of technology applied to processing, storing, and transmitting information in electronic form” (Lucas, 2000:11). Developments in information technology have made it possible to carry out commercial transactions 24 hours a day, 7 days a week. These developments have also changed people's perception of space. It has become much less costly to identify favorable transactions across geographically dispersed markets, because information technology can help firms process a vast amount of information and exploit “E-everything” (Goodhue, Wybo and Kirsch, 1992; Malhotra, 2000). With the advent of the Internet era, therefore, information technology has become an important cornerstone of e-commerce strategy.

Another important trend is that more attention has been given to entrepreneurial ventures. This is

not surprising considering the significant impact of entrepreneurial ventures on job creation (Reynolds and White, 1997), economic growth (Wennekers and Thurik, 1999), and national advantages (Porter, 1990), among others. Given the high failure rate of entrepreneurial ventures (Ruhnka, Feldman and Dean, 1992; Timmons, 1999), however, more attention should be paid to the issue of how they can gain



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and sustain competitive advantages. Thus, entrepreneurial ventures might regard the potential of information technology as a source of competitive advantages.

These two trends can be brought together to raise an important issue related to the theme of e-

commerce strategy by entrepreneurial ventures: Does employing information technology always help entrepreneurial ventures gain competitiveness? Or are there certain conditions under which the expected positive impact of information technology on entrepreneurial ventures' competitiveness is more likely to occur? The answers to these questions will have significant practical and managerial implications for entrepreneurial ventures’ e-commerce strategy. Compared to established firms with a long history of operations, entrepreneurial ventures face many disadvantages, often referred to as the "liability of newness" (Stinchcombe, 1965). A typical example of the liability of newness is the need to be involved in extensive information gathering before and after launching a business (Kazanjian, 1988; Terpstra and Olson, 1993). In addition to the liability of newness, entrepreneurial ventures may face the "liabilities of foreignness" (Hymer, 1976; Johanson and Vahlne, 1977) when expanding their operations beyond the domestic market. The liabilities of foreignness arise from a lack of information about local market conditions, among other factors.

As mentioned earlier, however, developments in information technology have made it possible to

gather and analyze information at a much lower cost. To exploit such benefits, therefore, entrepreneurial ventures may be inclined to employ information technology as e-commerce strategy to enhance competitiveness. Most of the previous empirical studies on information technology, however, failed to find a linear relationship between information technology and competitiveness (Banker, Kauffman and Mahmood, 1993; Barua and Lee, 1997; Lucas, 1999). In other words, there is not the same likelihood of a return from each information technology investment (Lucas, 2000). Clarifying the relationship would have significant practical and managerial implications for entrepreneurial ventures that usually have to assign a very high opportunity cost to employing information technology that requires significant amounts of money and time.

In this paper, we use information-processing theory and take a contingency approach toward the

relationship between information technology and competitiveness in the context of entrepreneurial ventures’ e-commerce strategy. This issue is especially important for entrepreneurial ventures operating in the emerging regions that do not usually provide location-specific advantages in terms of infrastructure for information technology. Compared to those in developed countries, entrepreneurial ventures in emerging countries or less-developed countries may face additional challenges and thus more risks when employing information technology.

The remainder of this paper is organized as follows. We first review information-processing

theory to show why it may be highly relevant to investigate the relationship between employing information technology and gaining competitiveness for entrepreneurial ventures. Through perspectives based on information-processing theory, we then develop a set of propositions to clarify the conditions that may affect the relationship between information technology and competitiveness. In the last section, we discuss potential contributions and implications of this paper for future research on e-commerce strategy by entrepreneurial ventures.

THEORY AND PROPOSITIONS



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Because of the Internet, uncertainty is the only certain factor of the new economy. As a consequence, it has become critical for firms to understand how to deal with the challenges stemming from the Internet-driven uncertainties. The advent of the Internet has also changed the perception of information. Traditionally, it has been perceived as something to "protect" in order to ensure the appropria te private return on a firm's investment in new information (Buckley and Casson, 1976; Hennart, 1989; Magee, 1977; Rugman, 1980; Williamson, 1975). This perception reflects the belief that scarcity is a major determinant of value. In the Internet era, however, information is increasingly perceived as something to share rather than to protect in order to maximize its value. The network effect, known as Metcalfe's Law, emphasizes abundance rather than scarcity as a major determinant of value. The basic idea of the network effect is that the sum of a network increases as the square of the number of members – the value of a network is "n" squared, with "n" being the number of nodes in the network. In this respect, the network effect is in sharp contrast to the axiom in the industrial age that emphasized scarcity as a major determinant of value. In the Internet economy, value is derived from abundance rather than from scarcity. Thus, the more people that are added to the network, the greater the value of the network as a means of transmitting information.

Information, the currency of the Internet-driven new economy (Liautaud and Hammond, 2001),

should be circulated and utilized to perform its function and maximize its value. This belief, coupled with recent developments in information technology, has created a situation in which firms tend to experience information overload. What becomes critical, then, is how firms can better cope with risks stemming from information overload as well as from the lack of necessary information. The emergence of the Internet era itself has also produced profound change and discontinuity creating many uncertainties. Consequently, more attention has been given to information because, as Miller and Shamsie (2001) argue, information is very valuable in an uncertain environment.

According to Forrester Research (2003), two-thirds of the surveyed senior-executive decision-

makers of 818 U.S. firms responded that their company’s 2004 information technology budget would be higher than or similar to the actual amount spent on information technology in 2003. Meanwhile, the annual growth in corporate information technology is expected to be 4% in 2004, reaching a figure of US$743 billion. This may reflect the belief that employing information technology can reduce the cost of doing business (Barua, Konana, Whinston and Yin, 2001). For example, business costs related to the traditional intermediaries, such as wholesalers, distributors, and retailers, can be eliminated or reduced through "disintermediation" or "re- intermediation." Market research costs can also be reduced due to information technology that makes possible more efficient, faster, and cheaper data collection as well as covering more geographically diverse customers. Through information technology, entrepreneurial ventures can make use of the opportunity for one-to-one direct marketing relationships with potential and current customers. Entrepreneurial ventures typically lack the extensive capital needed for television, newspaper, and radio advertisements. But the Internet, where advertising costs are much less, is able to help entrepreneurial ventures overcome such disadvantages. Thus, information technology may be able to help entrepreneurial ventures gain competitiveness.

However, the expected positive effect of employing information technology on a firm's

competitiveness may be moderated by the following factors. Perspectives based on information-processing theory (Egelhoff, 1982; Galbraith, 1973, 1977; Tushman and Nadler, 1978; West, 2000) view an organization as a system that has to cope with uncertainty. Information processing can be defined as problem-definition, data collection, transformation of data into intelligible and usable information, and the storage, retrieval, and communication of that information within the organization (West, 2000). The



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impact on an organization of the environmental factors that it chooses to deal with can be expressed in terms of the information-processing requirements they create, whereas the potential of the organization to cope with the requirements can be expressed in terms of the information-processing capabilities furnished by its organizational design (Egelhoff, 1982). Traditionally, information-processing perspectives have been used to analyze information management issues, mainly in the context of banks (e.g., Rogers, Miller and Judge, 1999), small firms (e.g., El Louadi, 1998), health care firms (e.g., Bolon, 1998), multinationals (e.g., Egelhoff, 1982), or semiconductor firms (e.g., West, 2000). In this paper, we apply the information-processing perspectives to the issue of e-commerce strategy by entrepreneurial ventures operating in the Internet era.

The information-processing perspectives argue that the difference between the amount of

information required to perform a task and the amount of information possessed by an organization is the relative uncertainty or information to be acquired and processed. Thus, the effectiveness of employing information technology for entrepreneurial ventures' competitiveness will depend on the information-processing requirements and the information-processing capabilities that may vary across several dimensions. Figure 1 graphically represents the framework of the present study. COUNTRY CHARACTERISTICS

First of all, the characteristics of the country in which an entrepreneurial venture operates may affect the level of its information-processing capabilities, which may in turn moderate the relationship between employing information technology and gaining competitiveness. Fully reaping the benefit of information technology requires the existence of infrastructure that makes it possible to use a borderless network.

According to the Global Information Technology Report (Dutta, Lanvin and Paua, 2003),

however, there is still a huge gap between countries in terms of readiness for the networked world. Such readiness includes Internet access options, access costs, and connectivity. Not surprisingly, the lack of necessary physical infrastructure in many countries has been perceived as probably the most salient obstacle to accomplish the networked world (Oxley and Yeung, 2001). In addition to communication infrastructure, legal infrastructure concerning privacy, intellectual property, and taxation are also critical (Hughes and Glaister, 2001; Lee and Turban, 2001; Pedwell, 2002; Sarkar, 2003).

Even though the number of countries connected to the Internet has dramatically increased by

280% in the last 10 years, from 55 in 1993 to 209 in 2003, a digital divide between those with high and those with low access levels still exists (International Telecommunication Union, 2003). As long as this digital divide exists, it is practically impossible to maximize the potential of employing information technology. With the advent of the new "economic geography" of the Internet era (Leamer and Storper, 2001), a country's readiness in terms of information technology infrastructure will affect entrepreneurial ventures' ability to process information in that country. Entrepreneurial ventures operating in countries equipped with infrastructure for information technology will be better able to reap the benefits of employing information technology. In contrast, a lack of infrastructure for information technology at the country level may prevent entrepreneurial ventures from reaping the full benefits of their employment of information technology. Thus:

Proposition 1 (P1): The effect of employing information technology on entrepreneurial ventures' competitiveness will be moderated by the level of information-processing



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capability at the country level: The higher the country's readiness in terms of information technology infrastructure, the stronger the relationship between employing information technology and gaining competitiveness.

INDUSTRY CHARACTERISTICS

Entrepreneurial ventures operating in different industries may face different levels of information-processing requirements. Taking the industry rather than the firm or the country as its unit of analysis, industrial organization economics provides insights into and contributions to the development of strategies for firms in a certain industry (Gilbert and Bimbaum-More, 1996). Each industry has unique characteristics, which may affect the need for entrepreneurial ventures to employ information technology. Other things being equal, employing information technology will be more meaningful and productive when there is a demand to process a greater amount of information. Otherwise, employing information technology might be a form of overinvestment and thus a firm will fail to maximize its potential.

The external application of information technology involves managing the vertical and

horizontal interactions among economic activities along the value chain in an industry (Clemons and Row, 1991). Therefore, the degree of similarity in terms of operating processes in a certain industry may determine the information-processing requirements of entrepreneurial ventures. Previous studies found an industry standard as an important facilitator of business transactions based on information technology (e.g., Barua, Konana, Whinston and Yin, 2001; Iacovou, Benbasat and Dexter, 1995; Mehrtens, Cragg and Mills, 2001; Pennings and Harianto, 1992).

As mentioned earlier in discussing the network effect, value in the Internet economy is derived

from abundance rather than from scarcity. One activity within a value chain can be linked to others through the Internet, making real time data available both within the firm and to outside suppliers (Porter, 2001). When information technology capitalization is asymmetrical among business partners in a value chain, however, seamless transactions along the value chain are impossible to achieve. Thus, the more business partners that are linked to each other through the network, the greater the potential to exploit the benefits of employing information technology as e-commerce strategy. All these arguments emphasize the importance of generating “network externalities” through widespread adoption of transactions based on information technology within a certain industry. Thus,

Proposition 2 (P2): The effect of employing information technology on entrepreneurial ventures' competitiveness will be moderated by the level of information-processing requirement at the industry level: The more converged is the industry standard towards relying on symmetrical transactions based on information technology, the stronger the relationship between employing information technology and gaining competitiveness.

PRODUCT CHARACTERISTICS

Information-processing requirements also vary depending on product characteristics. It is important to note that the vast majority of products fall along a continuum between digital and non-digital goods incorporating both types of digital and non-digital attributes (Alba, Lynch, Weitz, Janiszewski, Lutz, Sawyer and Wood, 1997; Lal and Sarvary, 1999). Thus, product characteristics can



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be categorized depending on the relative importance of product attributes (i.e., digital vs. non-digital) in determining the value of a product.

Defined as “all product attributes that can be communicated through the Internet” (Lal and

Sarvary, 1999:487), digital attributes can be easily described and communicated in the form of information. It is then possible to assess digital attributes through the inspection of the information. If digital attributes are more important than non-digital attributes in determining the value of a certain product, therefore, the information about the product should be communicated. Based on the information, consumers can easily compare the products in the category of digital attributes and thus have the opportunity to place orders without visiting the stores. Thus, information about digital attributes will enable consumers to engage in an Internet-based evaluation and transaction. As a result, information-processing requirements of digital attributes would be very high, and thus employing information technology can be entrepreneurial ventures’ e-commerce strategy.

Information technology would not an effective mechanism, however, when entrepreneurial

ventures deal with products for which non-digital attributes (e.g., ‘freshness,’ ‘taste,’ and ‘smell’) are more important than digital attributes. It should be noted that non-digital attributes are fundamentally difficult to describe in the form of information. Given their characteristics, non-digital attributes should be evaluated through physical presence. Because a personal ‘touch-and-trial’ rather than ‘screen-to-person' information is required, (Peterseon, Balasubramanian and Bronnenberg, 1997), information-processing requirements of non-digital attributes would be very low. Thus, simply employing information technology would not be effective for products with more non-digital attributes; employing information technology may little, if any, advantages over traditional business approaches. Rather entrepreneurial ventures may have to rely on traditional mechanisms through which customers can actually ‘experience’ the products. Under these circumstances, employing information technology would be a poor substitute for traditional approaches. Thus,

Proposition 3 (P3): The effect of employing information technology on entrepreneurial ventures' competitiveness will be moderated by the level of information-processing requirement at the product level: The more the value of a product is determined by digital attributes, the stronger the relationship between employing information technology and gaining competitiveness.

STRATEGIC CHARACTERISTICS

A firm's corporate viability and prosperity depend upon its comprehensive awareness of a borderless environment (Sera, 1992). It is no longer surprising that entrepreneurial ventures undertake international expansion at an early stage of their growth (McDougall, Shane and Oviatt, 1994; Oviatt and McDougall, 1997; Shrader, Oviatt and McDougall, 2000; Westhead, Wright and Ucbasaran, 2001; Zahra, Ireland and Hitt, 2000). When expanding abroad, entrepreneurial ventures may choose diverse strategies. International expansion can be understood in the context of a firm's cross-border competitive strategy in the global marketplace. In this connection, Bartlett and Ghoshal's (1991) strategic typology of 'global' and 'multidomestic' firms may help us understand the levels of information-processing requirements each type of entrepreneurial ventures faces in its internationalization. Empirical analyses of this typology have revealed significant differences between global and multidomestic approaches in terms of a number of dimensions such as local responsiveness (Harzing, 2000; Leong and Tan, 1993).



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Entrepreneurial ventures may recognize and emphasize the differences among national markets, and thus take a multidomestic approach by modifying products and management practices from country to country. This is consistent with the argument that entrepreneurial ventures may be in a better position to overcome the liability of newness when specializing in delivering customized products (Borch, Huse and Senneseth, 1999; Gartner, Starr and Bhat, 1998; Mosakowski, 1993; Robinson, 1998; Sandberg and Hofer, 1987). Such a proliferation of products designed to meet local needs requires entrepreneurial ventures to process a significant amount of information. In contrast, entrepreneurial ventures that assume that national tastes and preferences are more similar than different may implement a global strategy focusing on global efficiency. Such firms would then face relatively lower levels of information-processing requirements in their international operations. Thus, employing information technology is more likely to enhance competitiveness for entrepreneurial ventures with a multidomestic strategy than those with a global strategy. Thus:

Proposition 4 (P4): The effect of employing information technology on entrepreneurial ventures' competitiveness will be moderated by the level of information-processing requirement at the strategy level: The more the strategy is orientated toward a multidomestic approach, the stronger the relationship between employing information technology and gaining competitiveness.

STARTUP-TEAM CHARACTERISTICS

The resource-based view of the firm emphasizes the role of human resources as a determining factor for sustaining competitive advantages. Under the assumption of firm resource heterogeneity and immobility, organizational resources and capabilities that are rare, valuable, nonsubstitutable, and imperfectly imitable form the basis of a firm's sustained competitive advantage (Barney, 1991). A typical example of such resources would be human resources, especially at managerial and executive levels (Athanassiou and Nigh, 2000; Kazanjian and Rao, 1999; Reuber and Fischer, 1997). The upper-echelon perspectives (Hambrick and Mason, 1984) also argue that demographic characteristics at managerial and executive levels are significantly rela ted to the organizational outcomes of strategic choices. In fact, previous studies have found that cognitive ability and skills at the managerial and executive levels are essential for initiating change (e.g., Bantel and Jackson, 1989; Wiersema and Bantel, 1992).

As the arguments of "absorptive capacity" (Cohen and Levinthal, 1990) indicate, entrepreneurial

ventures led by startup-team members with higher levels of cognitive ability and skills would be in a better position to fully benefit from employing information technology. When startup-team members of entrepreneurial ventures are not well equipped with cognitive ability and skills, they may experience ambiguity in the management of information technology. In some cases, such ambiguity may involve information technology only at the experimental level. Indeed, Song and Montoya-Weiss (2001) provided empirical evidence for the notion that the perception of technological ambiguity leads to inefficiencies in valuing and utilizing the core technology and its application. In contrast, entrepreneurial ventures led by startup-team members with higher levels of cognitive ability and skills may be in a better position to identify environmental opportunities/problems precisely, interpret relevant information properly, and implement necessary changes promptly through information technology.

Compared to top management teams in established firms, startup-team members in

entrepreneurial ventures may have a greater legitimacy in the managerial initiatives and responsibilities



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due to their status as owner-managers. Those initiatives and responsibilities include how to analyze information to make necessary changes. Even after their ventures reach the later stages of development, startup-team members tend to retain, rather than relinquish, their involvement in most business functions (Ardichvili, Harmon, Cardozo, Reynolds and Williams, 1998). As a consequence, the cognitive ability and skills of the startup-team members will moderate the relationship between employing information technology and gaining competitiveness. Thus:

Proposition 5 (P5): The effect of employing information technology on entrepreneurial ventures' competitiveness will be moderated by the level of information-processing capability at the startup-team level: The higher the members' cognitive ability and skills, the stronger the relationship between employing information technology and gaining competitiveness.

DISCUSSION

In this paper, we first pointed out the recent trends that have made e-commerce strategy even more important for entrepreneurial ventures operating in emerging regions. Facing the liability of newness and operating in locations that do not usually provide the necessary infrastructure for information technology, entrepreneurial ventures may face a double-edged sword. Here, we have investigated certain conditions under which the expected positive effect of information technology on entrepreneurial ventures' competitiveness is more likely to occur.

The expected reductions of intermediaries, market research, and marketing costs may drive

entrepreneurial ventures to employ information technology as e-commerce strategy, but based on information-processing theory, we argued that information-processing requirements vary at the levels of industry (P2), product (P3), and strategy (P4), whereas information-processing capabilities vary at the levels of country (P1) and startup-team (P5), which ultimately may moderate the relationship between information technology and competitiveness (See Figure 1). The framework developed in this paper enables us to clarify the conditions under which the employment of information technology by entrepreneurial ventures can be more productive. According to information-processing theory, the congruence between information-processing requirements and information-processing capabilities is considered to be an antecedent to organizational effectiveness (Galbraith, 1973, 1977). Thus, the answer to the question of whether employing information technology can enhance entrepreneurial ventures' competitiveness may depend upon the degree of congruence or "fit" between the information-processing requirements and information-processing capabilities of each entrepreneurial venture. Consequently, there is no single best suggestion for all types of entrepreneurial ventures. Only after an entrepreneurial venture analyzes the relationship between information technology and competitiveness through the lenses of information-processing requirements and information-processing capabilities can it have a better idea of how to maximize the potential of information technology. Thus, the framework developed in this paper can serve as a foundation upon which guidelines for an optimal degree of information-technology investment and usage can be developed for entrepreneurial ventures that face the challenges of determining not only "whether" but also "when” to employ information technology as e-commerce strategy.

It should be noted that the framework developed here does not specify each dimension's relative

importance. Employing information technology requires considerations from different dimensions simultaneously rather than in isolation. Thus, one of the directions for further research would be to identify some conditions under which certain variables at a certain level should dominate and play a



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more important role than others in predicting the effectiveness of employing information technology for entrepreneurial ventures' e-commerce strategy. This is critical because factors at different levels may lead entrepreneurial ventures to feel the need to employ information technology in different directions. For example, entrepreneurial ventures adopting a multidomestic strategy may understand the need to employ information technology to gain competitiveness (P4). However, the lack of infrastructure for information technology in the country where an entrepreneurial venture is operating may make it practically difficult, if not impossible, to reap the full benefits of employing information technology (P1). Similarly, employing information technology cannot guarantee competitiveness for entrepreneurial ventures that operate in the industry where the need for symmetrical transaction based on information technology is not high (P2), even though startup-team members of entrepreneurial ventures may be competent at exploiting the power of information technology (P5). Thus, it is of critical importance that future research provides entrepreneurial ventures with guidelines for choosing the relative weights of the factors and thus deciding the optimal timing for and degree of employing information technology. Such guidelines may help entrepreneurial ventures better understand how to maximize the potential inherent in employing information technology to enhance competitiveness. Future research might also investigate any interaction effect among the factors. For example, product characteristics (P3), strategic choices (P4), and industry characteristics (P2) can interact together. In this paper, we focused on five key contextual factors that shape the information-processing requirements and information-processing capabilities of entrepreneurial ventures. Therefore, another potentially important theoretical extension of this paper would be to investigate other contextual factors. For example, future research might want to extend the applicability of information-processing theory arguments beyond the country level and examine information-processing capabilities at the level of regions. Within a country, information-processing capabilities can vary across regions (e.g., Silicon Valley vs. other regions in the U.S.) because different geographic regions possess different ecosystem qualities (Zacharakis, Shepherd and Coombs, 2003). In a similar vein, focusing on customers' information-processing capabilities and requirements may be another direction for future research. This is important as customer perceptions and consequent behaviors are critical factors determining the effectiveness of employing information technology as a firm strategy (Griffith, Krampf and Palmer, 2001; Koufaris, Kambil and LaBarbera, 2001; Lynch and Beck, 2001; Resnick and Lergier, 2003; Van Beveren and Wilson, 2002).

CONCLUSIONS

Enhancing competitive advantages is important for every type of firms but especially important for entrepreneurial ventures. It should be noted that the ability to employ information technology, which is usually believed to lead to competitiveness in the Internet era, is clearly limited by the amount of resources possessed by an entrepreneurial venture. To better understand the effectiveness of employing information technology as e-commerce strategy to gain competitiveness, however, more important than the absolute amount of resources possessed by an entrepreneurial venture is the relative amount of resources available to an entrepreneurial venture. In other words, what is important is the amount of resources which are not committed at present and thus can be available at the required times (Mathiyalakan, 2003).

To employ information technology as e-commerce strategy, an entrepreneurial venture needs

additional resources or slack resources. In a broad sense, low slack restricts the range of viable solutions open to managerial choice (Yasai-Ardekani, 1986). Compared to such established firms as multinational corporations (MNCs), entrepreneurial ventures usually lack financial resources and thus have to assign a very high opportunity cost to employing information technology. Thus, such entrepreneurial ventures



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would face much higher risks of investing significant amounts of money and time in information technology.

To make it worse, employing information technology itself cannot guarantee success as we have

argued in this paper. Rather, entrepreneurial ventures should formulate and implement a right strategy that fits with their internal and external environments. To put it simply, there is no single best e-commerce strategy for technological entrepreneurship. Only when an entrepreneurial venture analyzes its internal and external environments through the perspectives of information-processing requirements and information-processing capabilities can it have a clear idea of whether and when it should employ information technology as e-commerce strategy. In this respect, we hope the framework developed in this paper will provide a foundation for more rigorous research on entrepreneurial ventures’ e-commerce strategy as well as a practical guide for entrepreneurial ventures in the Internet era.

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FIGURE 1

Framework of the Present Study

Information-processing capabilities

P1 P5 P2 P3 P4

Country characteristics

information technology

infrastructure

Startup-team characteristics

cognitive ability

and skills

Industry characteristics

convergence toward

symmetrical transaction

Employing information technology

Strategy characteristics

orientation toward

multidomestic approach

Product characteristics

relative importance

of digital attributes

Gaining competitiveness



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TESTING AN E-LOYALTY CONCEPTUAL FRAMEWORK

Anis Allagui, State University of New York Potsdam Azza Temessek, Universite de Savoie

ABSTRACT

This paper provides a conceptual framework for the investigation of website loyalty in hyper media computer mediated environment. An illustrative case for a portal is presented. First, a model is proposed that shows the predictive variables of e-satisfaction. Second, the model is empirically tested to explore its relative effect on consumer behavioral e- loyalty. The predictors examined are e-services offered (i.e., core services and supporting services), website design, and customization. Hypotheses are proposed about the effects of these factors on e-satisfaction and about the relationship between e-satisfaction and e- loyalty. The findings show that customization, interface design, and core services positively impact e-satisfaction. The website supporting services do not generate e-satisfaction. The data also demonstrate that online satisfied consumers are loyal and will continue to use the website.

INTRODUCTION

Developing consumer loyalty in the electronic marketplace may appear a somewhat utopian when consumers can leave with just a mouse click away (Srinivasan and al, 2002). The difficulty of building loyalty in the online environment results from the multiplicity of competing alternatives offering the same product or service. This situation complicates the consumers’ ability to compare and assess different services with minimal search effort and expenditure.

In the last years, authors have undertaken researches to explore e- loyalty in the online shopping

context and have identified factors affecting such a pattern. Yet, little attention has been paid to the e-services loyalty and researches in this area are still scarce.

Online services and specifically a portal site, offer to Internet users many functional advantages

through easy access to many related services and a rich informational content. The researches in this context have used service theory as a platform for thinking about e-service conceptualization and evaluation. In this perspective, previous researches have identified factors that were found to be potential describers of customer e- loyalty: satisfaction, perceived quality of services offered, customization and user interface. Drawing on these conceptualizations, the focus of this paper is to investigate these antecedents of customer e- loyalty to an Internet portal. This study reviews the theoretical key conceptual issues and develops a research model showing the expected relationships between constructs. BACKGROUND AND MODEL DEVELOPMENT

Early views of the concept of loyalty focused primarily on repeat purchase behavior. Thus, consumer loyalty was seen only as a repetitious purchasing behavior of the same brand over a period of time. Later, researchers proposed to measure loyalty by attitudinal and behavioral responses toward a brand over a period of time.

Loyal customers are undoubtedly important as they contribute to the success of a website,



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especially a portal. By visiting frequently the website, they usually provide positive word-of-mouth and recommend using its services to other customers, which reduces operating costs.

Core and supporting services can be interpreted as the content range of services that the company

mainly offers to its customers. Consequently, in an electronic context, consumers’ satisfaction will be determined according to judgment or evaluation for core and supporting services. The core service is the main reason for the company to be on the market. Supporting services are value-adding components that are used to distinguish the service from competitors’ offerings (Liljander and al, 2002).

In our case, in order to identify core and supporting services, depth interviews were conducted

with seven long-term users of a portal website. Six of them explained that their main use of the website was essentially the search engine and the electronic mail, which we consider here as core services. Links to other websites, information, news, entertainment, available forums and chat rooms depend entirely on the user’s need and appreciation of the content. Thus we conclude that these elements are rather considered as supporting services. This line of reasoning leads to the following hypothesis:

H1a: Users’ satisfaction will be a function of core services appreciation. H1b: Users’ satisfaction will be a function of supporting services appreciation For services offered on the Internet, the traditional service concept, consisting of a core service

complemented by supporting services needs to be extended with a fourth factor, the user interface (Grönroos and al. 2000).

Consumers evaluate both what the company offers (content) and how it is offered (form). The

user interface is the medium through which the services are provided. Instead of interacting face-to-face with service representatives, customers of e-services interact with a user interface. The user interface, or site design, determines how services are delivered to customers and this can be expected to impact their satisfaction toward the website. In addition to functionality, the customer should feel comfortable while navigating on the website and using the service. A well-organized visual interface and clearly readable overview of available services as well as appealing patterns and colors will contribute to generate satisfaction, and we expect that:

H2: There will be a positive relationship between perceived website design and e-satisfaction. Customization is the ability of a website to tailor the choice of services and transactional

environment to individual customers (Srinivasan and al, 2002). Websites are often structured towards some possibility of personalizing content. Internet portals offer ways to trans form what appears to be generic into individual patterns. These sites encourage the Internet user to join and to be a part of a group, which lure the web surfer into a more permanent and satisfying relationship. As a subscriber who has given personal information, one is also invited to reconstruct a homepage of news, information and content driven by individual interests. Although constrained by what an Internet portal categorizes, the surplus of categories available means that there is always the sensation of personalizing one’s information sources. Moreover, pages can be transformed in terms of color, sizing and frames. These advantages of customization make it appealing to enhance users’ satisfaction and will drive the user to visit the site again in the future. Therefore, we suppose that:

H3: There exists a positive relationship between website customization and e-satisfaction.



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Finally, research in customer satisfaction found that satisfied customers are more likely to

purchase the same product/service repeatedly. The ability to keep customers is related to the intensity of customer satisfaction. Therefore, it is reasonable to predict that satisfied users of a website will have a higher loyalty intention toward its services. This way of thinking leads us to propose the next hypothesis:

H4: The higher the level of e-satisfaction, the higher the level of e- loyalty.

Our conceptual model (figure 1) provides us with a framework that leverages elements from each

theoretical perspective to identify how satis faction toward a website can depend on patterns such as website services, design and personalization. In addition, the model suggests that customers’ satisfaction is the key concept that enhances the behavioral loyalty regarding the use of the website. SAMPLING AND MEASUREMENT

A convenience sample of 350 subscribers of the Internet portal Yahoo! was recruited for the study. Altogether, 306 usable questionnaires provided the data of the survey. Respondents were asked to answer 5-point Likert-format items where 1 represented “totally disagree” and 5 “totally agree.”

E-satisfaction was measured by adapting items commonly employed to measure satisfaction: the degree to which the consumer is satisfied, pleased and convinced with his web site use (Oliver 1980). Online loyalty was measured by items traducing both attitudinal and behavioral loyalty to the website: appreciation and continuation of use in the future (Anderson and al 2003).

User appreciation of website design as well as customization were measured according to existing reliable scales. Items measuring site design are questioning about appreciation of the outlook of the pages and congruency between design and content (Van Riel and al 2001). Customization traduces the feeling of uniqueness for the user and the adaptation of services to his needs (Srinivasan and al 2002).

The items for capturing core and supporting services evaluation are gathered from our qualitative

data. The web site customers frequently mentioned directories, links and discussion forums as

Core Services

Supporting Services

Customization

E-Satisfaction Website Loyalty Website Design

Figure 1 - Research framework of consumer loyalty to Internet portal

H1 (a, b)

H2

H3

H4



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components of supporting services for the portal chosen for the study. However, the same customers considered the search engine and the electronic mail as the site core services, their reason for using this portal. Consequently, these four elements were included in our survey items. RESULTS

In order to ascertain the reliability of our instruments, Cronbach alpha coefficients were calculated for scales reflecting at least three items. They were found to be greater than the 0.70 level that has been recommended. Furthermore, exploratory factor analysis was applied to assess the unidimensionality of the scales.

To test H1, H2 and H3, multiple regression analysis with path coefficients (standardized beta

weights) was used. The regression coefficients are presented in table 1. A preliminary examination of outliners, excessive multicollinearity, homoscedasticity and normality was performed.

Table 1: Regression Findings For the e-satisfaction Model

Predictor Variable Expected Effect

Standardized Coefficient (SE)

t-value (p-level)

Core service + .40 (.03) 6.62 (.00)

Supporting services + .08 (.05) 0.51 (.13) Website design + .26 (.04) 2.93 (.04)

Customization + .24 (.04) 4.38 (.00)

Fmodel (p-level) 59.93 (.00)

R2 (R2 adjusted) .40 (.39)

From the findings in table 1 it can be seen that supporting services is not related to e-satisfaction.

However, the regression coefficients for core services, web design and customization are statistically significant. Their signs are also in the direction we expected. Moreover, we find that core services have the greatest impact on e-satisfaction (ß=0.4, p<0.05). The data also demonstrate that positive perception of site design (ß=0.26, p<0.05) is important to e-satisfaction assessments. On average, site design is the second most important element driving satisfaction levels. In fact, site design is tied with customization (ß=0.24, p<0.05) as the next important predictor of online satisfaction.

Thus, H1 is partially supported, whereas the findings provided support for H2 and H3.

Bivaried correlation between e-satisfaction and e- loyalty was calculated In order to test H4. Pearson correlation index was significant and indicated the strong relation existing between the two variables (?= 0.44), which lead to validate H4. Besides, in order to validate our model as shown in figure 1 we adopted a structural approach that evaluate the adjustment of the links between our variables. All the model diagnostics indicate acceptable fit [?2 = 320.32 (df=196) (p = .000); RMSEA = 0.75; GFI = 0.9; CFI = 0.92; n = 306].

DISCUSSION AND CONCLUSION

From the findings of this study, we noticed that consumers’ satisfaction and loyalty toward an Internet portal depend mainly on the perceived quality of the ir major usage (core services) of this portal.



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Nevertheless, additional services present on the website did not affect either the users’ online satisfaction or loyalty. This is probably due to the customers’ practices and use. The subscribers may not have been exposed enough to the website to evaluate each of the supporting services. One can regularly visit the Internet portal and be satisfied by using the search engine and consult his electronic mail without paying attention to the extra information offered to him.

Yet, we conclude that user interface and customization effectively contribute to generate

satisfaction and long-term-established relationship with the website. These two concepts are considered part of the service package.

The website has to be visually appealing, user friendly, convenient to use and technically

functioning to attract the subscribers’ attention (Ramayah and al, 2003), as well as developed to satisfy specific needs of its customers, which make them feel more comfortable and drive them to behavioral loyalty.

As defined in Laudon and Laudon (2002), portal is a website that provides with an initial point of entry to the web. It will be interesting to conduct future researches that investigate the relationship between loyalty to portal websites and e-shopping behavior. As the consumers get into the web through specific portals, they will frequent mainly sites listed by those portals. Thus it will be important to understand if the e-loyalty developed can be transferred for shopping sites recommended by portals.

REFERENCES

Anderson R. and Srinivasan S. 2003. E-Satisfaction and E-Loyalty: A Contingency Framework. Psychology and Marketing, 20 (2), 123-138. Grönroos C., Heinonen F., Isoniemi, K. and Lindholm, M. 2000. The Netoffer Model: A Case example from the Virtual Marketspace. Management Decision, 38 (4), 243-52. Laudon K.C. and Laudon J.P. 2002. Management information systems: managing the digital firm. Eds Prenhall. Liljander V., Van Riel A. and Pura M. 2002. E-Services. Eds Bruhn. M. and B. Stauss. Oliver, R. L. 1980. A cognitive model of the antecedents and consequences of satisfaction decisions. Journal of Marketing Research, 17, 416–469. Oliver, R. L. 1999. Whence customer loyalty. Journal of Marketing, 63, 33-44. Srinivasan S., Anderson R. and Ponnavolu K. 2002. Customer Loyalty in e-commerce: An exploration of its antecedents and its consequences. Journal of Retailing, 78, 41-50. T. Ramayah, Nabsiah A.W. and Chuah K.Y. 2003. Exploring Subscriber Evaluation of Trade Portals: A Malaysian SME Context. Asia Pacific Seminar on E-Customer Relationship Management Van Riel A., Liljander V. and Jurriens P. 2001. Exploring consumer evaluations of e-services.



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International Journal of Service Industry Management, 12 (4), 359-377 About the authors: Anis Allagui Unite de Recherche en Marketing I.S.G Tunis, Tunisia State University of New York at Potsdam Email address: [email protected] Azza Temessek Unite de Recherche en Marketing I.S.G Tunis, Tunisia Universite de Savoie, France Email address: [email protected]

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