Digital Business Transformation and Channel Systems
- How digital interactive information technology changes strategies and structures in supply chains and channel systems -

 

Overview

In the early 1990s newspapers and magazines were caught off guard when consumer online services like America Online (AOL) emerged to compete for their audiences and advertising fees. Today, many retailers, manufacturers, and service providers across many consumer goods categories are carefully watching the activities of electronic retailers like Amazon, online auctioneers like eBay, and digital audio and video distributors like Apple's iTunes and Real that use Internet and Web technology to develop electronic relationships with individual customers. These new electronic market makers and electronic intermediaries are not merely new entrants; they often preempt traditional sales and distribution channels, arrogate the customer connection, and thus usurp the revenue stream. From an organizational perspective they start to change the structure of entire supply chain and channel systems (Holland and Lockett 1997, Fulk and De Santis 1995, Grandori and Soda 1995, Huber 1986).

Organizational change is further fueled by continuous enhancements of Internet and Web technology such as Web services standards. While the Internet has improved interconnectivity, Web services technology is explicitly designed to support interoperable machine-to-machine interaction over a network (www.w3c.org). The use of Web services technology could, therefore, more easily facilitate a business network structure that includes more nodes or business partners, and interaction between them (Hagel and Brown 2001, Patil and Saigal 2001, Hars and Schlueter Langdon 2002). Newspapers, trade journals, and consultants often refer to this as the emergence of business networks, value webs, etc. (e.g., The Economist 2002).

 

Research Issues

Structural Complexity
However, very often it is unclear how a company would benefit from adopting a network structure. Many firms are already struggling today with too much complexity in supplier and channel relationships. Even within organizations, many companies work hard to identify a structure that maximizes performance across product, market, and production business units.

Strategic Importance of Information Systems
Information systems and particularly software are quickly emerging as a new "factory." In content industries incumbents are left with questions whose answers will not only redefine relationships with many traditional business partners but with entire industries such as communications and IT: To what extent should traditional "content" creators and distributors be involved in digital infrastructure? And what shape should this involvement take? Should content companies own digital distribution systems or should they influence the design of key technology standards for digital distribution systems?

"Make or Buy" Decisions
In the U.S. cable television industry, multiple systems operators, including Time Warner Cable, have used ownership of coaxial cable infrastructure to gain control over access to content and programming by tens of millions of subscribers. In 2000, TWC temporarily took Disney's cable channels off-line to better negotiate lower programming cost. As a consequence, many content creators are responding to this vertical foreclosure threat by integrating forward into distribution. In the area of online or Web-based services, digital infrastructure extends beyond communication networks to include human computer interfaces (such as the Windows operating system screen), as well as software applications (such as the Web browser). Some content companies rely on third-party technology to provide a human computer interface. Others, such as AOL, maintain their own user interface, integrating innovative software applications into it, including Web browsing capability.

As of today, no best-practices approach has been identified. Mr. Levin, the former CEO of AOL Time Warner, has said that "he was clashing regularly with Mr. Case, then chairman of AOL Time Warner, about 'convergence,' or the melding of different technologies. Mr. Case wanted the company to spend heavily on it; Mr. Levin disagreed, arguing that resources should be spent on existing market opportunities instead" (Cauley 2003).

 

Approach and Findings

I have used the structure-conduct-performance approach of Industrial Organization theory (Mason 1939, 1949; Bain 1956, 1968) and case study analysis to derive a classification concept for organizational analysis in electronic channel systems. This concept is called "2-3-6."

A 1996 study, conducted under the auspices of the European Commission applied the "2-3-6" concept to investigate how the Internet has changed industry structures in European publishing (EU 1996).

Findings suggested that business opportunities and challenges would fall into 3 distinct categories of convergence battles:

Experiment with "2-3-6"-based analysis: Please click on 2-3-6.

 

Currently, research is focused on several issues that undergird the link between IT investments and the creation of value across business relationships. We examine strategies that involve knowledge sharing, operational linkages across channel participants, and customer involvement. Research hypotheses are tested using data gathered with survey instruments. The surveys are designed as one-shot, cross-sectional studies. Data collection is focused on industries that are widely known to adopt IT early and use it heavily. Therefore, primary targets are firms in high-technology, communications, and financial services (i.e., Aberdeen Group 2002):

Data Collection: "Building Strong Customer Relationships Through Cross-Business
Connections--Aligning Your Customer And IT Strategy With a Networked World"
Please participate in phase 3 of our data collection effort (Fall '03)

 

Publications

"Creating Indirect Relational Value in B2B Channel Systems: The Role of Operational Linkages and the IS Flexibility and Integration Tradeoff." Working Paper IOM-03-02, USC Marshall School, 2003 (with N. Saraf).

Emergent Patterns of Integration in Electronic Channel Systems. Communications of the ACM 45(12), 2002: 50-55 (with M. J. Shaw)

"The Online Retailing Challenge: Forward Integration and E-Backend Development." In: Proceedings of ECIS July 2000 Conference held in Vienna, Austria: 1025-1028 (with M. J. Shaw)

Schlueter, C. 1998. Der nächste Shop ist nur ein Klick weiter. Handelsblatt (November 17): 48.

A Strategic Framework for Developing Electronic Commerce. IEEE Internet Computing 1(6), 1997: 20-28 (with M. J. Shaw)

Schlueter, C. 1996. Informationen aus der Steckdose. Handelsblatt (December 18): B3.

Case study: America Online. In: European Commission DG XIII/E, and Andersen Consulting. Strategic Developments for the European Publishing Industry towards the Year 2000: Europe's Multimedia Challenge. Brussels-Luxembourg, Appendix 2, 1996, 373-388.

 

Acknowledgments

Chris Langdon gratefully acknowledges the advise and thoughtful suggestions on channel system research of Gary L. Frazier, the Richard & Jarda Hurd Professor of Distribution Management, at the USC Marshall School of Business in Los Angeles.

Chris Langdon would like to thank the Center for Telecommunications Management (CTM) at the USC Marshall School of Business and its former director, Professor Jack Borsting, dean emeritus of the USC Marshall School, and the original holder of the E. Morgan Stanley Chair, for a research grant that has supported some of the work in this project area in 2000-2001.

Chris Langdon gratefully acknowledges the many discussions with Bernie Jaworski, a co-founder and Managing Director of Monitor's Marketspace. In February 2002, Bernie was honored with the first-ever Sheth Foundation/Journal of Marketing Award for his 1993 article, "Market Orientation: Antecedents and Consequences," co-authored with Ajay Kohli.

 

References

Aberdeen Group. 2002. Financial Services Firms Lead in Adoption of New Technology. News Release. November 20. Aberdeen Group: Boston, MA.

Bain, J. S. 1956. Barriers to New Competition. Harvard University Press: Cambridge, MA.

Bain, J. S. 1968. Industrial Organization. 2nd ed. Wiley: New York, NY.

Cauley, L. 2003. After a Tense Exit, Levin Tells His Side. The New York Times (February 2) [electronic document] (accessed 02/04/03): available at www.nytimes.com.

The Economist. 2002. Timely Technology-New Kinds of Software Could Make Companies Both More Integrated and Flexible. February 2: 5-7.

European Commission, and Andersen Consulting. 1996. Strategic developments for the European publishing industry towards the year 2000: Europe's multimedia challenge. Brussels-Luxembourg.

Fulk, J., and G. DeSanctis. 1995. Electronic Commutation and Change in Organizational Forms. Organization Science, Focus Issue 6(4): 337-349.

Grandori, A., and G. Soda. 1995. Inter-firm Networks: Antecedents, Mechanisms and Forms. Organization Studies 16(2): 183-214.

Hagel, J., and J. S. Brown. 2001. Your Next IT Strategy. Harvard Business Review (October): 105-113.

Hars, A., and Schlueter Langdon, C. 2002. Opportunities and Risks of Distributed Systems Architectures. Information Management 5(3): 13-20.

Holland, C. P., and A. G. Lockett. 1997. Mixed Mode Network Structures: The Strategic Use of Electronic Communication by Organizations. Organization Science 8(5) (September-October): 475-488.

Huber, G. P. 1986. A Theory of the Effects of Advanced Information Technologies on Organizational Design, Intelligence, and Decision Making. Academy of Management Review 15(1): 47-71.

Mason, E. S. 1939. Price and production policies of large-scale enterprises. American Economic Review 29: 61-74.

Mason, E. S. 1949. The current state of the monopoly problem in the United States. Harvard Law Review 62 (June): 1265-1285.

Patil S., and S. Saigal. 2001. When Computers Learn to Talk: A Web Services Primer. The McKinsey Quarterly [electronic document] (accessed 01/31/02); available from http://www.mckinseyquarterly.com.